Kiva Stories from the Field

By Nancy Tuller, KF8, Ghana, Africa

I have a professor and mentor from my undergraduate days whose advice and thoughts I value and respect so much.  I still communicate with him regularly, and over the years, the topic of interest rates in microfinance has come up repeatedly in our conversations.  This is the man from whom I first learned about community currency, an alternative exchange system used alongside national currencies.  He is knowledgeable about micro and macroeconomics, as well as finance.  However, our conversations about interest rates for microloans always end the same way:  with me, for the most part, defending the rates charged for microloans, and with him maintaining that the rates are most often too high.  I think I finally have the words to support my position, and I offer them up to you all.

It seems I’ve always intuitively known that if you want to be in the business of giving very small loans to the poor, your expenses are going to be higher than if you are a financial institution that works with middle to high income clientele.  If you want to continue providing basic financial services to the poor you must have a sustainable operation, with an ability to cover all your expenses and generate funds to lend as well.  Many microfinance institutions (MFIs) rely on donor funds to stay sustainable, and I would even venture to say, without the statistics at my fingertips, that the majority of MFIs begin operations this way.  Many are not able to wean themselves from donor funds.  But relying on donor funds has its own cost, in terms of meeting donor needs, reporting back to donors, and the very real threat of MFIs losing sight of their own missions by putting their financial viability (and sometimes donor missions) at the top of their priority list.  The more recent trend in microfinance is to move away from donor funds and seek financial sustainability as quickly as possible.  Scaling up the business by adding more borrowers is a step in this direction, and there are certainly MFIs, who once they have reached a financial comfort level, have lowered their interest rates.  However, that comes with time and sustainability.  The first goal, before lowering interest rates, is financial self-sufficiency.

One thing that is really important to acknowledge is that different country contexts present different challenges to meeting financial sustainability for MFIs.  For example, Kiva recently launched its first loans to borrowers in the United States.  One of the MFIs offering these loans, ACCION, charges an interest rate of 12% APR.  That may seem on the reasonable end to many from the US.  However, (more…)