Viewing all posts with tag: Interest Rates  

Overdraft as a Product, not a Penalty?

The Taylors overdraft their checking account every two weeks, on purpose.

As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.

The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . . 

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Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

My last two posts on the potential repayment crisis in Chiapas described the high risk of a crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world. But here is the good news: thus far there is no crisis, and one could still be avoided. 

I have argued before that development finance institutions and other funders could leverage Smart Certification to enforce client protection practices and thus reduce the risk of the kind of over-lending that's happening in Chiapas. However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.

The answer to avoiding a repayment crisis in Mexico will thus require government action . . . 

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Impact Evaluation of Compartamos Released

The long-awaited impact study of Compartamos, led by Manuela Angelucci of the University of Michigan and Dean Karlan and Johnathan Zinman of IPA, has finally been published. The research team used a randomized trial to test the impact of loans offered at 110% APR by Compartamos, the largest microlender in Mexico. After three years of data collection on a variety of factors, the results were generally positive with no evidence that the loans caused harm or significant negative effects.  Researchers found that loan recipients grew their business revenues and expenses, were happier, more trusting, had greater household decision power, and were better able to manage liquidity and risk.  However, there was little evidence that loans had an impact on building wealth like household income, business profits, or consumption.

One of the more interesting conclusions from the paper is as follows . . . 

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Worse than AP: The Damage of a Repayment Crisis in Chiapas

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis. No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start. In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help. But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.

Let’s be blunt: not all countries are created equal. Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh. Back then I compared a possible crisis in India to the crisis in Bolivia a decade before: "India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling." Well, Mexico is no India . . . 

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From Responsible Lending to Responsible Profit

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred. 

With few exceptions, his critique that microfinance investors are investing in MFIs charging exhorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don't belong in your portfolio or you should learn how to explain those investments . . . 

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Highlights of David Roodman's Microfinance Open Book Blog

David Roodman’s conversation with Jonathan Morduch is coming up tomorrow. If you haven’t read David’s book yet, you should. But we can be realists. You probably don’t have time to buy and read the whole book in the next 36 hours. So, here’s a quick cheat sheet of some highlights from David’s blog over the past few years. Reading these posts will get you up to speed (but you should still read the book!).

Perhaps David’s most famous post is an October 2009 post titled “Kiva is Not Quite What it Seems,”  about the online microlender, Kiva. The post kicked off a wide-ranging debate about the role of transparency in the framing of NGOs’ operations and ultimately changed the way the organization presents itself. In the post Roodman explained there was significant divergence between Kiva’s rhetoric and marketing and how it actually did its work . . . 

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Should interest rates be month-ized?

The idea behind APR – annualized percentage rates – is to put different interest rates into comparable terms. Some loans are for 2 months, say, and some for 2 years, so to compare them, it can be helpful to ask: “what would the rate be if the loan was for a year?”

Comparing apples to apples makes sense. Or at least that’s the financial industry/expert consensus.

Arjan Schutte is managing partner of Core Innovation Capital, a venture capital fund that invests in innovative financial technology aimed at the underbanked in the U.S. Arjan argues that APRs are misleading when it comes to short-term loans. Arjan points out that Americans took out $40 billion in pay-day loans last year (not including all the other types of short-term credit such as overdraft, pawn, etc.). Most of these loans are very short term, usually for emergency liquidity and a quick infusion of cash to meet short term needs. In that case, borrowers are thinking more about the dollar cost of the transaction than about the interest rate . . . 

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From Highs to Lows - An Indian Crisis Unfolds Rapidly

India is the biggest, fastest-growing microfinance market anywhere.  And it's at risk of hitting a bad crisis.  This will be surprising if you haven't been paying attention to the global press for the past 3 weeks.  The last big microfinance news from India centered on the millions of dollars earned by investors following the SKS IPO. Vinod Khosla made the front of The New York Times for his $100 million plus pay-day. 

Just a few weeks ago, most of the who's who of microfinance in India got together for a conference in Mumbai.  The agenda gives no sense of what the rest of October would bring.

But a spate of suicides by microfinance customers, in response to alleged harassment by microfinance loan collectors, has turned attention back to conditions in villages -- and it's not all pretty.  Regulators are now rushing to clamp down on microfinance institutions.

Shloka Nath has the best piece I've read, online today in Forbes India . . . 

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Can it Help the Poor if it Hurts the Banks?

