Micro-Lending

[awke]

What are your views on Micro-Lending?

I’ve always heard about the benefits: self-empowerment, giving access to otherwise hard to get capital, encouraging economic growth, helping women in male-dominated societies, etc. I’ve lent some money before through Kiva (the most well known Micro-Lending service out there).

Upon doing some research, I’ve realized that the field partners (the local organizations that coordinate with the recipients) actually charge extremely high interest rates to those borrowing the money. The average interest rate is about 35%.

Their justification is that they need the interest to pay for operations, and they are still charging several basis points below the prevailing interest rates in the economy. I’m starting to wonder if by lending money, all I’m doing is taking on the default risk a local bank (the field partner) while still having people be lent money at usury rates.

Or am I missing something here? I’d really like to be able to lend people money in need and not have them pay any interest. I don’t care if the default rate is high and I lose all my money.

 

[triumphguy]

I’ve used Kiva for years. The great thing being you can use the same money again and again to help different people. I’ve not yet had a default, and I’ve had the satisfaction of knowing I’ve helped women and men in poor countries improve their business or farm. Currently I am helping a women in a far eastern country get through university.

This summer though, our family did something different. My brother - a deacon in Montreal and his daughter went to work at an orphanage in Ghana. While there he realized that the orphanage was always begging for food, and he saw the opportunity to lease 10 acres of overgrown farm land for 10 years for a minimal sum (in western eyes). I gave him $250 towards this and the land was there’s. The kids and volunteers cleared the land and planted different crops. They are now self sufficient and have enough surplus to sell.

This is pic is taken on that land - they are having a corn feed with the first crop.
https://scontent-a.xx.fbcdn.net/hph...=cf9815b13eadec60187d2290dfbfa6d6&oe=551DEF00

The first planting
https://fbcdn-sphotos-g-a.akamaihd....8dd02577dd73299cc0b5fe4e8b16d94c&oe=54DF705B&gda=1423121872_db88c21745777b42368d5d3d53856dc3

 

[awke]

I’ve used Kiva for years. The great thing being you can use the same money again and again to help different people. I’ve not yet had a default, and I’ve had the satisfaction of knowing I’ve helped women and men in poor countries improve their business or farm. Currently I am helping a women in a far eastern country get through university.

This summer though, our family did something different. My brother - a deacon in Montreal and his daughter went to work at an orphanage in Ghana. While there he realized that the orphanage was always begging for food, and he saw the opportunity to lease 10 acres of overgrown farm land for 10 years for a minimal sum (in western eyes). I gave him $250 towards this and the land was there’s. The kids and volunteers cleared the land and planted different crops. They are now self sufficient and have enough surplus to sell.

That’s a great story about Ghana. That is the kind of thing I would definitely be looking to support

But my concerns about micro-lending still remain. Essentially, I feel like through Kiva, I am lending money interest-free to a local bank (or field partner), who is in turn loaning that money to somebody in need and charging them 35% interest. (The average interest rate is 35% on Kiva).

I’m concerned that the end recipient is still getting taken advantage of with usury rates. Just slightly lower usury rates than the average loan they’d receive otherwise. The real beneficiary is the field partner who is getting free capital.

I’m not posting this to try to discourage micro-lending; I’m honestly hoping that there’s something wrong with my logic.

 

[triumphguy]

Perhaps the poor are getting money when they would otherwise get none.

Perhaps Kiva’s lending rate isn’t so high after all:shrug:.

This is what Kiva says on their site: kiva.org/help/interestRateComparison#AverageInterestRateBorrowerPaysToKivaFieldPartner

Average Interest Rate Borrower Pays To Kiva Field Partner:

The self reported average rate charged by the Field Partner to the entrepreneur. Note that Kiva.org does not currently take a cut of the interest rate charged by Field Partners and instead relies on an optional lender fees/donations to help pay for running our website (small core staff, rent, servers, etc).

If the Field Partner interest rate seems high, consider the following:

Field Partner interest rates are a highly affordable alternative to the local money lender

Local money lenders - often the only option for poor entrepreneurs to get a loan - charge interest rates ranging from 60% to 800% annualized.

A poor entrepreneur can generate greater benefits from additional units of capital than can a highly capitalized business, because she or he begins with so little.

According to the World Bank, studies covering India, Kenya, and the Philippines found that the average annual return on investments by microbusinesses ranged from 117 to 847 percent.

