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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 4 / July - August 2004 |
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Voices of Microfinance Thank you to all those who contributed their expertise to provide valuable insight into the following question: There has recently been much debate on the need to have liberal interest rates and also protect consumer’s rights. What constitutes a usury interest rate in microfinance? Definition: usury
I usually consider that
a microfinance institution is charging exorbitant or usurious interest rates
when: the price exceeds that of moneylenders in their areas of operation; and
when the operating cost ratio is higher then the average of its competitors
in its country and region. However, the age of an institution can also come
into play, for example: imposing low interest rate levels at the start-up phase
is limiting the institution to self-finance its growth (client outreach and
Return on Asset (RoA)) and creates donor dependency to support unrealistic pricing
and expansion plans. — Guy Dionne
— Anand
Prasad There cannot be a single definition for a usurious interest rate that can be used in every economy, since market rates differ from country to country. For viability, usually microfinance institutions charge higher interest rates than commercial banks due to higher transaction costs. However this does not mean that the rates are usury, it reflects the cost of increased access to poor people to finance. For viability, as in all commercial structure, interest rate should be calculated with a view to at least cover the costs of the institution, i.e. administrative expenses, cost of funds, cost of loan losses, etc. These costs change from country to country, or even from institution to institution, therefore the environment in which the microfinance institution provides services as well as the structure of the MFI should be taken into consideration in determining the appropriate interest rates. — Berna
Bayazit For Prisma Microfinance of Honduras and Nicaragua, we define usury rates as rates so high or the length of the loan so long that borrowers’ payments are never sufficient to completely retire loan principal. We are always conscious of giving our borrowers the best deal and not ever being accused of charging usurious rates. To this end, we monitor 5 factors when setting our non-usury loan rates: 1) loan principal and interest are fully amortized within stated loan durations, usually six to 36 months; 2) we charge simple interest, not flat interest, and usually stay 500 to 750 basis points below the local market; 3) a borrower’s monthly debt-to-income ratio (including loan and interest payments) do not exceed 80-90%; 4) the organization’s annual overhead/operating costs are tightly controlled to not exceed 10% of average assets; and 5) through good loan underwriting and active repayment control, delinquency is kept between 5% and 10% of the total loan portfolio according to international CAMEL standards. — Dr.
Kendall Mau, MBA, DBA The interest rate of an MFI should reflect these variables: the best interests of the beneficiaries, the rate of annual inflation in the given country, and the commercial rate of interest in the local banking system. The rate of interest on credit allocation should be the lowest possible, and below the rate of the local commercial banking system. The rate of interest on beneficiaries savings should be at least the level of inflation and higher than that offered by the local commercial banking system. — Zvi
Galor Usury, for credit unionists, is excessive interest, i.e. interest incompatible with the following statement: “Credit unions provide credit on reasonable terms and at affordable rates of interest.” The interest rates are typically the lowest possible rates consistent with: covering operating costs, competitive remuneration of savings, provision for bad debt and other required or desired reserves, and building of institutional capital required for safety and soundness. All surplus revenues are returned to the members in the form of dividends on shares, interest on savings, loan interest rebates, improved services, or some combination of thereof..." I am currently advising
two US Muslim groups on adapting the credit union model to the principles of
Islamic Banking. Most devout Muslims (not to be confused with "fundamentalist")
accept the interpretation of the Koran that all "riba," i.e. a fixed
rate of interest on loans or deposits, is forbidden. The basic principle is
that of "shared risk." Muslims believe that it is immoral if the risks
and benefits of a loan or an investment are not shared equitably by all participants.
There are some dissenting opinions among Muslim scholars and Islamic banking
practitioners who do not equate interest with "riba" but they are
a minority. — Kelly
J. Morris, CCUE From my point of view, usury in microfinance would be charging interest rates higher than market rates, which do not contribute to expanding credit services among the poor. In different words, rates that do not contribute to the portfolio growth while maintaining depth of outreach, but to high spreads and the generation of over-the-industry profits that are finally distributed as dividends among the MFIs shareholders. If the market works, usury -under this definition- should not exist in the long run. — Francisco
Olivares-Polanco With the definition of
usury comes the implementation of price controls on capital - not only unnecessary
but creating unintended consequences. If the goal of donors is to ensure the
ethical lending of capital, they should be focused more on ensuring transparency
- where borrowers know up front all the fees, interest payments and loan repayment
schedules; this is still too often not the case. — Clement
Wan |
