Microfinance Practice: Re: [MFP] Teaching cost of borrowing to borrowers

And thank you too, Hugh. In spite of my misanthropic approach to managing my own financial affairs (such as they are) I rather like doing things with my neighbours, although it may be that living in a village with only 104 people helps, and I do tend to know their dogs' names better than their own.

And of course you are right, far better a VSLA, under whatever 'brand', than an imposed MFI group where lend - lend - stay in debt - stay in debt (and recover too, never mind the cost) is the message, but 'we' must never forget that none of 'us' would voluntarily chose a group, under a tree or in our sitting room, as the optimum approach to managing our finances. We wouldn't chose to send our children to a school without a loo, or to be treated by an inexperienced semi-qualified para-medic; all these 'barefoot' things are much better than no service at all, but, like microfinance, they are second-rate temporary solutions, not the final goal.

Malcolm

From: mailto:MicrofinancePractice@yahoogroups.com

Sent: Friday, October 09, 2015 7:24 AM

To: MFP

Subject: Re: [MFP] Teaching cost of borrowing to borrowers

Thanks Malcolm. The Raifaissen banks on Germany and Austria were very successful and it is a little known fact that a majority of bank accounts in the USA are held in Credit Unions (more than 100 million). Both of these are sort of second generation SGs. They do not sit under trees any more but seem to attract people to the idea that banking for mutual benefit instead of corporate avarice is an attractive proposition.

Your general principle, that you first of all consider if the service being proposed is one that would suit you, is one that I very much share), but one that I park at the door when I am working in places where cooperating in small groups is common and where what you and I see as a liability - loss of privacy - is turned to an asset that allows for really good credit decision-making and increased levels of savings mobilisation - because that's the social contract.

These things may change as the sirens of digital convenience chip away at their foundations, but they are proving to be resilient if only because, perhaps, meeting with your neighbours once a week for a practical purpose can also be quite enjoyable.