The costs of making a micro-loan in the developing world are higher versus larger loans in the West.

Cost of screening - Field Partners must screen entrepreneurs who commonly have no credit history, no collateral, are frequently illiterate, and often live in remote areas. To responsibly assess the credit worthiness of each entrepreneur, the cost is higher than the West where most everyone has a credit score and screening / loan application can be done electronically.

Cost of in person collections - Field Partner staff typically travel to each entrepreneur on a monthly basis to make collections. Compared to the West, where mail and internet repayments are standard, the costs are higher.

Cost as a size of the loan - If the Field Partner’s actual cost per loan is $25, the percentage cost is 0.25 percent for a $10,000 loan, but 25 percent for a $100 loan.

Field Partners must charge an interest rate that allows them to pursue their social impact agenda sustainably.

In order for Field Partners to reach more of the poor with relatively low interest loans (vs. local money lender), they need to cover their costs.

Given the higher costs of microloans discussed above, Field Partners must charge a sufficient interest rate.

Kiva aspires to provide transparency around the social impact and relative Field Partner interest rates in order to ensure to reward Field Partner that successfully create social value while lowering their costs to do so.

 

[PJH_74]

My gut reaction to Micro-Lending is similar to yours and I generally do not like any scheme that tries to “help” the poor with loans. Most of these schemes in developed countries fall into a couple categories:

1. Get them in debt beyond what they can pay and make money off fees, e.g. credit cards, especially prior to recent credit card reforms.
2. Put them into something they can’t really afford to own, like a house during the housing bubble.
3. Put them into a payment scheme that skits usury laws such as rent to own or the large “fees” on pay day loans that amount to 300-400% effective interest rates.

That said, the administrative costs of providing loans is fairly similar whether it’s a large or small loan. I also know first hand from my professional life that, even obtaining large commercial loans in developing areas such as Africa, never come at rates close to what you can get in the developed world.

So in my opinion, if the interest rates charged reflect reasonably the costs of administering the loans AND the loan amounts reflect something the borrower actually has a chance of repaying; micro-lending in moderation can be a good thing. I will always fear this turning into some sort of payday lender industry in the developing world, but straight charity also runs a high risk of not ending up in the right place or even doing harm if we are not careful. Helping the developing world always required diligence, real forethought, evaluating the results honestly, and setting aside your preconceptions.

 

[otjm]

My gut reaction to Micro-Lending is similar to yours and I generally do not like any scheme that tries to “help” the poor with loans. Most of these schemes in developed countries fall into a couple categories:

1. Get them in debt beyond what they can pay and make money off fees, e.g. credit cards, especially prior to recent credit card reforms.
2. Put them into something they can’t really afford to own, like a house during the housing bubble.
3. Put them into a payment scheme that skits usury laws such as rent to own or the large “fees” on pay day loans that amount to 300-400% effective interest rates.

That said, the administrative costs of providing loans is fairly similar whether it’s a large or small loan. I also know first hand from my professional life that, even obtaining large commercial loans in developing areas such as Africa, never come at rates close to what you can get in the developed world.

So in my opinion, if the interest rates charged reflect reasonably the costs of administering the loans AND the loan amounts reflect something the borrower actually has a chance of repaying; micro-lending in moderation can be a good thing. I will always fear this turning into some sort of payday lender industry in the developing world, but straight charity also runs a high risk of not ending up in the right place or even doing harm if we are not careful. Helping the developing world always required diligence, real forethought, evaluating the results honestly, and setting aside your preconceptions.

It would appear that you need to do some research on what micro lending is actually about.

1. it is not about credit cards, or giving people loans they cannot repay;
2. It is not about putting anyone in anything they cannot afford - it is not set up as mortgage money;
3. it is not about “rent to own” or skirting usury fees.

It is about providing entrepreneurs with money to either start a small business, or to expand a small business when bank money is not available at all.

In its essence, it goes back to the old Chinese saying: you can give a man a fish and feed him for a day; or you can teach him to fish, and feed him for a lifetime. The micro loan programs I have been familiar with are going to people, such as the woman who made articles out of tin which she retrieved from the garbage piles; it allowed her to purchase tin (which in turn reduced her time to obtain basic supplies). This in turn made her more productive; she eventually was able to expand her business to employ another to do the same; they both came out far, far ahead economically.

