April 18, 2012

My Two Cents on Impact: Exploring an Interest in Interest (rates)

Image from TaxBrackets.org

For those of us who follow microfinance news closely (I’m not the only one out there who gets “microfinance” Google alerts, right?) it’s been hard to see some of the trash talking about the industry in mainstream media in the last couple of years — since I’ve been watching. Critics point to greed via excessive interest rates imposed on the poor, and inappropriate money collection methods by some
MFIs, questioning whether microfinance is even effective. Andhra Pradesh and Grameen Bank have been in the news so much, they’re practically household names these days.

The negative publicity could certainly give a brand new, wide-eyed impact investor pause. But I’m beginning to realize that the bad publicity feeds an important system of checks and balances, helping expose harmful practices for the benefit of the entire microfinance industry.

Also, what I’ve learned so far from talking to experts in microfinance is that there are bad apples here, as in every other industry; nothing about microfinance is black and white; and poverty alleviation is exceptionally complicated.

One person I recently had the privilege of talking to is Sharlene Brown, National Director of Oikocredit USA, the issuer of my Fonkoze security on MicroPlace. (Fonkoze is Haiti’s largest microfinance institution.) I wanted to find out directly from her about Oikocredit’s due diligence process in selecting MFIs, the interest rates their MFIs are allowed to charge, and what kind of impact she’s seen.

(Feed My Starving Children, Flickr)

I found out that Oikocredit has 36 regional offices staffed with locals, doing the initial due diligence work on MFIs in their regions. Local Oikocredit teams ensure that their partner MFIs’ business practices meet the organization’s strict quality criteria, which take into account commitment to social and environmental impact, interest rates, fees, and product prices, among other things. To some degree, Oikocredit has a decentralized governance system, empowering the local offices to operate within the cultural contexts of their regions, which means they also don’t interfere with the operations of the MFIs, unless they find a problem. And when they do spot opportunities for capacity building, Oikocredit offers grants to MFIs to help them strengthen their skills, competencies and offerings.

Sounds good to me, but I’m still plagued by the question of interest rates imposed on the poor in developing countries, probably because the media has had a field day publishing horror stories of poor people killing themselves because of the shame and pressure of not being able to repay their microloans. I wondered if Oikocredit imposes a cap on what their MFIs can charge in interest? Are traditional interest percentages in the 30s? 40s? 100s?

It turns out there’s no magic number for what’s acceptable, which explains why I can’t find specific information about interest rates anywhere. Sharlene said that what seems preposterous to me (anything above a few percentage points) could be acceptable in a local context. And yes, that could include a 70% interest rate. One reason for this is that MFIs aren’t like banks, where clients go to them. Their reps go to clients, even if that means traveling for hours to rural areas that no other financial institution wants to deal with. They also offer additional services that are built into their cost factor – clinics, women’s empowerment classes, literacy programs – which makes the cost of doing business much higher.

Oikocredit has a tool that allows them to spot extreme rates in the regions they work in, but their first step is to understand whether there’s something going on that makes this acceptable. An example would be that an MFI is trying to get deeper into rural areas, which involves hours of travel by transport and by foot. Naturally, somebody has to get paid to do this, so rates and product prices must be higher.

(Lee Cohen, Flickr)

As a real-life example, Fonkoze focuses on women, many of whom can’t even count. In a great article about Fonkoze in a recent issue of GOOD magazine, its director, Carine Roenen, said that some of the women she works with recognize small bank notes by their color, but wouldn’t recognize large bills because they’ve never seen them. Clearly, these people need more than just loans, so Fonkoze has its borrowers, each receiving an initial $25 loan, form groups of five to help each other manage their money and their businesses. They also give them savings accounts, plus life, credit, and catastrophic insurance, and have borrowers attend four training sessions before taking out a loan, plus weekly meetings thereafter.

As of December 31, 2010, Fonkoze hosted 234,312 savings accounts with an average balance of about $100. And in the last ten years, the number of borrowers graduating from Fonkoze's basic literacy training has increased by 130%, which is incredible for a country with 52% of the population illiterate. Fonkoze has also seen its business skills training program grow by 550% in this same time period.

I’m no expert, but I would classify this as impactful and can understand that it would probably be pretty difficult to accomplish without charging interest.

There’s a lot to consider here, but the bottom line for me is that there are people and companies out there doing evil, and ones that are doing great things. The key seems to be to find ones that are trustworthy and are sincerely trying to make a difference and join them, or at least support their causes. Fortunately, MicroPlace has done the heavy lifting for me with its due diligence on the investment issuers to ensure my money is supporting deserving projects.

-- Lonnie Shekhtman
Lonnie is not an employee of MicroPlace and is paid by MicroPlace to produce her blog series.


  1. Good insight into this issue Lonnie. I think the scale of individual lending should be focused on in this environment. a $25 loan, even in a rural foreign country, isn't the same as our conventional $450k mortgage. a sliding scale of interest seems like a dangerous thing to me, especially with limited oversight, but traveling hours through the jungle or desert to loan someone a few bucks has to be more than an exercise in philanthropy.

  2. Thanks for your question, Jeannie. Yes, one of my two current investments provides greater access to healthy foods in under-served communities in my home state of California. Check out paragraphs six and seven of the blog post above for details. I'm interested in supporting people both in the U.S. and abroad, so my portfolio is going to reflect that. I think the entire microfinance industry is reflecting this truly international approach these days, with more impact investment opportunities benefitting poor communities right here in the U.S. Right now, MicroPlace offers a couple of U.S. investments from Calvert Foundation: California FreshWorks Fund and the “Women INvesting in Women Initiative,” which comprises investments funded by women targeted to women mostly in the U.S. (75%) but also throughout the world.

    Are you a current investor? Do you focus on specific regions?

    -- Lonnie Shekhtman