A few of you have asked questions about the interest rates on microcredit loans -- why 25-35%? Sounds like a rip off!!
Here's the skinny: Microfinance institutions (MFIs) are the on-the-ground organizations that make the loans to very poor men and women. 6-8 women (or men) agree in advance to form a lending group. They agree to help each out in the event that one is
unable to repay her loan. The MFI then enters the picture and provides serveral training sessions. Then the loans (averaging $100) are given to the women. The women agree to meet at a set time, on a weekly basis, to make loan payments. The loan officer
from the MFI arrives on his/her scooter and collects the loan payments, answers questions and does the paperwork. The loan officer zips around to a number of villages having similar meetings. If an MFI has 40,000 clients -- with all clients making weekly
repayments -- you can imagine the number of loan officers, scooters, laptops, etc. required.
The average cost of funds for MFIs in India (for example) is 8-11%. This is how much the MFI pays to borrow money from local big banks -- in order to have money to lend to their borrowers. By the time all the costs of running the MFI are loaded into the budgeting
spreadsheet, the MFI is required to charge a 25-35% interest rate in order to cover all costs. These interest rates are often equivalent to the prevailing credit card interest rates in the respective countries in which we work. Without such microcredit
loans, the poor are forced to borrow from money lenders and loan sharks at interest rates of 300% - 3,000%.
MFIs are NOT in the business to make a ton of profit. On the other hand, if they are running at a huge loss, then they won't be able to repay THEIR loans that they've received via large lines of credit from commercial banks in their home countries.
Unitus strives to lower the cost of running an MFI by streamlining internal operations, improving I.T. infrastructure, and lowering the cost of capital. This will have a two pronged benefit: (1) The interest rate the poor woman pays will be lowered and (2)
the MFI will be able to scale its operations more rapidly.
Microfinance is not the panacea to all the world's ills - but it is, in fact, a very powerful and reliable tool for empowering the poorest people in the world.