The experience I have had is with a micro loan organization; the size of the loans were pretty much under $250.00, and often about $50.00. They would loan to several businesses (individuals) who would be cross-responsible for paying the loan back. This put a group responsibility for one another and helped to increase pay-back of the loans.

 

[awke]

1. it is not about credit cards, or giving people loans they cannot repay;
2. It is not about putting anyone in anything they cannot afford - it is not set up as mortgage money;

But that’s what I’m asking about.

Average interest rate of 35% is pretty darn high. Even though it may be a couple basis points under the prevailing, it’s still extremely high. If that much isn’t usury, I don’t know what is.

And I don’t know the specifics of whether or not the loans are done as a mortgage. I would guess that they probably aren’t, since the field partner gets to lend money essentially risk free. They get rich when the borrower pays back the 35% interest. But if the borrower defaults, we lose the money.

Again, I’m really hoping I’m wrong. I just haven’t found a satisfactory answer showing what I’m missing.

 

[triumphguy]

If the cost for setting up a loan is $25 then it’s not really fair to include that $25 in the interest rate calculation.

Kiva for instance now asks people to donate towards the costs of running the loans.
kiva.org/help?solution=solution-50150000000Iv6FAAS

Do I have to donate to Kiva’s operating expenses?

100% of every dollar you lend on Kiva goes directly toward funding loans. Kiva doesn’t take a cut of the loans you make but instead supports our operations through optional donations from our lender community. When you check out on Kiva we’ll automatically ask for a 15% donation, however donations to Kiva’s operating expenses are always completely optional so you can always choose to donate $0.00 when you lend.

 

[awke]

If the cost for setting up a loan is $25 then it’s not really fair to include that $25 in the interest rate calculation.

Kiva for instance now asks people to donate towards the costs of running the loans.
kiva.org/help?solution=solution-50150000000Iv6FAAS

Kiva doesn’t charge interest and just relies on donations. It’s the field partners that charge interest.

So my understanding is if you want to lend $100:

-Kiva recommends you donate an extra few bucks to them (don’t remember how much; let’s say $10)
-Kiva send your $100 to the field partner
-The field partner lends the $100 to the borrower at 35% interest
-The borrower pays back $135 to the field partner
-The field partner pays back $100 to Kiva
-Kiva gives the $100 back to you

So out of this whole transaction:
-You lose $10 (the donation to Kiva)
-The borrower loses $35 (the interest to the field partner)
-Kiva makes $10 (from the donation)
-The field partner makes $35 (from interest)

But of course if the borrower doesn’t pay back the money, the field partner loses nothing (because it wasn’t their money they lent).

 

[otjm]

But that’s what I’m asking about.

Average interest rate of 35% is pretty darn high. Even though it may be a couple basis points under the prevailing, it’s still extremely high. If that much isn’t usury, I don’t know what is.

And I don’t know the specifics of whether or not the loans are done as a mortgage. I would guess that they probably aren’t, since the field partner gets to lend money essentially risk free. They get rich when the borrower pays back the 35% interest. But if the borrower defaults, we lose the money.

Again, I’m really hoping I’m wrong. I just haven’t found a satisfactory answer showing what I’m missing.

What you are missing is several points. The loans are being made to individuals who, by and large are eking out a living with minimal opportunity. They are not getting $10,000 loans, or $100,000 loans - they are getting loans of $50, or $100, or maybe $250, and maybe $1,000 - although I have not heard of loans that large.

These are people who may be living in a one room shack, and their roof is a piece of corrugated tin. The walls my be poles with a few cross braces (like I saw in Vietnam) and maybe thatch; a “room” might be made by hanging a blanket from the roof to divide off space.

Or they may be in Africa, and living in a thatched hut - again, one room, and cooking may be over a fire in the center of the room. Or they may be in a one room slum in India, and their “toilet facilities” may be a ditch made in the middle of the cement flooring. And good luck “flushing” that as they have no running water - as neither do the other two examples.

No one, and I mean no one, in their country is going to lend them a dime, let alone $50. 35% of $50 seems high, until you compare it to what they would have to pay if they even could find someone to lend. Whoever distributes the money has to a) pay their own costs - in an area where transportation for many may be a 150 cc motorbike. They too have to make a living, and if the loan is not repaid, they make nothing. Nobody and I mean nobody, is getting “rich”. You are presuming these people are handling tens of thousands, or more, of loans. They are not. And the payback time is not next week; the money goes to supplies, which then have to be turned into a product, which then has to be sold; and often that money turned back into supplies, with the same routine, before enough capital is built up that the loan can be paid back and enough capital still retained to continue the business.

