Dear Hugh,
Thank you for your e-mail and the thoughts therein are helpful to the growing effort of making the microfinance industry and the business of helping the poor worthy-while.
Nonetheless, the point in my e-mail was to find out the motivation behind the will to repay a loan. I understand that in lending, the defaulters might be classified in two categories i.e. Willful defaulters (those who are able to repay but choose not to) and Un-willful defaulters (those who are willing to repay but conditions beyond their control force them not to). Someone might borrow $1,000 at 200% interest rate and be able to repay, while another might borrow the same amount at 10% but fail to repay, so in this case what drives the repayment spirit. My e-mail wanted to find out the motivation behind the good repayment rate in VSLAs regardless of the seemingly high interest rates that they charge to each other. As you have read, a lot of good motivations were put across including psychological motivations. Thanks to Chuck, there was also a clarification that the "seemingly" high interest rates in VSLAs might not be high because there are not hidden costs and that the financial decision to borrow a certain amount for a certain repayment period at a certain interest rate plays a role in economic progress of a client.
As a disclaimer to my e-mail, I did not want to discredit the VSLA's interest rates against the MFI's. However, like I said, your blog post is a valuable contribution to the micro-finance sector, it makes us sit down and reflect on our ways of doing business and challenge ourselves on how we can be better.
On Tuesday, 30 June 2015, 16:35, "Hugh Sinclair Lat_Am@yahoo.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
Richard,
You seem concerned about the level of interest charged to the poor. This is en encouraging sign, and none can advise better on this than Chuck Waterfield. He provides a range of examples in order to demonstrate the interplay of loan term, amount and APR. Note one of the options in particular: "A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision."
I had a quick look at your own interest rates:
This is data somewhat out of date, but the best we have available. It appears your MWK500,000 loan is approximately US$1,000, it has a 12 month term, and an APR of just over 100%. I wonder if you could confirm whether you agree with Chuck's comments. As you are well aware, I have been critical for some time of the Opportunity Interest rates charged, and wrote a blog post specifically about the apparent contradiction between the claims made by Opportunity and the reality practiced.
Given that you represent an apparently Christian institution, you are presumably aware that usury is prohibited in the Bible. Could you explain the point at which an interest rate become usury? Presumably Opportunity have a policy on this, and yet I was unable to find it, or any discussion of interest rates, on your website.
From: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice@yahoogroups.com
Sent: Tuesday, June 30, 2015 5:34 AM
Subject: [MFP] Digest Number 3859
10 Messages
Digest #3859
1a
Understanding default rates in MFI's group loans and Village Savings by "richard chongo" rigochongo
1b
Re: Understanding default rates in MFI's group loans and Village Sav by "Chuck Waterfield" cwaterfield
1c
Re: Understanding default rates in MFI's group loans and Village Sav by "Narasimhan srinivasan" shrin54
1g
Re: Understanding default rates in MFI's group loans and Village Sav by "Sophie Chitedze" sophiechitedze
Messages
Mon Jun 29, 2015 8:19 am (PDT) . Posted by:
"richard chongo" rigochongo
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard ChongoSocial Performance ManagerOpportunity Bank Malawi
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard ChongoSocial Performance ManagerOpportunity Bank Malawi
Mon Jun 29, 2015 8:52 am (PDT) . Posted by:
"Chuck Waterfield" cwaterfield
Hello Richard,
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ <http://www.mftransparency.org/microfinance-pricing/Malawi/> )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
> On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
>
>
> Dear all,
>
> Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
>
> I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
>
> Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
>
> Best regards,
>
> Richard Chongo
> Social Performance Manager
> Opportunity Bank Malawi
>
>
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ <http://www.mftransparency.org/microfinance-pricing/Malawi/> )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
> On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
>
>
> Dear all,
>
> Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
>
> I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
>
> Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
>
> Best regards,
>
> Richard Chongo
> Social Performance Manager
> Opportunity Bank Malawi
>
>
Mon Jun 29, 2015 9:22 am (PDT) . Posted by:
"Narasimhan srinivasan" shrin54
Richard
We can calculate the APR on any loan. When we compare, we should see the context of the loan. Interest on a very short duration loan will invariably seem exploitative when annualised. The customer probably borrows from the group because it is cost effective compared to other sources of loan and in the context of opportunity which will be funded with the loan. In the Indian context, Self-Help Groups members charged between 28 to 40% APR on their loans to members. The alternative was to go to a money lender at around 60 to 100% APR. Within the groups, the excess of income over expenditure arising from the loans was added to the group corpus and in fact strengthened the member financial position.
