Help me understand the average cost to borrowers using various MFIs

Discussion in 'Kiva | Loans That Change Lives' started by KyRoamer, Oct 5, 2014.  |  Print Topic

  1. KyRoamer
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    KyRoamer Gold Member

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    Some use as the average number followed by PY (per year, I assume). Others express average charges in APR terms.

    Kiva explains:

    Although Kiva and its lenders don't charge interest or fees to borrowers, many of Kiva's Field Partners do charge borrowers in some form in order to make possible the long-term sustainability of their operations, reach and impact. For this specific Field Partner, Kiva displays an Annual Percentage Rate (APR), which represents the estimated average cost paid by a borrower to this Field Partner to access a loan posted on Kiva, with that cost annualized and converted into a percentage rate. Currently, Kiva displays APR for most of its Field Partners that aren't microfinance institutions (MFIs), in addition to some that are. Kiva is exploring ways to simplify and standardize the process to collect, calculate, assess and share APR pricing information for more partners. Using tools provided by MicroFinance Transparency, Kiva calculates this APR based on a detailed analysis of the types of loans this Field Partner has posted and/or plans to post on Kiva.
    I was looking at a loan in Zimbabwe with funding via Camfed Zimbabwe (http://www.kiva.org/partners/305). It shows average cost to borrower as 0% APR. Does this mean that there are no charges to borrower or simply that Kiva has not calculated one for this Field Partner? If the latter, perhaps ?? APR would be a better way to let us know.

    Now I only loan where the APR or PY is 40% or less. Is that a valid criteria for lending? If it is 0 I think I will exclude it as too good to be true.

    Back to annual cost, I know some Field Partners perform services beyond lending and some have smaller average loans (likely more costly to service). If a Field Partner has a high average cost but is highly rated, has a low default rate and has been around for a while such as ASKI (http://www.kiva.org/partners/305), should I ignore its 47% PY.

    I am bothered by the charges MFIs impose on borrowers but understand that for these borrowers other sources of funds don't exist. But backing there loans seems like supporting pay day lending in the States.

    Whether staying under 40% makes sense I have no idea but it makes me feel better and I'll assume (unless you correct me) that 0% APR doesn't mean no cost to borrowers.
     
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  2. canucklehead
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    canucklehead Gold Member

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    Just some quick thoughts on this as I may add or expand when I have a little more time.

    This has been discussed before on this forum and at the Kiva Do and often is a source of ill-ease when lending on Kiva.

    To start, one imperative I always stress with lending your money on Kiva is it is your money and you lend to those you wish to. If you are not comfortable, there are many loans that fit your criteria and you can select those if you wish to do so.

    The percentages for each MFI are determined by the individual MFI. Kiva loans help to bring down the cost of loans be offering interest free loans. The cost of lending money is often higher with local organizations due to the cost of operation, not that they wish to gouge their clients (borrowers). One has to consider the cost of operation. MFIs are not Chase bank with a lot of resources to support their operations, often there will be a few employees with high operational burdens associated with running the MFI, independent of interest rates.

    Second, local interest rates are not necessarily the sub 5 or 6% people are used to in developed nations. While I would like to see this, it is not possible given local market influences and access to capital. You can take a look at this chart to see that in some nations, the lending interest is up to 20% alone. I should note that this is for credit-worthy businesses or individuals. One should remember that many of the borrowers on Kiva would not be able to get these loans, and if so, their cost to borrow would be even higher. The same thing happens in the US, where ones rate reflects their credit history or score and capital access. I am loathe to compare to payday loans as those are true profit-making ventures where their goal is to squeeze the borrower. Kiva and MFIs should be for enabling the borrower (of course this is intent, but lets hope practice reflects intent).

    Finally, a better indicator of whether an MFI is operating for their own interest vs the borrower is to take a look at their Profitability (one line item below their Average Cost to Borrower). I tend to use this as an indicator of the health of the MFI (>0% to ensure their viability), but also <5% to ensure they are not profiting from their clients to excess.

    Its an impure science, but these are guidelines I tend to follow in selecting loans.
     
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  3. KyRoamer
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    KyRoamer Gold Member

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    Interesting thought. Profitability varied on my last three loans. Asociación Arariwa (Peru) was at -1.0%. It has been a Kiva lender since 2008 and has loaned over $12 million with a 0.04% default rate. But if it has a minus rate of return how is it surviving? Kiva rates it 3.5 stars and stars take viability into account. Maybe it has other income sources. Anyhow, I rarely (not always) lend to an MFI with fewer than 3 stars and still prefer a reasonable PY or APR. Asociación Arariwa interest rate is double the rate shown the chart you mentioned BUT its average loan size is only $438.

    High rates may be a necessary fact of life if MFIs are involved. Kiva Zip and Zidisha have no MFIs. They also have higher default rates. Many MFIs provide services beyond lending that enhance clients chance of success so I am not shunning MFIs but instead trying to pick those well rated MFIs that have either lower than average cost to borrower or provide substantial services to assist borrowers in running a business.

    I again looked at the Camfed Zimbabwe site and it really does have a 0% APR as no fees or interest is charged borrowers. This Field Partner is unrated but active for some 13 months. Kiva describes its Field Partner Due Diligence type as Full Due Diligence. This adds to my comfort. So I am the first Milepointer to lend funds to Enicia (http://www.kiva.org/lend/768183) for her grocery business. Join me if this is a good fit for you.
     
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