Transcript Ethical problems relating to interest rates in microfinance

Interest Rate ethics : an aspect of
social performance in microfinance
Arvind Ashta
Chairholder in Microfinance
Burgundy School of Business, CEREN
E-MFP conference, Luxembourg, Nov . 24-26
Thanks to the Banque Populaire de Bourgogne –Franche Comté for financing.
Plan
 Interest rate levels
 Questions of governance
 Interest rate transparency
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Donations and Equity to Compartamos
Public funds
International
Development
institutions : CGAP, IFC
US AID
Private funds
Accion
Compartamos
AC (NGO)
32%
68%
Compartamos
Ashta
(for-profit)
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Compartamos IPO in 2007
30%
Paid up capital 2000
Book Value 2006
Ashta
$ 1.8M
$ 38M
100%
$ 6M
$ 126M
IPO Proceeds 2007
$ 470M
$1550M
Market Value 2007
$ 600M
$2000M
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The problem of governance
 For-profit or Not-for-profit
 Those who convert from
not-for profit to for-profit:
is this ethical
 Should not-for-profits own
for-profits?
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Legal Status
Former
status
SKS
NBFC since 2006
Society before
Spandana
NBFC since 2005
Society before
SHARE
NBFC since 2000
Society before
Bandhan
NBFC since 2007
Society before
Asmitha
NBFC since 2002
SKDRDP
BASIX
Trust
NBFC and Bank
since 1997
Grama Vidiyal
NBFC since 2008
BISWA
Society since 1994
Equitas
NBFC since 2007
Trust before
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Interest rates worldwide
(Rosenberg et al. CGAP 2009)
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Interest rates in Mexico (based on
Rosenberg 2007, CGAP)
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Power versus Interest Grid of Compartamos
stakeholders (Ashta & Hudon, 2009)
High
Existing
Borrowers
Employees
Potential
Borrowers
Interest
Managers
Shareholders
Donors
Regulators
Low
Low
Power and influence
High
Stakeholder
Overall objectives
Expected interest rate desired
Existing Borrowers
Potential Borrowers
Availability, Impact
Availablility, Impact
Donors
Outreach, impact
(but also sustainability)
Profit, growth, job stability, (but some may have social
objectives)
Client protection (Outreach, impact, employment?)
Low interest rates
Mixed: High if it enables outreach but Low as
future borrower
Mainly low interest rates?
Employees
Regulators
Shareholders
Ashta
Profit, growth
(but 2/3 also have development goals)
European Microfinance Week, Nov. 2009
Mainly high interest rates?
Not related to interest rate (Low interest
rates?)
High interest rates
(some may want lower interest rates)
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Ashta & Hudon (2009 a and b)
 Impact on existing borrowers would be
greater if interest rates were lower
(donors, existing borrowers)
 Need to be profitable

for sustainability (shareholders)

For growth (impact on new borrowers)
 How to balance these two objectives?
 Earmark Share capital to borrowers

As part of interest payment

As free/ bonus shares
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The problem of transparency
 Flat rates
 APR EAR
 Other elements to take into account

compulsory savings,

up front fees
 Particular problems when period is short
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What is the whole truth in lending?
Example: you buy a good for 140 $. You pay 20$ cash and
150$ to be repaid in 6 monthly instalments (for a total of
170$)
Method
1
2
3
4
5
6
Calculation
method
(GP–RP)
/ RP
[(GP-RP)/
RP] x 2
[(GPRP)/LA] x
2
[(GPRP)/AOB]
x2
(GP–RP)²
-1
IRR x 12
Interest
rate
21.4%
42.8%
50%
86%
104%
IRR12-1
81% (APR)
(APR)
(EAR)
119%(EAR)
GP: global price
RP: real price
LA: loan amount
AOB: average opening balance = (LA+D)/2
D: downpayment
APR: annual percentage rate of charge
EAR: effective annual rate
European
IRR:Ashta
Internal
rate Microfinance
of return Week, Nov. 2009
For finance professionals, last
method is the whole truth: 119%
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Interest rates of the top 10 Indian MFIs, where
available (source: websites Oct. 2009)
Interest Rate
Effective annual rate/ declining
balance
On flat basis
12.5% to 15% flat
25.6 – 30.2%
SKS
Not discolosed
Spandana
23.6%
SHARE
Bandhan
12.50% flat + 1% processing + 23.56% + +
10% deposit
12.50% - 15.00%
23.60% - 28.13%
Asmitha
11% to 11.25%
SKDRDP
15%, 18%, 21% & 24% + a 10%
cash deposit
BASIX
Not disclosed
Grama Vidiyal
20%
BISWA
27.5% to 28.5%
Equitas
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Conclusion: How to link interest rates with Social
performance measures
 Deviation from average rates

International

Country
 Deviation from celings

Deviation from usury rates

Deviation from money lender rates
 Governance


Is part of intrest going back to borrowers in terms
of share capital
Are profits lower if there are more NGOs on the
board/ more donor funds
Figure 4: Minimum Reservation prices
Price
AC 3: Average total cost curve
including inflation and cost of
subsidized faciilities
AC2: Average operating
and financing cost curve
Pmax
Pmin 3
Range of negotiation
AC 1: Average operating
cost curve
Pmin 2
Pmin1
 Transparency in interest rates

Flat rates ?

APR disclosed ?

EAR disclosed ?

Other fees/ compulsory deposits disclosed?
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Quantity of loan
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Future research questions
 How should you distribute benefits with the range?
 How do you feel if your NGO becomes a profitable entity?

Former Donors to NGO

Former volunteers to NGO
 If you separate your loan from insurance services –to lower interest
rates
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
Will people still take your insurance services

Does packaging oblige them to take all?
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