On default rates, in India, the MFIs report PAR 30 days at less than 1% (March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on their loans to SHGs (which are the closest to VSLAs). The default rates within the groups - member loan repayment rates to the group are even lower. My view is that the difference between MFIs and banks is explained by the frequency of customer contact and rigour of monitoring. As long as savings of members with the VSLA are substantial and external funds - such as from MFIs and banks - form only a minor part of the overall funds of the group, credit discipline will be intact. When external funds increase in proportion and high variability in size of loans to different members within the group is seen, default rates will tend to increase. These again are my impressions.
Regards
Srinivasan
>
>> On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
>>
>>
>> Dear all,
>>
>> Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
>>
>> I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
>>
>> Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
>>
>> Best regards,
>>
>> Richard Chongo
>> Social Performance Manager
>> Opportunity Bank Malawi
>>
>
>
>
Mon Jun 29, 2015 9:37 am (PDT) . Posted by:
"Hugh Allen" hughvslanet
Dear Richard. Things are now very different.
The average outstanding loan size in a VSLA is $45, and disbursed is about $60-70. But it varies enormously. I have just returned from a VSLA today in southern Tanzania where one member just paid back a loan of $750, and capitalisation was over $5,000 - and I know of one in Nairobi with a capitalisation of over $500,000. But that's an outlier, and for most rural VSLAs loans are over 3 months and interest rates (determined by the members) vary from 5% per month to 10% per month. Since VSLAs have virtually no expenses and very high repayment rates, all of this income is net and untaxed. The average annualised return on assets is 29% (as per the 172,000 groups whose data is posted to the SAVIX – www.thesavix.org). 5% per month flat is an effective rate of 60% per annum (since there are no hidden fees or compulsory, blocked savings) so I am not sure where the figure of 500% comes from. The reasons that VSLAs have very high repayment rates are, I think:
1 they can only borrow a maximum of 3 times what they have saved
2 members are sensitive to the fact that they are borrowing their neighbours' money and are therefore a mite more prudent and accountable
3 members get all of their capital back at the end of a year, with interest distributed in proportion to savings. If a borrower defaults, shares equal in value to their debt are cancelled and earnings on those shares are lost to the defaulter
Most VSLAs are great for short-term needs/opportunities, such as low-investment petty trade, where the velocity of cash revolving in the IGA may be many hundreds of percent a month and daily returns are usually in the order of 5-20%. They are not so well-suited to agriculture, where maturities of investments are usually 4-6 months or longer and they are completely unsuited for long-term investment in fixed assets. So Chuck is right. Small short-term investments in informal trade tend to have very high yields, against which a 5-10% monthly cost of borrowing is a marginal and minor expense, whereas a longer-term investment usually yields less in percentage terms but more in absolute value and is accompanied with a lower cost of borrowing.
From: Chuck Waterfield [mailto:waterfield@microfin.com]
Sent: 29 June 2015 18:52
To: MFP
Cc: Hugh Allen
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hello Richard,
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
The average outstanding loan size in a VSLA is $45, and disbursed is about $60-70. But it varies enormously. I have just returned from a VSLA today in southern Tanzania where one member just paid back a loan of $750, and capitalisation was over $5,000 - and I know of one in Nairobi with a capitalisation of over $500,000. But that's an outlier, and for most rural VSLAs loans are over 3 months and interest rates (determined by the members) vary from 5% per month to 10% per month. Since VSLAs have virtually no expenses and very high repayment rates, all of this income is net and untaxed. The average annualised return on assets is 29% (as per the 172,000 groups whose data is posted to the SAVIX – www.thesavix.org). 5% per month flat is an effective rate of 60% per annum (since there are no hidden fees or compulsory, blocked savings) so I am not sure where the figure of 500% comes from. The reasons that VSLAs have very high repayment rates are, I think:
1 they can only borrow a maximum of 3 times what they have saved
2 members are sensitive to the fact that they are borrowing their neighbours' money and are therefore a mite more prudent and accountable
3 members get all of their capital back at the end of a year, with interest distributed in proportion to savings. If a borrower defaults, shares equal in value to their debt are cancelled and earnings on those shares are lost to the defaulter
Most VSLAs are great for short-term needs/opportunities, such as low-investment petty trade, where the velocity of cash revolving in the IGA may be many hundreds of percent a month and daily returns are usually in the order of 5-20%. They are not so well-suited to agriculture, where maturities of investments are usually 4-6 months or longer and they are completely unsuited for long-term investment in fixed assets. So Chuck is right. Small short-term investments in informal trade tend to have very high yields, against which a 5-10% monthly cost of borrowing is a marginal and minor expense, whereas a longer-term investment usually yields less in percentage terms but more in absolute value and is accompanied with a lower cost of borrowing.