Another business I came across, was a farmer (if you could call someone who worked in the fields by had a farmer) who wanted to start a business with chickens and fish.

He applied, and got a loan so he could buy some chickens for breeding, and food. After he had paid back the loan, and the ;chickens were doing reasonably well, he then applied for another loan; in the meanwhile he had hand dug an area for fish.

He ended up getting the loan, built a coup and feeding area over the pond, and the cast off feed and the manure from the chickens fed the fish, and he was in business providing eggs, meat, and fish. One of the loans, the second one, was for $250.

Seriously - do some reading. Not just on micro loans, but also on what real stark naked poverty amounts to. I think you will get it.

Or better yet, travel to one of those countries and see first hand what is going on.

When you live in a country where a loan interest on a small loan like that could be the full amount borrowed or more, if you could even find someone to loan it, then you will begin to understand what usury is.

What you are missing (and I am not trying to be unkind) is perspective.

And by the way, the borrower does not “lose” the 35%; that is the cost of business. extremely cheap when they have almost no overhead - they have no shop; they have no costs of electricity; they have no cost of water as there is none immediately available.

The loans are not mortgages, because a mortgage is on real property. These people own the clothes on their back and not much more. They don’t own property - at least as we understand owning property.

 

[awke]

What you are missing is several points…

Alright, now we’re talking. This is the kind of discussion I was expecting to have.

So essentially, there are 3 arguments that I hear you saying:

1 - These people are poor. Really really poor.
2 - They wouldn’t ever get loans otherwise.
3 - Nobody is getting rich of this

I want to play devil’s advocate here. I’ve thought about it a bit, and here is how I would respond:

1 - Of course I know they are poor. I want to help them. That is exactly why I am going through this exercise. If I didn’t care about poverty, I wouldn’t be giving any money at all. Instead, I’m trying to figure out what is the best way to help out, and I have my doubts whether micro-loans actually work as advertised.

2 - I guess this is the crux of the argument that I get from most people, and I guess I would say it is a valid argument. If one believed that taking out loans was essential for personal economic growth, then we are doing a service by micro-lending.

But I still get back to thinking: at what point does this no longer become the right thing? I think we would all agree that lending money for no interest would be a good thing. A couple basis points to cover transaction costs would be fine. But 35%? Wouldn’t that be considered usury? A number of the field partners in Africa have interest rates over 50% (with one as high as 88%). Peru has 60%.

Eventually, the interest rates get too high to where somebody is being taken advantage of. If you were unable to get a loan to buy a car from a bank, and I told you I’d lend you $10k at 25% interest; I’m not doing you a service. I’m being a loan shark and charging usury rates.

I would also fear that if people that were very poor and for generations haven’t been loaned money by a financial institution, they aren’t going to be the best at gauging what an appropriate interest rate is. We see the poor in the US often running into this problem by getting stuck in loans with extremely high interest rates.

3 - This one, I guess I’d have to disagree with you. Somebody is making a good chunk of money; just not by American standards.

Kiva itself isn’t making much, since they just get a few bucks from donations (and any other grants).

But let’s look at the field partners. We’ll take Kenya for an example. The very first loan I see on Kiva in Kenya today is for $3,375 (kiva.org/lend/784869). The GDP per capita in Kenya is $994. So essentially, this loan is 3.4x bigger than the average income. (Would be equivalent to a loan of $180,682 in the US).

Kenya charges about 37% interest. So if the borrower pays this off in a year, the field partner would make $1248 off of him. That’s more than the average salary in Kenya. Would be equivalent to $66,781 in the US.

If the local banks in Kenya are charging a few basis points higher (let’s say 40%), then they’ve determined they can make enough money from interest to cover expenses AND defaults (which will be high to the volatility of the country) to still stay in business. The field partners, though, are charging 37% interest and only have to cover expenses. The defaults are passed on to the Kiva lender, and they don’t have to worry about it.

Again, we’re not making people rich by US standards. But we’re giving the field partners in Kenya a ton of ammo to be able to compete with the local banks charging similar interest rates, but taking on none of the risk.