Is the interest rate too high? My perspective from the back of a motorcycle.
27 March 2009
To understand the interest rate that Pearl Microfinance charges its clients takes more than a brief look at a few numbers.
If you ask someone at Pearl what the interest rate is on Pearl loans, they will tell you “2.5%.” This means that there is a 2.5% per month interest rate. 2.5% interest is charged on the original loan amount rather than the balance remaining – in technical terms this is a flat interest rate rather than a declining interest rate. With a flat interest rate, over in a year, the clients would be charged 30% of the original loan size, and with the declining balance interest rate, they would be charged 16.25% of the original loan size.
These seem like very high numbers, but since the vast majority of the loans that are posted to Kiva’s website have 3 or 4 month loan terms the total interest paid ends up only being between 7.5% and 10%. To me, after a long motorcycle ride last Monday, this seems reasonable.
The Borrowers gather to receive their loans.
On Monday I went to visit the borrowers of Mityana, Uganda. Mityana is a mid-sized town that is about 50 km west of Kampala.
A few minutes after reaching the office, the credit office (CO) who was to take me to the field that day roared up on his motorcycle and came rushing in, very apologetic for not being there to greet me when I arrived. After welcoming me, greeting me, asking after my family, and all the people in Kampala, the CO asked me, “Are you really coming with me to visit the group today?”
This should have been a warning signal of what was to come, but since many Ugandans fear that I will not be able to manage things like carrying my own bag I tend to insist that I can do whatever people are asking of me (yes, this does result in me trying to do things that I definitely can not do – like chop an onion with a dull knife while holding the onion in the palm of your hand, but who can do that?!?).
The CO insisted that we take lunch before going because the place we were going was “very far!” So we took lunch and then sat around in the office waiting for the executive members of the group we were to visit to finish getting the money from the bank. At PEARL, the executive members of the community banking groups are responsible for carrying the cash to and from the groups. While we sat around, I played with the youngest member of the office, the 3 month-old baby of the office assistant.
About 45 minutes later, the CO started preparing me for the journey. He insisted that I wear a huge raincoat that he must borrowed from a local muscle-builder – and a helmet that looked as if it had been through a few crashes. I got on the back his motorcycle, and we set off.
After about 10 minutes on the road, the CO pulled over and asked me if I would sit “like a man.” I was sitting side saddle since I was wearing a long (cream colored) linen skirt, but I feared that he was asking me to sit “like a man” for my safety, so I swallowed my pride, hiked up my skirt, and tried to find a way to throw my leg over the side without traumatizing the children who had gathered to observe the scene.
A view from the road early on.
Usually before getting on the back of any motorcycle I tell the driver – “Mpola mpola – kale?” Which roughly translates into, “Go slowly, ok?” This usually has the effect of making my driver practically fall over since almost no white people who live in Uganda take the time to learn even a few words of Lugandan, but more importantly – it usually does makes the driver go slowly. Since the CO was a co-worker, I did not feel that I could tell him to go slowly – and he did not.
For the next hour, we traveled up and down hills that were at about 45 degree slopes on roads that were not only unpaved but seems to be covered with about 4 inches of dust. There were a few brief periods where I did not fear for my life. Eventually the road flattened out, which meant, much to my dismay, that the CO increased his speed.
Then we came upon the “road repair”…
The “road repair” was an area where HUGE piles of sand, that I am assuming were going to be flattened later, had been dumped in the middle of the road at about 8 foot intervals. The piles were about 6 feet high (I could not see over them), and they spanned the entire width of the road, except about 1 foot on one side – and the side where there was small passable area was not always the same side, which meant that was virtually impossible to continue down the road. The CO tried to drive his bike very slowly, often having to put his feet down and push off the side of the heaps of sand.
We kept almost falling over but the CO seemed unconcerned. I was very concerned.
When my skirt ripped, I was even more concerned, and when the back wheel skidded out beneath me, I got off – that is the graceful way of explaining how I ended up off – and started walking.