From: Chuck Waterfield [mailto:waterfield@microfin.com]
Sent: 29 June 2015 18:52
To: MFP
Cc: Hugh Allen
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hello Richard,
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 10:46 am (PDT) . Posted by:
"Hugh Allen" hughvslanet
Dear Srinivasan,
This is an insightful commentary. The most important statement was "When
external funds increase in proportion and high variability in size of loans
to different members within the group is seen, default rates will tend to
increase." This has been our experience.
On a closely related issue, Paul Rippey did an important study in Niger, in
which he correlated sources of capital to member retention. He found the
following:
1 Groups that use only their own savings to capitalise a
loan portfolio increased their membership by an average of 4.5
2 Groups that borrowed externally and had a bad
experience lost an average of 8.7 members
3 Groups that borrowed externally and had a good
experience lost an average of 2.9 members
The average group in Niger has about 20 members
I speculate that the poorer members vote with their feet and leave the
groups when they see external liquidity distorting saving/loan ratios (and
thus increasing risk) and realise that most of the inflowing capital goes to
the better off members - but is explicitly guaranteed by the collective to
the external lender.
Hugh
From: MicrofinancePractice@yahoogroups.com
[mailto:MicrofinancePractice@yahoogroups.com]
Sent: 29 June 2015 19:22
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] Understanding default rates in MFI's group loans and
Village Savings and Loans Associations
Richard
We can calculate the APR on any loan. When we compare, we should see the
context of the loan. Interest on a very short duration loan will invariably
seem exploitative when annualised. The customer probably borrows from the
group because it is cost effective compared to other sources of loan and in
the context of opportunity which will be funded with the loan. In the
Indian context, Self-Help Groups members charged between 28 to 40% APR on
their loans to members. The alternative was to go to a money lender at
around 60 to 100% APR. Within the groups, the excess of income over
expenditure arising from the loans was added to the group corpus and in fact
strengthened the member financial position.
On default rates, in India, the MFIs report PAR 30 days at less than 1%
(March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on
their loans to SHGs (which are the closest to VSLAs). The default rates
within the groups - member loan repayment rates to the group are even lower.
My view is that the difference between MFIs and banks is explained by the
frequency of customer contact and rigour of monitoring. As long as savings
of members with the VSLA are substantial and external funds - such as from
MFIs and banks - form only a minor part of the overall funds of the group,
credit discipline will be intact. When external funds increase in
proportion and high variability in size of loans to different members within
the group is seen, default rates will tend to increase. These again are my
impressions.
Regards
Srinivasan
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk
[MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to
micro-finance banks, a thought crossed my mind on how these VSLAs manage
their loans.
I have noticed that the interest rates for loans that members charge each
other is very high, maybe between 200% and 500% higher, than the rates that
MFIs charge. However, my rough sight shows that the repayment rate in VSLAs
is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in
VSLAs in comparison to MFIs group lending? I would love to see if my
assumption is correct and what issues surround the better repayment record
in VSLAs. Is it because the VSLA members are motivated that it is their
money they are growing and they will share the funds at the end of the
period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
This is an insightful commentary. The most important statement was "When
external funds increase in proportion and high variability in size of loans
to different members within the group is seen, default rates will tend to
increase." This has been our experience.
On a closely related issue, Paul Rippey did an important study in Niger, in
which he correlated sources of capital to member retention. He found the
following:
1 Groups that use only their own savings to capitalise a
loan portfolio increased their membership by an average of 4.5
2 Groups that borrowed externally and had a bad
experience lost an average of 8.7 members
3 Groups that borrowed externally and had a good
experience lost an average of 2.9 members
The average group in Niger has about 20 members
I speculate that the poorer members vote with their feet and leave the
groups when they see external liquidity distorting saving/loan ratios (and
thus increasing risk) and realise that most of the inflowing capital goes to
the better off members - but is explicitly guaranteed by the collective to
the external lender.
Hugh
From: MicrofinancePractice@yahoogroups.com
[mailto:MicrofinancePractice@yahoogroups.com]
Sent: 29 June 2015 19:22
To: MicrofinancePractice@yahoogroups.com
Subject: Re: [MFP] Understanding default rates in MFI's group loans and
Village Savings and Loans Associations
Richard
We can calculate the APR on any loan. When we compare, we should see the
context of the loan. Interest on a very short duration loan will invariably
seem exploitative when annualised. The customer probably borrows from the
group because it is cost effective compared to other sources of loan and in
the context of opportunity which will be funded with the loan. In the
Indian context, Self-Help Groups members charged between 28 to 40% APR on
their loans to members. The alternative was to go to a money lender at
around 60 to 100% APR. Within the groups, the excess of income over
expenditure arising from the loans was added to the group corpus and in fact
strengthened the member financial position.
On default rates, in India, the MFIs report PAR 30 days at less than 1%
(March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on
their loans to SHGs (which are the closest to VSLAs). The default rates
within the groups - member loan repayment rates to the group are even lower.
