Microfinance Practice: Re: [MFP] Fixing sustainable rate of interest

Dear Mingyee,

Many thanks for your inputs. These are quite helpful.

I wanted to learn about the factors prevalent in the field of operation of MFIs that could provide some (not ALL) explanation to differences in the interest charged by MFIs in different economies.

For example, should low cost of commercial borrowing in certain economies (say, in Europe) as compared to high cost of commercial borrowing in West Africa be a basis for low interest on microcredit in Europe? This is in context of the Wonga discussion amongst MFP group members.

Alternatively, should very high cost of operation in West Africa (where Opex ratio could be about 30% or more) be one of the justifications for charging high interest from the microcredit clients in that part of the world?

I am trying to understand how the interest rate modelling works in different economies and your views throw more light on factors that need to be taken into account in the modelling process.

Best regards,
Kamakhya

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http://ng.linkedin.com/in/kamakhyasingh/

From: "Hsu Ming-Yee mingyee0706@yahoo.fr [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
To: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com>
Sent: Monday, 6 October 2014 7:48 PM
Subject: Re: [MFP] Fixing sustainable rate of interest

Dear Kamakhya,

I can contribute some inputs to your first question. I have worked at a Cambodian MFI for three years. This MFI uses a variation of the formula you have mentioned as a kind of starting point, but then adds two other aspects to arrive at concrete interest rates charged to the clients:

a) Client riskiness: the interest rate varies within a certain range. The lower the estimated risk of the loan, the lower the rate; the higher the estimated risk, the higher the rate, up to a certain risk threshold, beyond which the loan is no longer granted. 

b) Competition: The interest rates arrived at internally are compared to market interest rates for a reality check. If they are markedly higher than what other MFIs charge, they are adjusted downwards.

Other aspects besides the above can be taken into account too:
c) Loan term: the longer the term, the higher the risk and the higher the   interest rate should   be.

d) Specific discount rate for loan product deemed particularly worthy by the MFI, for example for the purchase of environmentally-friendly products, for lending to particularly poor regions, etc.

I hope the above   helps. Best regards,

Mingyee  

    From:   "'Kamakhya Nr. Singh' kamy2n@yahoo.com [MicrofinancePractice]"   <MicrofinancePractice@yahoogroups.com>
 To: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com> 
 Sent: Sunday, October 5, 2014 1:58 AM
 Subject: [MFP] Fixing sustainable rate of interest
  
 Dear Microfinance practitioners  and experts,

I wanted to have your opinions/views on the following:

1. Do MFIs take decision on fixing  rate of interest on loans by using models like that of CGAP, which uses administrative expenses (AE), loan losses (LL),  the cost of funds (CF), the desired capitalization rate (K),  and investment income (II) in real world? As most of the  practitioners would be aware, CGAP model states that sustainable rate of  interest (R) can be calculated by using the formula indicated here:
 
            AE + LL + CF +  K - II
R=-------------------------------------  
               1 – LL
 
2. Are there empirical  studies on use of CGAP's kinds of models in fixing rates of interest charged to  the microfinance clients?
 
3. Do the huge  differences in the above factors such as AE, CF, LL in different economies  explain the difference in rate of interest charged in those economies?

It would be great to hear from you all.

Best regards,
KNS