90% Interest Rates Draw Lenders

This is an interesting article in the NYT about a microfinance lender in Mexico that is a for-profit, publicly traded company. You always hear in discussions of charity microlending that the default rates are incredibly low. Special measures are taken, such as lending almost exclusively to women and having the women form groups whose loans (and defaults) are pooled. And obviously, the transaction costs on making many small loans would have to be much higher than fewer, bigger loans. Nonetheless, I always wondered why the market didn't attract for-profit lenders, if the repayment rates were really so good.

Well, in this case it has. The non-profit lenders, and the man who came up with the idea, economist Muhammad Yunus, are opposed to the encroaches of for-profit companies that will be run for the benefit of their investors. As long as the for-profit lenders don't get the government to lean on their idealistic competitors it seems to me it would be all to the good--the funds of "ethical" investors can be put to work in underserved markets, and the original, non-profit orgs should be able to offer better rates in areas where they compete.

As I typed this entry, I wondered, do these organizations ever get protested against on gender fairness grounds? "You dickheads will just drink up the money" isn't a very conciliatory response, even if it's well-founded...Desultory googling yields this possible link between access to microfinance and becoming the victim of domestic violence for women in Bangladesh, but that wasn't exactly what I was thinking of. Except insofar as I was thinking about dickheads. The microfinance discrimination far exceeds anything like variable rates for car insurance; from everything I've read they just basically don't loan money to men. This may not result in serious injustice to the male would-be entrepreneurs as a class if men have access to traditional sources of credit closed to women in a society, but it could still be pretty unfair in any given case. It strikes me that the sort of people who would strongly object to this are the same people who would laud accurate, dispassionate risk assessment in other financial areas, but making up imaginary political opponents with contradictory views is unseemly, so I'll stop there.

UPDATE: mere seconds later, I am moved to ask, day-um, what's in that cheese? That looks gooood.  Mmm, mysterious queso.

Comments

[ajay]

Well, "not lending to men" is the traditional Grameen model, but it's certainly not universal to microfinance - not even to Grameen any more. Some microcredit organisations are women only, some (Grameen, FINCA) lend predominantly but not exclusively to women.

I'd make three points:

1. In terms of access to credit, the menfolk are likely to be the ones with title to property anyway, and thus will be more able to borrow against it through conventional channels - microcredit is uncollateralised.

2. A lot of the microcredit companies are charities, and charities can focus wherever they want; it's quite OK to have a charity that provides healthcare or education specifically to women, so why not credit?

3. There is NO point 3.

[Andromeda]

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[jeet]

I'm going to go with queso fresco with peppers.

[dsquared]

[You always hear in discussions of charity microlending that the default rates are incredibly low]

You also always hear that they've had to massage the data on these default rates to knock out a couple of terrible years in which the crops failed and well what can you do about that ... but ex those years, the default rates are INCREDIBLY LOW! Yunnus is a particularly egregious offender with respect to that one.

also, branding is something of an issue here; "microfinance" is very trendy, particularly since that Nobel Prize, so it is a label that tends to get slapped on all sorts of things:

Silvina Martínez started a little restaurant in her house a year ago to sell her homemade snacks to students at a nearby high school. It has grown steadily since then. With this cycle, she was going to borrow about $1,100 to paint the restaurant and expand her menu.[...] Alejandra Abúndez, 57, keeps pigs and cattle, and produces 330 pounds of cheese a day, which she sells in the local market. She and her daughter, Micaela Rivera, were borrowing $3,550 from Compartamos to buy animal feed and to stock the tiny store in her front entryway

$1,100 to $3,550 aren't microloans. They really aren't.

[Doug M.]

They aren't? Why not?

"Microloan" is a shifting metric. $1,000 is an insane amount of money in rural Bangladesh. In a medium-income country like Mexico or Bulgaria, not so much.

Low default rates: you do understand that microlending has become a vast universe involving billions of dollars and many, many different sorts of loans? An NGO lending a few hundred bucks to Ugandan farmers for seeds and tools and a commercially-funded institution lending a few thousand bucks to Romanian merchants for import credits are both "microlenders", but they're operating on totally different business models and will produce totally different metric results.