On 9 Oct 2015 03:55, "'Malcolm Harper' malcolm.harper@btinternet.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
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> Sorry, Hugh, I don't really know what other people want, so I have a distressing habit of looking in the mirror, and asking myself what I want. And I know I don't want to do my financial transactions in a group, so I hesitate to believe that other people do.
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> People don't talk much about BRI in Indonesia these days, but I understand that their Unit Desa programme is still flourishing. I remember asking Dick Patten (who helped to design the programme) why they did not use groups, and he said there were two reasons; he did not believe that there was any strong tradition of group saving and lending in Indonesia, or in Java at any rate, and that he wouldn't himself like to bank that way.
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> Malcolm
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> From: mailto:MicrofinancePractice@yahoogroups.com
> Sent: Thursday, October 08, 2015 8:59 PM
> To: MFP
> Subject: Re: [MFP] Teaching cost of borrowing to borrowers
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> Where do you get the 'no group nonsense' stuff from Malcolm? What doesn't suit you a lot of people find helpful and reassuring. Otherwise why would the average INGO SG spawn two more all without NGO involvement? Mass hysteria? I think that a lot of groupy stuff is nonsense, but despite my prejudices SGs have the inconvenient merit of flourishing.
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> On 8 Oct 2015 20:56, "'Malcolm Harper' malcolm.harper@btinternet.com [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com> wrote:
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>> This is interesting Anuj. Did you ask the students to compare the Compartamos interest rates with the rates charged by payday lenders in USA or Canada (mycanadapayday, 600% in Nova Scotia, here in the UK look at Quickquid, 1270% APR, lots like them, clearly stated, on bill boards as well as websites, as the law requires) ? And discuss what really matters most to micro-borrowers ? Here, in USA and Mexico ? And what that implies for all the effort being put into 'financial literacy training' ?
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>> It's not that interest rates don't matter, of course they do, but particularly for investment in petty trading, typically earning 850% or so return on the investment (see CGAP and elsewhere) what matters most is fast friendly accessible service, no group nonsense, all the things that make payday lenders so successful, and if it costs 36% (or so) a year to provide that, rather than 24% a year, it's a good deal.
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>> Malcolm
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>> From: mailto:MicrofinancePractice@yahoogroups.com
>> Sent: Thursday, October 08, 2015 3:49 PM
>> To: MicrofinancePractice@yahoogroups.com
>> Subject: RE: [MFP] Teaching cost of borrowing to borrowers
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>> A quick insert:
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>> We worked with group of undergrad students in Tech Monterrey Queretaro campus (a week long seminar), and used Compartamos case analysis in small groups. On one level, worked like a charm for helping understand the interest rate issue, and on 2nd level, made the issue quite clear to those young minds, what they need to look for when they interface with the MF world in Mexico. (Thanks Chuck!).
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>> What we emphasised was that, it is of course essential to have transparent pricing, and legislation; but also what to look for key elements (compulsory savings, timing for repayments, flat rate) to get a broader sense about how MF is trying to camouflage price or not.
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>> On another note, it will be interesting to analyse if transparent pricing improves client performance and loyalty, is there a correlation between the two? From personal experience, we can perhaps say safely, yes there is indeed a correlation, but then, we won't believe it till we have an expensive study/ evaluation done J.
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>> Anuj
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>> From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
>> Sent: Thursday, October 08, 2015 11:31 AM
>> To: MicrofinancePractice@yahoogroups.com
>> Cc: microfinancepractice@yahoogroups.com
>> Subject: Re: [MFP] Teaching cost of borrowing to borrowers
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>> Hello Howard,
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>> I'm in the wilderness typing on my iPhone, so need to be brief. I've given a lot of thought to these alternative measures, and they all have serious weaknesses when not considering a typical loan with constant payments. The examples you give below don't work when grace periods happen, or when there are irregular no-payment weeks as happens in India and Bangladesh. The examples also don't consider compulsory deposits, and the way they wreak havoc on the true price. All these affect the average balance figure that you're trying to get to.
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>> Another trick Lenders use is messing with the timing, such as using interest paid up front. It isn't just total paid and average balance that affect price. Timing can have a major impact.
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>> I've never found a way for a reasonably accurate price comparison other than generating the APR from the cash flow using dates and amounts. Clients will never be able to calculate this, and it requires legislation to limit the abuse that lenders practice.
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>> A couple of quick rules do work so-so. Declining balance interest is honest, and it gives the true price. Tell clients the more tricks the lender uses, the more cautious to be. Flat interest, fees, and forced savings all distort prices. Second, if two loan products seem nearly identical (same amount, term, grace period, no forced savings, then doing something of a comparison of total amount paid is reasonably close maybe 80% of the time.
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>> I have a bunch of examples in different power points and materials at mftransparency.org. Try searching in the Google search box on the website to narrow your search.
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>> Chuck Waterfield
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>> On Thu, Oct 8, 2015 at 2:15 AM, 'Howard Brady' hbrady@mfiresources.org [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
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>>> Hi all,
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>>> Last week I was training a group of microfinance practitioners and the concept of transparency and interest rates came up. I immediately thought of MFTransparency (of which I was a founding board member) and the interest rate calculation tool that's been used thousands of times to calculate APR and EIR of products worldwide. But I wondered how these numbers are explained to borrowers. I'm sure that the borrowers can be instructed, "the MFI with the lowest APR or EIR has the lowest borrowing cost", and that's pretty simple and maybe I should leave it at that. (Some borrowers chose to go with a more expensive source of funds because it may prove easier to get, to repay, or maybe they don't want to join a group, etc., but we'll leave that aside for the moment.)
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>>> However I was curious if, to perhaps make it more simple for borrowers to understand, if the MFI could tell the client, "If you get this loan and pay it off as scheduled, then get another loan immediately thereafter so as to complete one year of borrowing with us, your interest and fees and other charges will be 75 (pesos) for the 300 (peso) loan." You and me would pull out our calculators and compute the rate of 25%. I was thinking, though, that this doesn't take into account the difference from a "balloon" or "bullet" or "principal paid at the end of term" loan and a declining balance loan where, on average, ½ of the loan is outstanding at any one point in time (I know it's a bit more than that, but for simplicity purposes, let's say it's ½). So the client would need to be instructed about this and be told that they are only going to have access to ½ of the capital, at any one point in time, so it's more like a 150 peso loan. (Which increases the stated rate to 50% in this example). In other words the statement above would need to be revised to say, "If you get this loan and pay it off as scheduled, then get another loan immediately thereafter so as to complete one year of borrowing with us, your interest and fees and other charges will be 75 (pesos) for the 300 (peso) loan. However we're asking you to pay off a portion of the loan amount with each payment so on average you're only able to use 150 (pesos) of the 300 (pesos). You should compare the cost of 75 (pesos) with a 150 (peso) loan with other MFIs to determine the lowest borrowing cost."
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>>> So my question(s) to the group is, "Have you seen interest explained in this way to a borrower?" And then feel free to tell me if you think it's a good idea or not to try this out. Private or public critique is welcome.
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>>> Thanks for your comments in advance,
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>>> -howard
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>>> Howard Brady
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>>> President & CEO – MFI Resources
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>>> MFP Moderator
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>>> hbrady@mfiresources.org
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