By Eva Wu, KF9 Philippines
Having read Meg’s excellent blog post “Bad Roads, Interest Rates, and MFI Sustainability” and the ensuing comments from Kiva lenders, I admit that I was rather baffled. Particularly by comments that varied upon the theme of: “In the U.S. you can get loans for ~8%! You can get credit for 18% interest, which we find high and oppressive! So how can MFIs charge 36% interest rates on loans to their poor clients, it is usurious, it can’t be justified…” so on and so forth.
I believe that if you were to plunk a U.S. bank into a developing country with limited infrastructure, where most clients don’t have ready access to the internet that lets them transfer money from one bank account to another with the click of a mouse, where you have to ask employees to constantly risk their personal safety by carrying huge amounts of cash over uncertain roads and territories, those banks would not be charging 8% interest or even 18% interest, but a much, much higher rate.
Still not convinced? Let’s try a quick breakdown of some actual numbers -
HSPFI, my host MFI and Kiva field partner, charges 3% interest a month on loans. So for a first-time borrower with a loan of P5,000 to be repaid over 5 months, in one month the HSPFI borrower would be paying back P1,000 on the capital, and P150 in interest. (The current exchange rate is 46 Philippine pesos to 1 U.S. dollar, so the USD equivalent is $21.74 in capital, and $3.26 in interest.)
The P150 interest collected on that loan covers salaries and benefits of not just the project or loan officers who collect the client repayments on a weekly basis, but also the salaries of admin staff members like the branch cashier, accountant and assistant accountant, as well as the branch manager. Let’s say our first time borrower lives in Camiguin. For HSPFI’s Camiguin Branch (which is HSPFI’s smallest but one of its most efficient branches), total salaries and benefits for their five staff members (three project officers, one admin staff, and one officer-in-charge/branch manager) in January 2010 came to roughly P27,500 (or $598 USD).
Apart from the salaries and wages of the branch staff, the P150 interest will also go towards salaries and benefits of the Head Office staff – HSPFI’s Executive Director, Director of Operations, HR staff, tech staff, community development staff, internal auditors, Kiva Coordinator(!), etc. – as well as Head Office’s administrative costs (for printing, office supplies, utilities, trainings and conferences…). Unlike the branches, HSPFI’s Head Office does not give out loans or collect interest from clients, so the branch offices make monthly contributions to help cover Head Office’s costs. HSPFI Camiguin Branch contributed P53,400 (or $1,161 USD) in management fees to Head Office this past month.
Still with me? Remember that our first time borrower is paying P150, or $3.26 USD in monthly interest on his or her loan of P5,000. But salaries and wages are hardly the only things that a functioning MFI has to pay for. Camiguin project officers spent about P4,500 (or $98 USD) on travel this past month. And to round out the estimated operational costs, total administrative expenses for necessities like utilities, phone, office supplies, rent, taxes/licenses, etc. for the branch came to about P26,150 (or $568 USD).
|Partial Operating Costs for HSPFI’s Camiguin Branch in January 2010|
|Branch Staff Wages & Salaries||P27,500 (~$598 USD)|
|Head Office Management Fee||P53,400 (~$1,161 USD)|
|Project Officers’ Travel||P4,500 (~$98 USD)|
|Administrative Expenses||P26,150 (~$568 USD)|
|Total||P111,550 (~$2,425 USD)|
Note that this is PARTIAL operating costs for HSPFI Camiguin. Kiva is not HSPFI’s only (or biggest) funder by any means, and other funders (e.g. Oikocredit, SEAD, PCFC, SBGFC) actually do charge interest on loans to HSPFI. I left that line item out of the above calculations for the sake of argument that Kiva’s funds are interest-free, but if I were to add that line item in Camiguin’s operational costs would increase by about P49,800 (or $1,082 USD).
By now you’re probably tired of me repeating that our first-time HSPFI borrower is paying P150, or $3.26 USD in interest this month on his or her loan of P5,000 – 0.13% of operational costs. Surely you have to account for repeat borrowers who have taken out higher loans and are correspondingly paying higher interest fees. So if we increase the loan amount to P30,000, our now long-time, repeat HSPFI borrower would be paying P3,000 on the loan capital and P900 (or $19.57) on interest this month – 0.8% of operational costs. This P900 definitely goes farther towards contributing towards operational costs, but note that borrowers with P30,000+ loans only make up about 10% of HSPFI’s total portfolio.
The above is very condensed and much abridged, to keep this post from being three times as long. But by listing out all these figures, I wanted to show that running an MFI is not cheap. It’s easy for us to condemn 3% monthly interest rates are high, but it’s just as easy for us to forget that staff, utilities, rent and a whole range of other operational expenses need to be paid in order for an organization – any organization – to run.
Also, working conditions for MFIs in developing countries are very different from banks in developed countries. This may seem like huge duh point, but it bears pointing out that MFIs’ operational costs are high in part because you need enough project officers to visit hundreds of clients every week and collect cash repayments, and you need enough admin/other staff to support the project officers. U.S. banks don’t need employees to visit every one of their clients on a weekly basis to collect repayments. Furthermore, banks in the U.S. have access the excellent technology/infrastructure in place that allows for automated payments (and greater automation in general) – which helps keep interest rates low. To say that MFIs in developing countries have “high” interest rates in comparison to banks in developed countries with “low” interest rates ignores the fact that banks in developed countries have certain operational advantages that MFIs in developing countries don’t have, and need to compensate for.
At this point maybe some of you are thinking, “I don’t really care about MFIs needing to cover operational costs, I only care about how this 3% monthly interest affects Kiva borrowers!” Leaving aside the fact that there would be no Kiva borrowers without field partner MFIs, I had previously met a Kiva borrower who decided to stop borrowing from HSPFI, and I know she’s not the only person to have ever done so. The interest rate might have been a factor behind her decision to stop borrowing, although there might’ve been other personal factors as well.
But on the other side of the spectrum there are Kiva borrowers like Ms. Mellianita Moron. Since this topic of “high” interest rates had been weighing on my mind, I brought it up during her interview. I explained that businesses in the U.S. can get loans at much lower interest rates, so there are Kiva lenders who are worried that MFIs like HSPFI are charging overly high interest rates to borrowers in the Philippines. I asked what she thought about HSPFI’s interest rate – was it indeed too high?'
HSPFI’s 3% monthly interest rate is ok! Mellianita exclaimed. Especially in comparison to other MFIs who she had borrowed from that charged 10% interest a month! And to top it all off the other MFI collects repayments on a DAILY basis, in comparison to HSPFI which collects repayments on a weekly basis. When I then asked if there are any additional services that she would like to see from HSPFI, Mellianita laughed and said that she wished HSPFI could increase loan amounts and release more loans at a faster rate, so she won’t have to borrow from MFIs that charge truly exorbitant interest rates and can just borrow from HSPFI. I looked around at the various center members and extended family who had gathered outside Mellianita’s sari-sari store to watch (and occasionally interject), as they all nodded their heads in agreement.
Eva Wu would like to thank HSPFI for generously allowing her to use figures from their latest financial statement in this blog post. She has lots of thoughts on the (unsexy) topic of MFI interest rates, but hopes for now that people can understand that asking why MFIs in developing countries can’t offer interest rates as low as banks in developed countries is a bit like asking why apples can’t be oranges. Or to use a more Filipino analogy, why lanzones can’t be rambotan.