We eventually did reach the group (the Lubajja Traders), and it was wonderful. The interviews were fantastic, and the scenery was stunning. There was a school next to where we were meeting was having music class so they were singing and dancing around. This combined with the sight of the lake near by, and smell of the tropical greenery almost made me forget that I would have to make a return journey similar to my first experience…
On the way back to town, the CO seemed to be driving even more recklessly. After almost completely wiping out a few times, we came upon a large obstacle, and I told the CO to stop so that I could walk around it, and he drove off eventually going out of sight…
I wondered if he had misunderstood me. Maybe he thought that I had had enough, and that I thought I could just walk the rest of the way. There was a truck up ahead, maybe he thought I would just try to hitch a ride with the truck. I wondered what exactly I would do if he had left me here to find my own way… I was hours away from town by foot and there was no way I would make it before it was dark.
So… I just kept walking, hoping that he would come back… I walked trying to hold the tear in my, now filthy, skirt closed, with a huge helmet squeaking on my head, sweat soaking through my shirt under my oversized rain coat, and limping slightly since my sandal had broken and cut my foot one the times that we had fallen. From under my helmet, I could still hear the children’s voices calling out, “Bye Mzungu!” and although I knew it would make me look even more crazy – I couldn’t help it – I started laughing out loud. I could not stop laughing. I kept thinking what a funny picture I must have made. I am sure that the story of the Mzungu who thought she needed to wear a helmet to walk in Uganda will be told for weeks.
Then and there I decided that, had there been a way to make a video of that day without killing myself, I would have made the phrase “10% interest” scroll across the bottom of the screen.
The cost of bringing financial services to these borrowers is incredibly high. In addition to the financial and physical cost, the CO’s are incredibly stressed by such work. The CO was clearly exhausted at the end of the day – by the way, he did come back for me and he had found a short cut that allowed us to avoid the “road repair” section – but he missed his evening classes at the university he attends. It is important that the staff at PEARL feels appreciated for the difficult tasks they undertake! 10% interest seems a reasonable charge.
In order to make a judgment about the interest that PEARL charges, it seems you must take a good look at the numbers, meet a lot of borrower groups, and then go for a ** insert an adjective that properly describes the above experience** ride on the back of a motorcycle. Then, and only then, can you begin to understand the complexity of PEARL, at least in terms of interest.
Note: Mzungu is what many people in East Africa call Whites.
~~ Please join the lending team for Pearl Microfinance. Our hope is to use this team to help you connect more to the borrowers, staff, and Kiva Fellows at Pearl Microfinance! Watch the video below to see some of the sights along the roads of Uganda (none of the footage is from my trip to Mityana…)~~
Entry Filed under: Africa, KF7 (Kiva Fellows 7th Class), PEARL Microfinance, Uganda. .
22 Comments Add your own
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <pre> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed
RSS - Posts
1. Brett Dobbs | 27 March 2009 at 03:29
Stephanie – you managed to make learning about interest rates both enjoyable and hilarious — while also showing how hard loan officers work for their banks/borrowers. Quite a feat. I will def. be sending friends and family to this post to explain why interest rates can be so high and the risk that loan officers sometimes take. Great post.
2. cory | 27 March 2009 at 03:51
hey Steph, great post!
In justifying the high interest rates, though, you are making a critical assumption: that the CO’s are fairly compensated for their hard work. This obviously varies from MFI to MFI, but I highly doubt that all, or even most, of the MFIs compensate their CO’s fairly.
Just my 2 cents!
3. Lori Gibson Banducci | 27 March 2009 at 06:16
steph-
what a fabulous post. i think that the more people understand about the “costs” associated with delivering financial services to the poorest of the poor….the more understanding they will be of the “seemingly” exorbidant interest rates.
what a trooper you are! i’m with you on the importance of learning how to say “please go slowly”….
4. Ken | 27 March 2009 at 07:22
This blog should be required viewing at all Bank of America, Chase etc. board and staff meetings. Let them know how a real banker works.
