Microfinance: Poor service; Tiny loans are getting more expensive

Feb 1st 2014 | From the print edition 

Microfinance: Poor service; Tiny loans are getting more expensive

INTEREST on the minuscule loans made by microfinance outfits has always been high, but over the past few years it has become even higher. A recent paper, using data on over 1,500 microfinance institutions (MFIs) from around the world, shows that for the smallest loans, typically less than $150, the average rate climbed steadily from 30% in 2004 to 35% in 2011.*

Even as small loans have become more expensive, they have also become more common. Global microfinance grew by 30% annually from 2004 to 2011, according to figures from MIX Market, a data provider. Strong growth heightened competition and made lenders more confident, says William Ford of MIX. Banks and mid-market MFIs started to poach the poorest clients away from low-end MFIs when they realised that lending to them was viable. The average loan size in the portfolios of most MFIs dropped after 2006, suggesting that they were indeed lending to a wider range of clients. Meanwhile, to replace lost customers, low-end MFIs began to serve borrowers even they had previously spurned as too great a credit risk.

That proved expensive. More frequent defaults seem to have forced lenders to raise their rates. So have steeper funding costs. The development agencies that tend to finance most MFIs have not been able to keep up with the industry’s expansion. Microfinanciers have had to raise money from commercial lenders, which charge higher interest. Funding costs for low-end MFIs increased by 70% between 2004 and 2011, the paper shows.

Rising rates may seem like grim news for the poorest borrowers. But they used to be at the mercy of moneylenders who might have charged 100% or more. In that sense, suggests Dean Karlan of Yale University, their borrowing costs may have fallen. That goes some way to pulling them out of penury.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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