NamasteDirect has issued its latest newsletter. In addition to other articles, the letter focused on a recent New York Times article that called into question some aspects of microfinance. The following excerpt (emphasis added) is from their April 2010 newsletter. A more in-depth analysis can be found on their website, which you can access by clicking here.
Our phones have been ringing off the hook these past few days as a result of the recent New York Times article about microfinance that wasn’t very positive. We thought we’d take the opportunity to talk about the issues raised and how NamasteDirect is distinguishing itself from the ‘pack.’
The four principal themes of the article are:
1. Microfinance banks (MFI’s) are making big profits from high and sometimes-unconscionable interest rates.
Most MFI’s charge what the market will bear, or what they think they need to cover all their operating costs. The common perception is that poor clients aren’t interest rate sensitive. In some cases rates are as high as 100+%. They do this because a main goal is to be profitable. The industry wide average rate is about 37%.
Because NamasteDirect’s mission is to assist borrowers in building businesses that have the potential to be bankable in the commercial sector, we use average commercial bank rates to set our rates. This right now is between 18-24% amortized on a declining balance.
2. The beneficial effects of microloans are debatable.
There is no question that small loans to the poor provide benefits of smoothing out cash flow and of minimizing the cyclicality of income, a huge benefit for families living one crisis away from not being able too eat. However there is little to no empirical data to show that people are moving up and out of poverty as a specific result of their loan. It is not a panacea for poverty as many have claimed.
Our primary focus is specifically on increasing the cash flow (income) of women’s businesses that receive loans. We measure monthly cash flow, we support the client with a business advisor for each loan cycle and we provide financial literacy training, all to increase their chances of success.
3. Transparency is lacking, sometimes intentionally so.
Most MFI’s (both for profit banks, and non-profit groups) are disingenuous about interest rates charged on their loans. For example, what is represented as a flat rate of 3% per month (or 36% per year) is actually over 60% according to standard accounting principles. That’s because interest is typically charged on the original principal balance throughout the life of the loan even though the balance is declining!
At Namaste both the clients and the public are advised up front that the loan APR is 22%. If anyone asks “how do you calculate the interest charge?”, we say “by using a flat rate of 1% a month on the original loan throughout the life of the loan.” We feel that it is important to be honest with borrowers, with donors and with potential investors.
4. Lenders are coming under scrutiny, sometimes with embarrassing results.
We think this is a good thing. Recently, the global economy barely survived a complete and total melt down because lenders were (and still are) under inadequate scrutiny by government regulators, by investors, by auditors, by financial institutions, by the press and by the general public.
The Namaste position is “let the sun shine in.” It can only result in betterment for borrowers, institutions, and society at large.
To learn more about NamasteDirect, or to subscribe to their newsletter, please visit their website.
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