My view is that the difference between MFIs and banks is explained by the
frequency of customer contact and rigour of monitoring. As long as savings
of members with the VSLA are substantial and external funds - such as from
MFIs and banks - form only a minor part of the overall funds of the group,
credit discipline will be intact. When external funds increase in
proportion and high variability in size of loans to different members within
the group is seen, default rates will tend to increase. These again are my
impressions.
Regards
Srinivasan
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk
[MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to
micro-finance banks, a thought crossed my mind on how these VSLAs manage
their loans.
I have noticed that the interest rates for loans that members charge each
other is very high, maybe between 200% and 500% higher, than the rates that
MFIs charge. However, my rough sight shows that the repayment rate in VSLAs
is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in
VSLAs in comparison to MFIs group lending? I would love to see if my
assumption is correct and what issues surround the better repayment record
in VSLAs. Is it because the VSLA members are motivated that it is their
money they are growing and they will share the funds at the end of the
period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 11:22 am (PDT) . Posted by:
jeffreyashe02139
Srinivasan,
Of course the big difference with Savings Groups (VSLAs) is that the profit from loans is distributed to the members according to how much each has saved. Savings Groups often charge a high interest rates on loans (5% or 10% per month in Africa but often 2% per month in Cambodia or elsewhere where the groups compete with MFIs). Charging 5% or 10% a month simplifies record keeping but it also maximizes the yearly payout of savings, interest payments and fines that increase the size of the payout at the end of a yearlong cycle. Members often receive back 40% more than they saved when the money is distributed.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: Narasimhan srinivasan shrin54@yahoo.co.in [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Sent: Mon, Jun 29, 2015 12:22 pm
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Richard
We can calculate the APR on any loan. When we compare, we should see the context of the loan. Interest on a very short duration loan will invariably seem exploitative when annualised. The customer probably borrows from the group because it is cost effective compared to other sources of loan and in the context of opportunity which will be funded with the loan. In the Indian context, Self-Help Groups members charged between 28 to 40% APR on their loans to members. The alternative was to go to a money lender at around 60 to 100% APR. Within the groups, the excess of income over expenditure arising from the loans was added to the group corpus and in fact strengthened the member financial position.
On default rates, in India, the MFIs report PAR 30 days at less than 1% (March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on their loans to SHGs (which are the closest to VSLAs). The default rates within the groups - member loan repayment rates to the group are even lower. My view is that the difference between MFIs and banks is explained by the frequency of customer contact and rigour of monitoring. As long as savings of members with the VSLA are substantial and external funds - such as from MFIs and banks - form only a minor part of the overall funds of the group, credit discipline will be intact. When external funds increase in proportion and high variability in size of loans to different members within the group is seen, default rates will tend to increase. These again are my impressions.
Regards
Srinivasan
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] < MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correc t and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Of course the big difference with Savings Groups (VSLAs) is that the profit from loans is distributed to the members according to how much each has saved. Savings Groups often charge a high interest rates on loans (5% or 10% per month in Africa but often 2% per month in Cambodia or elsewhere where the groups compete with MFIs). Charging 5% or 10% a month simplifies record keeping but it also maximizes the yearly payout of savings, interest payments and fines that increase the size of the payout at the end of a yearlong cycle. Members often receive back 40% more than they saved when the money is distributed.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: Narasimhan srinivasan shrin54@yahoo.co.in [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Sent: Mon, Jun 29, 2015 12:22 pm
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Richard
We can calculate the APR on any loan. When we compare, we should see the context of the loan. Interest on a very short duration loan will invariably seem exploitative when annualised. The customer probably borrows from the group because it is cost effective compared to other sources of loan and in the context of opportunity which will be funded with the loan. In the Indian context, Self-Help Groups members charged between 28 to 40% APR on their loans to members. The alternative was to go to a money lender at around 60 to 100% APR. Within the groups, the excess of income over expenditure arising from the loans was added to the group corpus and in fact strengthened the member financial position.
On default rates, in India, the MFIs report PAR 30 days at less than 1% (March 2014). Banks report Non Performing Assets of 6.8% (March 2014) on their loans to SHGs (which are the closest to VSLAs). The default rates within the groups - member loan repayment rates to the group are even lower. My view is that the difference between MFIs and banks is explained by the frequency of customer contact and rigour of monitoring. As long as savings of members with the VSLA are substantial and external funds - such as from MFIs and banks - form only a minor part of the overall funds of the group, credit discipline will be intact. When external funds increase in proportion and high variability in size of loans to different members within the group is seen, default rates will tend to increase. These again are my impressions.
Regards
Srinivasan
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] < MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correc t and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 2:40 pm (PDT) . Posted by:
"Sophie Chitedze" sophiechitedze
Hi Richard
So glad to hear from you on this list serve.
