Rebekah, Please forward.Jeff
Dear All,
Most of these issues can be avoided through adopting savings groups that focus on disciplined savings and responsible lending with all the profits from lending returning to the members. Sure there are limitations such as limited loan size but those in the group that need more money can as individuals go to MFIs. 10 million savings group members in 65 countries in 150,000 villages can't be wrong. See "In Their Own Hands: How Savings Groups are Revolutionizing Development" wwwintheirownhands.com. for a new way to look at these issues. Savings groups could rival microfinance in its outreach with a very modest investment.
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: 'w.hiemann' w.hiemann@berlin.de [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MicrofinancePractice <MicrofinancePractice@yahoogroups.com>
Sent: Wed, Oct 8, 2014 5:15 am
Subject: RE: [MFP] Wonga under strick regulation
Dear all,
One answer to the WHY is human behavior:
On part of the borrowers: avoiding hardship and maximizing pleasure (loan for holiday, see the start of this thread!), lack of planning and discipline (among others); it is (too?) easy to obtain a loan.
On part of the MFIs: Maximizing income: Incentives (officers earn easier and higher bonus for loans than for deposits!) and targets ("success" = higher indebtedness of poor households); therefore ignoring prudential loan sanctioning policies (business model: high interest rates cover losses from those who commit suicide).
Therefore: Financial Education. But who foots the bill?
Thank you,
Wolfram
Some responses and comments:
* Yeah, I was using a bit of hyperbole to grab attention. Our industry really needs some waking up. We like to believe our own marketing materials… perhaps because the truth is hard to stomach.
* I'm pretty sure I was on the generous side saying that 300 (10%) of the people on MFP really understand pricing. I've spent the last 7 years talking and teaching prices to thousands of people. It's not an easy topic to grasp and really understand. The majority of people working inside MFIs don't really know or understand the price they are charging.
* Yes, when someone needs cash, they need to look at cash-flow for debt repayment, but the amount to be repaid is seriously affected by the prices we charge in microfinance and the length of time people stay in debt to us. Borrowing $100 and paying back $120 a month later is a high annualized price, but can be a sound decision. Staying a client of an MFI for a full year (or many years) and pay annualized prices we often charge (> 100% APR) is not a sound decision. You can explore and find out much more about our true prices and how they are correlated to loan amounts and loan terms at our website:
www.mftransparency.org * We find clients systematically borrowing from other MFIs when they already have a loan from one MFI. The "why" is complex and not universal…. maybe we give way too small of loans for their needs (this happens a lot), so they have to go get more loans…. maybe they borrow from one MFI to pay back the other MFI, as payments become difficult (and I expect this happens a lot). Over-indebtedness is a serious problem, and most MFIs ignore it and ignore their role in it - short term gains motivate actions that create long-term disasters.
* What we SHOULD be doing is helping people save. But we talk about this far, far more than we do it. Profit is more easily made in lending. Microfinance takes the easy route. Coops took a different route, but rather than seeing what we can learn from them, our literature belittles them and talks about the wondrous abilities of the for-profit world.
* We are currently suffering the damage of mistakes compounding with our mistakes compounding with our other mistakes
Colleagues,
I don't think we should get in to discussing savings vs credit but think as a Credit Union that cares about its members who are both savers and borrowers and works to ensure the members understand the need and interest to save and also have the opportunity to borrow. I first got involved in a new local rural credit union in Bolivia 41 years ago (wow, time flies) and basically those initial principles still hold today even though "Progreso, Ltda" is now much bigger, of course, with many more savings and financing products, including agricultural loan products started 39 years ago.
Cheers,
Calvin
I tend to agree with Wolfram. Borrowing should be about the need for a useful lump sum that you are credibly assured from your own experience you can easily pay back. Price is certainly part of the equation, but a large majority of the poor have a strong preference to save, rather than borrow, if only because borrowing, however benign and competitively priced, carries risk with it: saving up is always safer than saving down. I sometimes think that the MF industry would be a whole lot different if Mr. Yunus had taught those first 25 women to save rather than borrow.
Dear Chuck, although I agree that there are reasons to exaggerate in order to draw attention to a particular problem, please allow me to comment that your statements go beyond reasonable borders. I refer to this sentence: "Whether one should borrow or not is ALL ABOUT THE PRICE, and few understand prices, even 90% of the 3000 people subscribed to this MFP listserve."
The most important financial services for the poor are first of all offering the infrastructure for safe and anytime accessible deposits. Poor people want to save and they are able to save. The problems are transaction costs and discipline.
Whether one should borrow or not is - in most instances - NOT ABOUT THE PRICE (and not at all about the interest rate!). In most instances you find that the principal is much higher than the interest payment. Therefore, whether one should borrow or not depends on the repayment capacity (irrelevant if from income, donation, sale of assets, or…) and whether or not repaying the loan results in (severe) SUFFERING on part of the debtor.
I agree that maybe the majority of the subscribers do not understand prices, but the ratio of 90% may just refer to the minority who are active participants and want to learn. Do you think I'm too optimistic?
Wolfram
Many of you will remember some of Malcolm Harper's references to Wonga, a payday lender in the UK that has been charging shockingly high prices and growing by leaps and bounds.
Well, they won't be growing quite so fast now…. They've drawn a lot of attention from:
1) those who think high profit and high demand must obviously mean you're doing a wonderful job and providing a much desired product, as well as
2) those who argue that people buy before they think, and therefore get into a situation they shouldn't be in. High profits don't mean it's a win-win situation, but a situation where those with money and power coax the naive and innocent.
Things are changing in a big way. Here are a couple of the articles that describe the situation.
I constantly read microfinance industry literature that says all credit is good, the poor need more of it, it's our role and obligation to flood more credit into the market, and all of that is going to magically end world poverty. Whether one should borrow or not is ALL ABOUT THE PRICE, and few understand prices, even 90% of the 3000 people subscribed to this MFP listserve.
Here's one of the case studies in the BBC article above that counters the case studies that we lenders like to flood the media with:
Case study: 'I lied to get a £120 Wonga loan for a holiday'
When Elliott Gomme needed money for a holiday, he turned to payday lender Wonga.
He needed £120 and says he didn't have a problem convincing them to lend him cash by saying he worked full-time.
But the 20-year-old admitted lying on his application and told BBC Newsbeat it was "too easy" to be accepted.
He's now likely to be one of 330,000 people whose debts will be written off after a ruling that Wonga lent money to people who couldn't repay it.
"My bank couldn't give me an overdraft or anything, and so I went to [Wonga]," he says.
He received his money and went on holiday, but a few weeks later he says the firm started calling him and he says they were "constant".
"They were ringing me every day," he says. "They were telling me how much I owe and that there was added interest."
Elliot says that a few months later he was being told his debt had risen to more then £800 and it began to affect his day-to-day life.
He says the amount of the debt was making him feel depressed and that he had "no idea" what he would have done if this ruling hadn't come.
In Elliott's opinion, the whole process is too simple and he wants payday lending to be banned.
"It's so easy to go online and get one that you don't really look at the small print and they don't really tell you that much," he says.
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