5. Jeremy | 27 March 2009 at 09:48
Just wanted to let you know that this post is currently making the rounds at Kiva HQ. You’ve done an outstanding job of illustrating why the rates are high. Plus, your videos are awesome
6. Bill Brick, KF6 | 27 March 2009 at 13:51
Hi Stephanie – superb post! I love the videos! Playing devil’s advocate if I may, some MFI’s hide behind the “high cost of delivery” argument to charge userous rates. In evolved markets like the US, businesses operate at a loss until they can achieve the efficiencies necessary to meet market prices and make a profit. In places like Uganda, markets are fragmented, inefficient and unregulated, making market price is a nebulous notion. Many MFI’s push their operating inefficiencies onto their borrowers, who lack competitive alternatives and the sophistication to negotiate a fair deal. In microfinance, the social mission must always supersede the profit objective – the primary stakeholder is poverty, not shareholders. Thus, MFI’s need to be vigilant in constantly seeking the greatest efficiencies they can achieve – through scale, technology, operating practices and capital costs. There’s really no incentive to do this if they can simply charge higher rates to cover their costs. After all, its much easier to rationalize than innovate in third-world environments. And, who else will endure what you’ve described to reach these rural borrowers, leaving them with no choice but to pay whatever rate is charged? Fortunately, Kiva does a great job screening its MFI partners,demanding both strong social missions and best operating practices – insuring that Kiva borrowers are beneficiaries of best-in-class financial services. PEARL is a noteworthy example. Thanks to you and all Kiva Fellows for telling the stories and illuminating the facts.
7. cory lee | 27 March 2009 at 21:27
Hi Bill I really loved your comment. It articulated what I’ve been struggling to articulate for the past two months. I’m very suspicious of the “high cost of delivery” argument myself. I think that while it sounds very agreeable at first, you have to really clarify what the expenses are exactly, added up, and determine if it is in fact “high” *relative to the revenue that is generated from the high interest rates* (asterisks for emphasis). Its all too easy, for example, to pay credit officers scandalously low wages and still charge high interest rates when in fact you can afford to charge rates far lower. This argument is especially specious to me considering that MFI’s are primarily incentivized to maximize profit, not social impact.
8. Jim | 28 March 2009 at 13:57
I’m no expert but I would also think the rates are high because the loan amounts are low individually and collectively in any one area. In the US, bankers make loans of hundreds of thousands on a single house so 5% interest is $5,000 per hundred thousand. Just a few of those and they can support a loan officer. If the loan size is $1000, 5% is $50. It takes quite a few of those to support a program. Still, it would be nice if the support came from donations and the borrowers got the benefit of lower rates.
9. Mark | 29 March 2009 at 05:27
From my point of view, the key lesson from this story has nothing to do with interest rates. The key lesson is…WEAR PANTS!!
Love,
Dad
P.S. I am very proud of you!
10. First Quarter 2009 Review « Kiva Stories from the Field | 31 March 2009 at 15:54
[...] Stephanie’s thoughts on microfinance interest rates from the back of a motorcycle [...]
11. muraya | 1 April 2009 at 00:25
i agree with some of you guy but .Everyday when I watch the news, it becomes even more evident that the economies of the world are melting down. It is sad… almost scary, that mighty economic giants have been brought to their fee.
I am also reminded that this meltdown is hitting our Kenyan economy and the rest of third world country not yet spared .I hope that the same banks that were putting thousands of citizens into bad or severe credit can now see the other side of the coin….ALL created by these banks’ unquenchable greed…i still think the concept should be introduce to Kenya banks
12. grace | 3 April 2009 at 00:45
After a round of laughter, i think i will agree with Mark’s comment of wearing pants. Surely she bought the idea since for the very first time ever since Stephanie came to Pearl, she put on pants only once after the incident, though, there was no field trip that day. *you can’t imagine how smart she was*
About the interest rate, this is set with a lot of factors in consideration but Not as a result of compensating Credit officers as most would put it in this case. And since Credit Officers are just some of the workers of MFIs; and if it could be a matter of compensation, then i think an interest of 10,000 Uganda shillings would be too little for a loan of 100,000 Uganda shillings after a period of 4 months.