I have not come across any research focused on understanding repayment rates of VSLAs loans versus MFI loans but the following are certainly contributing to higher VSLA loan repayment than to MFIs:
● As you rightly put it, the interest comes back to the group when a loan is borrowed from the VSLA and this is a motivation for them. When I first facilitated VSLA linkages to OIBM and MRFC around 2005, groups kept complaining that the interest they paid when they borrowed from their group came back to the group as income while that paid to an MFI was a cost to the group/members.
● At times, the timing of loans did not meet group needs. For example, loans applied for in May or June were approved late which coincided with the onset of rains. Businesses thrive seasonally because most VSLA clients prioritize farming during the rainy season. At this time, it is agricultural loans that are on demand. VSLAs on the other hand respond to needs of VSLAs timely as long as funds are available.
● Another area you may look at is how your institution addresses the needs if VSLAs when developing financial products. Is it demand driven?
● What delivery channels are employed. At times clients were assured that loans would be collected at their meeting locations close to their homes. Groups had repayments ready for collection but no one went up to collect. Next, they discovered that their loan installment was marked as overdue. Three office bearers ended up using public transport to go and repay at the main branch far from where they operate and this became expensive for them.
There is need for an indepth study or random interviews to capture specific reasons on this isdue from groups.
I am in Lilongwe and we can chat if needed. My contact is:
0993868532
Sophie Chitedze
Independent Consultant
Sent from Yahoo Mail on Android
From:"richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Date:Mon, 29 Jun, 2015 at 17:19
Subject:[MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
So glad to hear from you on this list serve.
I have not come across any research focused on understanding repayment rates of VSLAs loans versus MFI loans but the following are certainly contributing to higher VSLA loan repayment than to MFIs:
● As you rightly put it, the interest comes back to the group when a loan is borrowed from the VSLA and this is a motivation for them. When I first facilitated VSLA linkages to OIBM and MRFC around 2005, groups kept complaining that the interest they paid when they borrowed from their group came back to the group as income while that paid to an MFI was a cost to the group/members.
● At times, the timing of loans did not meet group needs. For example, loans applied for in May or June were approved late which coincided with the onset of rains. Businesses thrive seasonally because most VSLA clients prioritize farming during the rainy season. At this time, it is agricultural loans that are on demand. VSLAs on the other hand respond to needs of VSLAs timely as long as funds are available.
● Another area you may look at is how your institution addresses the needs if VSLAs when developing financial products. Is it demand driven?
● What delivery channels are employed. At times clients were assured that loans would be collected at their meeting locations close to their homes. Groups had repayments ready for collection but no one went up to collect. Next, they discovered that their loan installment was marked as overdue. Three office bearers ended up using public transport to go and repay at the main branch far from where they operate and this became expensive for them.
There is need for an indepth study or random interviews to capture specific reasons on this isdue from groups.
I am in Lilongwe and we can chat if needed. My contact is:
0993868532
Sophie Chitedze
Independent Consultant
Sent from Yahoo Mail on Android
From:"richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Date:Mon, 29 Jun, 2015 at 17:19
Subject:[MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 4:13 pm (PDT) . Posted by:
jeffreyashe02139
Sophie,
You nicely point out the difference between a group managed VSLA and an MFI. MFIs need to be very good to match the performance of a VSLA and few MFIs are as flexible, convenient or reliable as a VSLA. MFIs are for those few who need a much larger loan than the VSLA can provide but for savings and smaller loans the VSLA serve the needs of clients better. See my book "In Their Own Hands: How Savings Groups are Revolutionizing Development" www.intheirownhands.com.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: Sophie Chitedze sophiechitedze@yahoo.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>; MFP <microfinancepractice@yahoogroups.com>
Cc: Hugh Allen <hugh@vsla.net>
Sent: Mon, Jun 29, 2015 5:40 pm
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hi Richard
So glad to hear from you on this list serve.
I have not come across any research focused on understanding repayment rates of VSLAs loans versus MFI loans but the following are certainly contributing to higher VSLA loan repayment than to MFIs:
● As you rightly put it, the interest comes back to the group when a loan is borrowed from the VSLA and this is a motivation for them. When I first facilitated VSLA linkages to OIBM and MRFC around 2005, groups kept complaining that the interest they paid when they borrowed from their group came back to the group as income while that paid to an MFI was a cost to the group/members.
● At times, the timing of loans did not meet group needs. For example, loans applied for in May or June were approved late which coincided with the onset of rains. Businesses thrive seasonally because most VSLA clients prioritize farming during the rainy season. At this time, it is agricultural loans that are on demand. VSLAs on the other hand respond to needs of VSLAs timely as long as funds are available.