Credit risk is a reality for banks around the world. It is even a fairly predictable reality, if sometimes ignored (Exhibit A: Present dynamics in the US). Banks often know what percentage of their loan portfolio is at risk and they price that risk through higher interest rates for riskier clients, among other ways. Microfinance institutions (MFIs) do not have the same luxuries. They lack the information about their clients necessary to differentiate, they already get enough flak about their “high” interest rates, and they are constantly fighting to keep operations costs low, a difficult task if you increase complexity. It’s no wonder, then, that low client default rates have become a kind of holy grail for microfinance providers. When you feel powerless to change so much of what you do, its useful at least to have a clear measure of commercial success.

And yet, could the rigidity of the typical micro-credit product be partially responsible for the fact that access to credit has limited, if any, income effects for micro-entrepreneurs?

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Virtual Conference Day Two: Designing financial services, interest rates and market research, part 3

Key Principles of Designing Financial Services

•    Daryl Collins posed the question of whether product design for the poor needs to undergo a complete and utter re-think, or whether tinkering around the edges is sufficient.

•    The conversation about how to formalize some of the informal mechanisms (such as savings groups) that seem to be working for poor families continued. While Village Savings and Loan Associations (VSLAs) and Savings and Loans Groups (SLGs) seem to be a sort of “savings club plus” with enhanced reliability (in theory), Daryl wondered whether there was evidence that they actually do enhance reliability in practice.

•    Daryl followed up on the VSLA and SLG conversation and noted that they were largely absent in any of the three diary countries. Based on her observations and familiarity with other research, she suspected that there would be take up despite the existence of other centrally offered services. Daryl wondered whether people save more in VSLAs than in other more traditional types of financial devices, like a bank account. Citing research from the South African diaries, Daryl reported that respondents saved much more of their monthly income in savings groups than banks, despite holding accounts in both types of accounts. She wondered how these patterns shift when a new type of channel, such as m-banking is introduced into the picture. 

•    Jonathan Morduch offered his comments on the VSLA discussion and commended Daryl for her question about what happens when people have the choice to save/borrow in VSLAs versus in traditional banks. Jonathan cited observations from Tanzania where the population using VSLAs is distinct from the “banked” population. In Tanzania, the VSLA-users Jonathan saw were also in ROSCAs. This portfolio allowed for greater flexibility and is in accord with other parts of East Africa where it is common for people to be in several ROSCAs simultaneously. Jonathan cited a surprising element in a two-year VSLA in Tanzania where the dividend was divided based on cumulative savings, without regard for whether the savings were deposited in the first month or the 24th. While this arrangement made things simpler for the group, it seemed problematic for economists who weigh the “time value of money” heavily.

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Virtual Conference Day Two: Designing financial services, interest rates and market research, part 2

Key Principles of Designing Financial Services
•    It was pointed out that reliability is important for clients from the point of view of security as well as assurance that their requirements would be met

•    Sandeep and Jitendra noted that convenience is becoming a major differentiator in competitive markets and that door step services are highly valued by clients. Peter also highlighted the importance of convenience by speaking about the importance of proximity and local participation.

•    Ashish Bazaari of BGFL mentioned that in the context of individual lending the product features like amount of loan, repayment terms and frequency and tenure of the loan need to be flexible to suit client requirements

•    It was observed that imparting flexibility should take into consideration the viability of doing so given the costs involved. Information Technology was mentioned as one enabler which could potentially impart flexibility to products while minimising the costs.

•    It was noted that structure is especially important when clients are saving with a specific purpose and a suggestion was made to develop structured products suited to client cash flow.

•    There was an opinion that structure and flexibility are not complementary and that attempting to balance both in the same product might be counterproductive. The response from the forum cited the Jijenge account at Equity Bank as an example and countered that it was indeed possible to balance these seemingly contrasting principles.

•    Clemence Tatin Jaleran of CIRM mentioned that the key principles remain the same even for microinsurance, though the specific regional context would also have to be studied to arrive at an ideal balance of these key principles. Premasis built upon the need for flexibility in microinsurance and mentioned that client flexibility requirements need to be studied during product development. He mentioned savings-linked insurance and stressed the need for product positioning to be clear in the minds of the customer . . . 

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How peer pressure can help you save

What do you think would make you more likely to save—being paid a higher interest rate or the social pressure of making a public commitment to save more and then having your peers monitor your progress?  A new paper from Felipe Kast and Dina Pomeranz (hat tip to the CMF folks for blogging it first) finds that while both strategies help to increase savings, the peer commitment mechanism comes out on top...

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The impact of microfinance credit ratings

It’s been great to see business school faculty take an interest in microfinance.  Gabriel Natividad of the strategy group at the Stern School of Business at NYU just published an interesting new paper that links asymmetric information, third-party credit ratings, the price of credit and the operations of microfinance institutions (MFIs). Empirical evidence on information problems lags behind theory and practice, so the paper’s especially welcome...

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