13. Fupi | 8 April 2009 at 13:10
Fungy (sorry),
You are both hilarious and brilliant. I can totally picture your dirty mzungu self hobbling around. I am also shocked that you were wearing a skirt. Great post.
Fupi
14. Ramesh | 8 April 2009 at 14:20
What this demonstrates is, the total cost of finding the people to loan, disburse loan, collect periodic loan repayments, etc. takes enormous effort !! If 10% interest over 4 months allows an MFI and a borrower to bring about a better life, I am all for it !
Wonderful blog and great courage, Stephanie. Thanks.
15. John Marie | 9 April 2009 at 04:18
That’s the reality of life in rural Africa. I grew up in rural Uganda and what you describe is very familiar. Thanks for sharing your experience and thanks for reaching out to help our people. It’s helpful to read about this issue of interest rates because we are in process of introducing microfinance to my village in Masaka through this Uganda Rural Fund (http://www.ugandaruralfund.org). We have been looking at different MFI’s in the area.
Enjoy your time in Uganda – hope you like Matooke!
John Marie
16. Linda Chegwin | 10 April 2009 at 07:26
great video of the roadtrip…Ikea, hardware store etc. In Dec’08 I returned from a 3 month visit/volunteering in rural Uganda. The Irundu/Iganga and then Bugiri region. I too initially thought the interest rates were too high. I had also previously been in agreement with sponsorship donors who asked for low administrative costs. After seeing how difficult and expensive it is to copy/print/access a computer etc etc, I realized that it is not fair nor accurate to compare interest rates or administrative costs to those in countries with an “abundance of things”.
I laughed outloud over the “Mzunga walking with a helmet on her head”, as on one of my field trips I straddled a motorcycle backwards, wearing a dress (wide skirt though) holding/balancing a large box of handicrafts I would bring back to sell in Canada for a group of women’s health needs. Oh yes it was pouring rain too, needless to say many heads turned not once or twice but repeatedly to see if what they saw was real. As my friend said, many people were laughing around their evening meal that night, rather than grumbling, over that halirious sight. I know we did and still do. I can’t wait to return
17. Savitha | 10 April 2009 at 16:53
Excellent post! I am researching about getting Kiva to India and you give me a good understanding of interest rates and MFIs.
18. Billie Giese | 13 April 2009 at 18:19
Thank you for sharing the true costs of lending in Uganda. If all of you, from Kiva fellows to the COs are willing to undertake these ventures, my husband and I are willing to do our humble part and lend.
19. Raul (rap584 in Twitter) | 14 April 2009 at 10:09
Fantastic post! Loved the videos. Thanks for giving us insights on what it takes to make these loans happen.
Best,
Raul
20. Trainings to save my skirts (and Grace’s sanity) « Kiva Stories from the Field | 5 May 2009 at 05:56
[...] offices in Mubende and Mityana (Mityana is the place I decided the interest rate Pearl charged was reasonable) are the only offices that we post loans from that are west of Kampala. Mubende is a branch office [...]
21. Greg Simmonds | 13 October 2009 at 08:19
Hi Stephanie,
I am pleased to have stumbled on your blog. It is well done.
I could use some direction….I am a Canadian businessman who has just arrived in Africa, looking to help make a difference on the continent. I am interested to offer my business skills “on the ground” here.
I have just recently approached Kiva, as they are an amazing organization – one which I would love to become involved with. I have also tried to find contact information for Pearl Microfinance but have been unsuccessful. Are you able to provide any help?
Thank you in advance
Greg
22. John Mary | 13 October 2009 at 14:59
Greg, are you in Uganda? I have a friend who works with Pearl. I could get you in touch. Email jmlugemwa@gmail.com You can also see our work at http://www.ugandaruralfund.org We have some small micro finance program with the women in the villages (village banking).
Have a great time in Uganda.
Peace,
John Mary