● Another area you may look at is how your institution addresses the needs if VSLAs when developing financial products. Is it demand driven?
● What delivery channels are employed. At times clients were assured that loans would be collected at their meeting locations close to their homes. Groups had repayments ready for collection but no one went up to collect. Next, they discovered that their loan installment was marked as overdue. Three office bearers ended up using public transport to go and repay at the main branch far from where they operate and this became expensive for them.
There is need for an indepth study or random interviews to capture specific reasons on this isdue from groups.
I am in Lilongwe and we can chat if needed. My contact is:
0993868532
Sophie Chitedze
Independent Consultant
Sent from Yahoo Mail on Android
From:"richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Date:Mon, 29 Jun, 2015 at 17:19
Subject:[MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
You nicely point out the difference between a group managed VSLA and an MFI. MFIs need to be very good to match the performance of a VSLA and few MFIs are as flexible, convenient or reliable as a VSLA. MFIs are for those few who need a much larger loan than the VSLA can provide but for savings and smaller loans the VSLA serve the needs of clients better. See my book "In Their Own Hands: How Savings Groups are Revolutionizing Development" www.intheirownhands.com.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: Sophie Chitedze sophiechitedze@yahoo.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>; MFP <microfinancepractice@yahoogroups.com>
Cc: Hugh Allen <hugh@vsla.net>
Sent: Mon, Jun 29, 2015 5:40 pm
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hi Richard
So glad to hear from you on this list serve.
I have not come across any research focused on understanding repayment rates of VSLAs loans versus MFI loans but the following are certainly contributing to higher VSLA loan repayment than to MFIs:
● As you rightly put it, the interest comes back to the group when a loan is borrowed from the VSLA and this is a motivation for them. When I first facilitated VSLA linkages to OIBM and MRFC around 2005, groups kept complaining that the interest they paid when they borrowed from their group came back to the group as income while that paid to an MFI was a cost to the group/members.
● At times, the timing of loans did not meet group needs. For example, loans applied for in May or June were approved late which coincided with the onset of rains. Businesses thrive seasonally because most VSLA clients prioritize farming during the rainy season. At this time, it is agricultural loans that are on demand. VSLAs on the other hand respond to needs of VSLAs timely as long as funds are available.
● Another area you may look at is how your institution addresses the needs if VSLAs when developing financial products. Is it demand driven?
● What delivery channels are employed. At times clients were assured that loans would be collected at their meeting locations close to their homes. Groups had repayments ready for collection but no one went up to collect. Next, they discovered that their loan installment was marked as overdue. Three office bearers ended up using public transport to go and repay at the main branch far from where they operate and this became expensive for them.
There is need for an indepth study or random interviews to capture specific reasons on this isdue from groups.
I am in Lilongwe and we can chat if needed. My contact is:
0993868532
Sophie Chitedze
Independent Consultant
Sent from Yahoo Mail on Android
From:"richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Date:Mon, 29 Jun, 2015 at 17:19
Subject:[MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 7:36 pm (PDT) . Posted by:
"Hugh Allen" hughvslanet
Dear Richard. Things are now very different.
The average outstanding loan size in a VSLA is $45, and disbursed is about $60-70. But it varies enormously. I have just returned from a VSLA today in southern Tanzania where one member just paid back a loan of $750, and capitalisation was over $5,000 - and I know of one in Nairobi with a capitalisation of over $500,000. But that's an outlier, and for most rural VSLAs loans are over 3 months and interest rates (determined by the members) vary from 5% per month to 10% per month. Since VSLAs have virtually no expenses and very high repayment rates, all of this income is net and untaxed. The average annualised return on assets is 29% (as per the 172,000 groups whose data is posted to the SAVIX – www.thesavix.org). 5% per month flat is an effective rate of 60% per annum (since there are no hidden fees or compulsory, blocked savings) so I am not sure where the figure of 500% comes from. The reasons that VSLAs have very high repayment rates are, I think:
1 they can only borrow a maximum of 3 times what they have saved
2 members are sensitive to the fact that they are borrowing their neighbours' money and are therefore a mite more prudent and accountable
3 members get all of their capital back at the end of a year, with interest distributed in proportion to savings. If a borrower defaults, shares equal in value to their debt are cancelled and earnings on those shares are lost to the defaulter
Most VSLAs are great for short-term needs/opportunities, such as low-investment petty trade, where the velocity of cash revolving in the IGA may be many hundreds of percent a month and daily returns are usually in the order of 5-20%. They are not so well-suited to agriculture, where maturities of investments are usually 4-6 months or longer and they are completely unsuited for long-term investment in fixed assets. So Chuck is right. Small short-term investments in informal trade tend to have very high yields, against which a 5-10% monthly cost of borrowing is a marginal and minor expense, whereas a longer-term investment usually yields less in percentage terms but more in absolute value and is accompanied with a lower cost of borrowing.
