MFT to the rescue! Oh, I think Malcolm was being sarcastic.
Malcolm I don't fully understand your email, but I am obliged to give something of a response.
First, this training MFT is offering is not for financially illiterate clients. It is for financial analysts that still haven't quite learned all the tricks and twisted logic of pricing. Even we don't understand it. It's super complicated… and that's why clients, who desire or need money now and expect the payment later won't be that hard, because we tell them "low weekly payments" end up paying a lot for that convenience of the loan. And its why the lenders, who are clearly on the side of the negotiation with much, much more power and information, end up making so much profit.
There is no "one correct price" for loans, and no "one correct price" for micro-credit. High prices do not always mean high profits. It depends on the complexities of the loan product. I don't follow Malcolm's numbers on the example loan, as I got mixed up between months and years… and that's a good example of how easy it is to get mixed up when trying to understand financial products. As I say over and over in my presentations: You're not buying a product, so the "total cost you pay back" has nothing to do with the real price. You are renting money, and it is a variable amount of money for a variable amount of time. The APR price is a unit rental price. 30% means for each US$1.00 you get AND KEEP for a full year, you would pay US$0.30 in cost. Pretty simple, and pretty accurate.
Now, let's take that idea and apply it to a one-week emergency loan that allows me to buy medicine for my child before my paycheck comes. I get $100 and I pay back $120 one week later. A 20% per week interest rate. Super-high, and mind bogglingly high if I annualize it. But it was worth it to me. $20 to cover an emergency is a good decision, if I have no other way to get the $100 for less. Payday lenders, when they give one week loans, are a good resource. But if I miss that payment a week later, and the interest continues at $20 per week, I'm quickly in deep trouble.
Now let's look at microfinance, not payday lending. You'll find a lot of loans at >100% annual interest (APR). That's a lot cheaper than 20% a week. But we don't give loans for a week. We give loans for 6 months… or 12 months… or for 6 months and then beg and plead with you to take another 6 month loan so you're paying us interest for 12 months. If your average balance over those 12 months is $500, you've paid us $500 in interest. And we like to pretend that clients make far more than $500 in economic benefit over that year, but the impact data certainly isn't validating those claims.
* The payday loan is a good deal for a week, but bleeds you to death really fast if you can't pay it back
* The microfinance loan is "cheaper" but it is for more time… but it can bleed you to death slowly if you don't break out of that debt cycle
Fortunately, many microfinance products are much lower in the price range (and loan balance) that doesn't have as much risk of harming people through large cash outflows. But which products are the safer ones and which are the ones that can potentially cause a lot of damage? Pricing analysis helps. It helps a lot. And MFT can combine that pricing information with an array of other useful product information (amount, term, purpose, client characteristics, bundled services, etc) that can help all of us understand credit a lot better and then use that knowledge to make better decisions about credit.
We've been on the microcredit bandwagon for nearly 50 years - and part of the credit for that goes to those Malcolm Harper books some of us learned from 30 years ago! I believe we need to be less bandwagon oriented, study what we've done, learn from that, and get smarter about what we do. That's what this training day is for. And we welcome debate and arguments. And I enjoy all these exchanges Malcolm and I continually have, because they make me think and deepen my understanding of an incredibly important topic - the price the poor pay for credit.
And, Malcolm… my father worked for a "Wonga". He was a moneylender. And he was a nice guy. Not all moneylenders are evil And not all moneylenders are rich. We grew up under quite modest economic means. I never say "Moneylending is bad, microfinance is good". My judgements are based on the motives and actions… and often the profit margins… of the lender.
Chuck Waterfield
On Wed, Sep 18, 2013 at 9:52 AM, Malcolm Harper <malcolm.harper@btinternet.com> wrote:
Thank you. I am sorry I cannot attend this programme (note the spelling, that's where I am, and why I can't come), but I hope you can cover small loan pricing in the UK and USA as well as in so-called 'developing' countries.I am often asked why UK and USA-based critics of microfinance in other places don't take a look at 'the mote in their own eye'. Why is it worth bothering with 'financial literacy training' for busy illiterate village women when millions of fully literate men and women here regularly borrow from the likes of 'Wonga' (www.wonga.com) and many others at annual interest rates (APR) of 2000% and more, that are openly stated, in big letters as the law requires, in all their websites and posters and so on ?The cost of a loan to the lender consists of three costs; 1. The cost of the money, what interest the lender pays to the 'wholesaler', bank, whoever it is. 2. The 'transaction costs', advertising, administration, follow-up, management.... 3. The risk costs, the chances that the borrower won't repay. It's the same with any business, selling the use of money (moneylenders, MFIs, banks...), or selling onions, except that most onion sellers sell for cash so there's no risk of non-payment (although the onions may go rotten if they are not sold.....)If I lend you $100 for a month, which you will repay at the end of the month, and I am paying 12% for my money (1% a month), it costs me $10 to administer your loan, and there is a 2% chance that you will not repay it, my cost will be $1 + $10 + $2 = $13. Annualised, with no compounding, that's $13 X 12 = $156, 156% interest !Cries of horror ! Send for MFT ! But actually quite reasonable. I hope you deal with this issue.Malcolm----- Original Message -----From: Ranya Abdel BakiSent: Tuesday, September 17, 2013 2:21 PMSubject: [MFP] Upcoming MFTransparency Training
Dear All,MFTransparency is organizing a one-day training titled "Calculating and Analyzing Microcredit Prices: From Confusion to Clarity" on Monday, November 4th 2013 from 9:00 am to 5:00 pm at the Sheraton Pentagon City Hotel in Arlington, Virginia, USA, which is being hosted by SEEP as part of the 2013 SEEP Annual Conference pre-conference training sessions.For more information on the content of this training, please read the blog on the MFTransparency website. For any specific inquiries about the content of this training you can contact: info@mftransparency.org. For all inquiries related to registration, please contact: annualconference@seepnetwork.org. To register directly for this training please click here.Best regards,
__._,_.___
| Reply via web post | Reply to sender | Reply to group | Start a New Topic | Messages in this topic (5) |
WARNING! If you hit REPLY, your message will go to the entire listserve, not just the original author!
.
__,_._,___
No comments:
Post a Comment