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Interest Rate ethics : an aspect of social performance in microfinance  

Interest Rate ethics : an aspect of social performance in microfinance  . Arvind Ashta Chairholder in Microfinance Burgundy School of Business, CEREN E-MFP conference, Luxembourg, Nov . 24-26 Thanks to the Banque Populaire de Bourgogne –Franche Comté for financing. Plan.

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Interest Rate ethics : an aspect of social performance in microfinance  

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  1. Interest Rate ethics : an aspect of social performance in microfinance   Arvind Ashta Chairholder in Microfinance Burgundy School of Business, CEREN E-MFP conference, Luxembourg, Nov . 24-26 Thanks to the Banque Populaire de Bourgogne –Franche Comté for financing.

  2. Plan • Interest rate levels • Questions of governance • Interest rate transparency

  3. Donations and Equity to Compartamos Public funds International Development institutions : CGAP, IFC US AID Privatefunds Accion Compartamos AC (NGO) 32% 68% Compartamos (for-profit)

  4. 30% 100% $ 6M Paid up capital 2000 $ 1.8M Book Value 2006 $ 38M $ 126M IPO Proceeds 2007 $ 470M $1550M Market Value 2007 $ 600M $2000M Compartamos IPO in 2007

  5. The problem of governance • For-profit or Not-for-profit • Those who convert from not-for profit to for-profit: is this ethical • Should not-for-profits own for-profits?

  6. Interest rates worldwide (Rosenberg et al. CGAP 2009)

  7. Interest rates in Mexico (based on Rosenberg 2007, CGAP)

  8. Power versus Interest Grid of Compartamos stakeholders (Ashta & Hudon, 2009)

  9. Ashta & Hudon (2009 a and b) • Impact on existing borrowers would be greater if interest rates were lower (donors, existing borrowers) • Need to be profitable • for sustainability (shareholders) • For growth (impact on new borrowers) • How to balance these two objectives? • Earmark Share capital to borrowers • As part of interest payment • As free/ bonus shares

  10. The problem of transparency • Flat rates • APR EAR • Other elements to take into account • compulsory savings, • up front fees • Particular problems when period is short

  11. What is the whole truth in lending? Example: you buy a good for 140 $. You pay 20$ cash and 150$ to be repaid in 6 monthly instalments (for a total of 170$) GP: global price RP: real price LA: loan amount AOB: average opening balance = (LA+D)/2 D: downpayment APR: annual percentage rate of charge EAR: effective annual rate IRR: Internal rate of return For finance professionals, last method is the whole truth: 119%

  12. Interest rates of the top 10 Indian MFIs, where available (source: websites Oct. 2009)

  13. Conclusion: How to link interest rates with Social performance measures • Deviation from average rates • International • Country • Deviation from celings • Deviation from usury rates • Deviation from money lender rates • Governance • Is part of intrest going back to borrowers in terms of share capital • Are profits lower if there are more NGOs on the board/ more donor funds • Transparency in interest rates • Flat rates ? • APR disclosed ? • EAR disclosed ? • Other fees/ compulsory deposits disclosed?

  14. Future research questions • How should you distribute benefits with the range? • How do you feel if your NGO becomes a profitable entity? • Former Donors to NGO • Former volunteers to NGO • If you separate your loan from insurance services –to lower interest rates • Will people still take your insurance services • Does packaging oblige them to take all?

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