From: Chuck Waterfield [mailto:waterfield@microfin.com]
Sent: 29 June 2015 18:52
To: MFP
Cc: Hugh Allen
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hello Richard,
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
The average outstanding loan size in a VSLA is $45, and disbursed is about $60-70. But it varies enormously. I have just returned from a VSLA today in southern Tanzania where one member just paid back a loan of $750, and capitalisation was over $5,000 - and I know of one in Nairobi with a capitalisation of over $500,000. But that's an outlier, and for most rural VSLAs loans are over 3 months and interest rates (determined by the members) vary from 5% per month to 10% per month. Since VSLAs have virtually no expenses and very high repayment rates, all of this income is net and untaxed. The average annualised return on assets is 29% (as per the 172,000 groups whose data is posted to the SAVIX – www.thesavix.org). 5% per month flat is an effective rate of 60% per annum (since there are no hidden fees or compulsory, blocked savings) so I am not sure where the figure of 500% comes from. The reasons that VSLAs have very high repayment rates are, I think:
1 they can only borrow a maximum of 3 times what they have saved
2 members are sensitive to the fact that they are borrowing their neighbours' money and are therefore a mite more prudent and accountable
3 members get all of their capital back at the end of a year, with interest distributed in proportion to savings. If a borrower defaults, shares equal in value to their debt are cancelled and earnings on those shares are lost to the defaulter
Most VSLAs are great for short-term needs/opportunities, such as low-investment petty trade, where the velocity of cash revolving in the IGA may be many hundreds of percent a month and daily returns are usually in the order of 5-20%. They are not so well-suited to agriculture, where maturities of investments are usually 4-6 months or longer and they are completely unsuited for long-term investment in fixed assets. So Chuck is right. Small short-term investments in informal trade tend to have very high yields, against which a 5-10% monthly cost of borrowing is a marginal and minor expense, whereas a longer-term investment usually yields less in percentage terms but more in absolute value and is accompanied with a lower cost of borrowing.
From: Chuck Waterfield [mailto:waterfield@microfin.com]
Sent: 29 June 2015 18:52
To: MFP
Cc: Hugh Allen
Subject: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Hello Richard,
In comparing prices, it is essential to evaluate them relative to the amount of the loan and the duration of the loan. Let's look first at conventional loans, then microfinance loans, then VSLA loans:
* A loan to buy a house, of $100,000 for 30 years can be good at 5% APR, but bankrupt you if it costs 10% APR
* A loan of $10,000 for a year at 10% might be a good decision.
* A microfinance loan of $1,000 for a year at 120% APR is very likely a bad decision.
* A microfinance loan of $1,000 for a month at 10% for that month (i.e., 120% APR) can be a good decision.
* A microfinance loan of $1,000 for four months at an APR of 120% probably isn't a good decision…. and then to accept the MFI's invitation to borrow that SAME amount at that SAME price for another four months, and then another four months, is very likely a bad decision.
The benefit-cost analysis from the point of view of the client shows that there may be quick, super-high returns, justifying a high price of a short loan. But few of the world's poor can generate super-high returns month after month, year after year. But many MFIs charge them super-high prices for those loans month after month, year after year. (Here are prices in your country right now, and many MFIs are charging over 100%: http://www.mftransparency.org/microfinance-pricing/Malawi/ )
A woman might turn $10 into $20 in a week, so if she sees that opportunity and doesn't have $10, she can borrow it for 10% a *week* and it is a smart decision. But the poor do not turn $1,000 into $2,000 in a week, nor in a month, and only some can do that in a year. The rational price to pay drops as amounts go up and time gets longer.
And that brings us to VSLA loans. VSLA loans are incredibly small amounts. Generally less than $10 in my understanding, in most countries. And they are extremely short-term loans, often just a week, in my understanding. My direct experience is quite old, dating back to the 1990's, when Hugh and I stumbled across this methodology in Niger. The amounts and terms likely are somewhat higher in various instances now. BUT… I'm sure VSLA loans are still vastly smaller than any loan an MFI provides, and VSLA terms are much shorter term than nearly any loan an MFI provides. That means paying prices of 500% for $10 for a week can be a smart decision for some people, some time.
I'm sure bad decisions are still made, and others can give data on repayment rates, but much of the same logic applies to defaults: If my house burns down and I didn't have insurance, I can't pay back the $100,000 loan. I lost a very large asset. But if my loan is for $10, I buy some bananas, and my bananas fall off the truck, I can probably find a way to pay back the $10 soon. But if I wait six months to pay back the $10, it has now become a loan of $100 and I'll probably default, at least on some of the interest payments.
