Bad Roads, Interest Rates, and MFI Sustainability

By Meg Gray, KF9 Nicaragua

I’ve driven over some pretty terrible roads over the last three months. It doesn’t seem to matter if they’re gravel, paved, dirt, or a mixture of the three. In Nicaragua every road has character and usually this “character” makes it harder to get to CEPRODEL’s clients. Now besides being an inconvenience, why does this matter? It matters because bad roads are just one of many factors that contribute to high operating costs for a microfinance institution (MFI). High operating costs mean higher interest rates are necessary in order for the MFI to be sustainable.

I feel like the conversation about interest rates usually starts and stops with the word “usurious” or “unfair,” when in reality it is much more complex than that. CEPRODEL charges 36% interest on loans to small businesses (rates are lower for some other types of loans) and yet I’ve talked to numerous clients who comment that they like working with CEPRODEL because their interest rates are so low. How could this be?

Bad roads make it harder for MFIs’ to visit clients or for clients to visit MFI offices. But on this front, roads are just one reason that MFI’s have such high operating costs. Here are just a few more:

-Populations are often very spread out. A small population spread thinly over a large area is much harder to reach. Even with centrally located offices, many clients still live quite a distance from the branch office. Many clients also have no way of visiting the branch and thus require more travel time from loan officers

-Very small loans are more labor intensive. Think of all the paperwork you had to do to get a loan for a house, a car, or tuition. An MFI’s application process probably doesn’t require quite as many signatures, but it is still a lot of time, manpower, and paperwork all for a very small loan. In other words the administrative cost of a loan is fixed no matter how small it is.

-Frequent repayments (often daily or weekly) are more labor intensive. The documentation of frequent repayments is also time consuming as is payment collection. For example, many CEPRODEL offices have loan officers that spend every afternoon walking or driving from business to business collecting repayments

Now, how are MFIs supposed to pay for all of this? Yes, they could keep seeking out grant money year after year, but I, for one, would like to see them become sustainable. The way for them to do that is to charge enough interest to cover their operating costs. While these rates may seem ridiculously high to us, MFI’s are not forcing people to take out loans. MFIs are providing a service and that service is in demand even with 36%, interest because these services are valuable to their clients. In short, these interest rates are necessary if MFI are going to provide the kind of services they do.

As long as we have loan officers willing to drive 30 kilometers through the mud on a motorcycle to spend an hour (or more) going over paperwork with a client all for a loan of $250, then yes interest rates are going to seem high, but financial services will also be reaching groups of people who have never had these opportunities before. And more importantly, these new clients will have ongoing access to financial services since the interest rates they are being charged will allow for the long-term sustainability of the MFI.

Meg Gray is finishing up her last week at CEPRODEL, a Kiva Field Partner in Nicaragua. Make a loan to a CEPRODEL entrepreneur today!

Posted in All, Anti-Poverty Focus, blogsherpa, CEPRODEL, Facilitation of Savings, Family and Community Empowerment, Innovation, KF9 (Kiva Fellows 9th Class), Nicaragua, Social Performance Tagged: Anti-Poverty Focus, CEPRODEL, Facilitation of Savings, Family and Community Empowerment, innovation, interest rates, KF9, Kiva, Meg Gray, microfinance, microfinance interest rates, Nicaragua, social performance