That said, many sorts of microlending are now profitable enough to be attracting large amounts of investor capital. So.

As to the gender issue, what the first poster said. The number of microlenders discriminating by gender is certainly under 50% now, and dropping. And while most microlenders are no longer charity NGOs, the ones that still are can do as they please.

Doug M.

[dsquared]

"Microloan" is a shifting metric. $1,000 is an insane amount of money in rural Bangladesh. In a medium-income country like Mexico or Bulgaria, not so much

So presumably in Liechtenstein or Norway, you could get oil rigs financed by microcredit?

These aren't microloans because a $1.1k loan is clearly big enough to be a viable commercial proposition for a lender. The point of "microcredit" was that it addressed the problem that really small loans like $20 for seed in Bangladesh could not possibly be economic at any interest rate because the cost of doing the paperwork was nearly as large as the loan. So the idea was that each individual loan would be assessed to be profitable as a cash-on-cash financial asset, but that Grameen Bank would provide the administration and infrastructure on a not-for-profit basis (NB that the admin costs issue is generally the reason why APRs on loan sharking are so dizzingly high; if it costs you $5 to do the paperwork on a $50 loan for a month, then the $5 you charge to recover your costs represents 10% of the sum lent, which compounded 12 times is equivalent to a 313% interest rate).

If you're just setting up a normal lending institution that's got a focus on small business loans poor people and a bit of a government subsidy, then that's called an "agricultural bank" and they've been around for a zillion years.

a commercially-funded institution lending a few thousand bucks to Romanian merchants for import credits

is a "microlender"???? FFS, Romania is an EU country. They have credit cards there. Providing working capital loans of thousands of dollars to import-export businesses is called "banking". Doing so with a subsidy to the interest rate is called "subsidised banking". The definition is surely becoming meaningless.

My point about default rates referred to Grameen Bank and is a staple of the microfinance industry narrowly defined; they don't half lie a lot about their default rates.

[ajay]

FFS, Romania is an EU country. They have credit cards there.

This is an interesting point: if credit cards were more widespread - and the accompanying infrastructure such as bank accounts - would anyone really need microcredit at all? The key point seems to be more microbanking - setting up accounts for businesses that take in a couple of dollars a day or whatever. Though this runs into the same paperwork/overhead problem.

[Kady]

Just wandered into your blog via some random search - I've also been thinking a lot about microloans recently, because I'm unconvinced about the "social good" that for-profit micro-loan investment vehicles provide. (There are a few: one actually went public a few months back.)

(1) I believe that the microloans tend to focus on women precisely because they lend to women in patriarchal economic systems that do not trust the financial acumen of women entrepreneur. Since you are in Singapore, surely you know of the Chinese "hui" system whereby neighbors pool their resources and the pool is then lent out to one member at a time? These credit mechanisms have traditionally not been available to women.

(2) I think that the new for-profit microloan funds require a great dose of scepticism. First, from what I know, i/o the original model, where the fund actually goes into the field and manages the loan, these new funds are so big that they tend to outsource the actual lending. So on some level, as an investor in a microloan fund, you can never truly know the on the ground lending practices. What are the collection practices? Are these secured lendings?

Also, unlike many "doing well by doing good" initiatives (ie. corporations reducing their electricity consumption --> reduces their costs) this is one of those situations where for a microloan fund to do the best (and on a fiduciary duty level, that is what they must strive for), they would charge absolutely the highest interest rates that they can get away with without triggering default conditions. Microloan rates were already high to begin with, because of their inherent riskiness and because of the high relative transaction costs. I shudder to think what interest burdens these third world entrepreneurs may have to shoulder under these new loans.

(3) It's like the U.S. Haven't you always wondered why it is the very poorest that have to pay the highest rates of interest on things like credit cards or home mortgages? We have a system that absolutely rewards pre-existing wealth. On a business level, I understand that it is prudent. But nevertheless, it makes me ill to think that we are exporting this structure all over the world.

[alice]

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