Our common failing is to not fully see how to evaluate loan prices. APRs are a unit price - the price to borrow $1.00 for 1 year. That is a necessary means for us to calculate prices. But then to determine if that APR is a responsible price means to evaluate the APR in the context of amount and duration. MFTransparency will be publishing some articles on this essential topic in July.
Regards,
Chuck Waterfield
waterfield@microfin.com
"A lie too often told becomes the truth" - Lenin
On Jun 29, 2015, at 4:22 AM, richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Chongo
Social Performance Manager
Opportunity Bank Malawi
Mon Jun 29, 2015 8:19 am (PDT) . Posted by:
"richard chongo" rigochongo
Dear Muneer,
Check out this link on Islamic Banking
http://alhudacibe.com/dlp/aboutprogram.php
On Sunday, 28 June 2015, 22:45, "muneer babu mkmmuneerbabu@yahoo.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
| Dear sir,
I would like to know more about Islamic MFI. Could you please send an article on Islamic MFI.
Regards
Muneer |
From: MALCOLM HARPER malcolm.harper@btinternet.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>;
To: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>;
Subject: [MFP] Islamic microfinance - call for cases
Sent: Tue, Apr 21, 2015 10:34:05 PM
| Dear Colleagues,
Islamic microfinance is growing rapidly, but is nowhere near meeting the demand. The existing material on the subject tends either to be wholly theoretical, or promotional, or naïve; there is a need for more information on what actually is being done, which products 'work' and which don't, and what are the results.
I am therefore putting together a collection of short 8-10 page case studies about actual Islamic MFIs, which will be published in a book and will also be disseminated on-line, through presentations at conferences and by other means.
If you know of a functioning Islamic MFI, and would be interested in preparing such a case study about it, or if any of your colleagues might be interested, please let me know. I shall then send you more details about what is required.
Many thanks,
Malcolm Harper
|
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Check out this link on Islamic Banking
http://alhudacibe.com/dlp/aboutprogram.php
On Sunday, 28 June 2015, 22:45, "muneer babu mkmmuneerbabu@yahoo.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
| Dear sir,
I would like to know more about Islamic MFI. Could you please send an article on Islamic MFI.
Regards
Muneer |
From: MALCOLM HARPER malcolm.harper@btinternet.com [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>;
To: MicrofinancePractice@yahoogroups.com <MicrofinancePractice@yahoogroups.com>;
Subject: [MFP] Islamic microfinance - call for cases
Sent: Tue, Apr 21, 2015 10:34:05 PM
| Dear Colleagues,
Islamic microfinance is growing rapidly, but is nowhere near meeting the demand. The existing material on the subject tends either to be wholly theoretical, or promotional, or naïve; there is a need for more information on what actually is being done, which products 'work' and which don't, and what are the results.
I am therefore putting together a collection of short 8-10 page case studies about actual Islamic MFIs, which will be published in a book and will also be disseminated on-line, through presentations at conferences and by other means.
If you know of a functioning Islamic MFI, and would be interested in preparing such a case study about it, or if any of your colleagues might be interested, please let me know. I shall then send you more details about what is required.
Many thanks,
Malcolm Harper
|
#yiv1187422787 #yiv1187422787 -- #yiv1187422787ygrp- mkp {border:1px solid #d8d8d8;font- family:Arial; margin:10px 0;padding:0 10px;}#yiv118742278 7 #yiv1187422787ygrp- mkp hr {border:1px solid #d8d8d8;}#yiv118742 2787 #yiv1187422787ygrp- mkp #yiv1187422787hd {color:#628c2a; font-size: 85%;font- weight:700; line-height: 122%;margin: 10px 0;}#yiv1187422787 #yiv1187422787ygrp- mkp #yiv1187422787ads {margin-bottom: 10px;}#yiv118742 2787 #yiv1187422787ygrp- mkp .yiv1187422787ad {padding:0 0;}#yiv1187422787 #yiv1187422787ygrp- mkp .yiv1187422787ad p {margin:0;}# yiv1187422787 #yiv1187422787ygrp- mkp .yiv1187422787ad a {color:#0000ff; text-decoration: none;}#yiv118742 2787 #yiv1187422787ygrp- sponsor #yiv1187422787ygrp- lc {font-family: Arial;}#yiv11874 22787 #yiv1187422787ygrp- sponsor #yiv1187422787ygrp- lc #yiv1187422787hd {margin:10px 0px;font-weight: 700;font- size:78%; line-height: 122%;}#yiv118742 2787 #yiv1187422787ygrp- sponsor #yiv1187422787ygrp- lc .yiv1187422787ad {margin-bottom: 10px;padding: 0 0;}#yiv1187422787 #yiv1187422787actio ns {font-family: Verdana;font- size:11px; 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Posted by: richard chongo <rigochongo@yahoo.co.uk>
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