APRLoanSize
|
|
|
|
Hi Dick, I strongly believe that we can’t/shouldn’t just look at “interest rates” in microfinance without looking at the issue of loan size. I’ve posted a few graphs on that point over the past six months, and I’ll give a couple more now to explain my point. Since the discussion is much about Mexico rates and profits, and about Compartamos, here is some data for Mexico and Compartamos. Before looking at interest rates, let’s look at operating costs. This first graph shows operating costs relative to loan size. Quite persuasive evidence that the operating cost ratio increases as average loan size decreases. And you can see that for the average loan amount Compartamos has (US$900), they are right in the middle-of-the-pack on efficiency. Looks like an op cost ratio of about 35%.
Now, of course, interest rates need to cover operating costs. So interest rates will need to be higher for those MFIs giving smaller loans. And the data (using real yield on portfolio figures) in the next graph shows that this is indeed the case. MFIs with smaller loan amounts are charging higher interest rates (and can justify why they are doing so, if they are being expected to be sustainable). Now notice in this graph that Compartamos, with an average initial loan amount of about $900, is generating a real yield of about 80%. But the other MFIs in Mexico giving loans of about the same size are generating yields between 35% and 65%:
In conclusion, what many of us assume is: “higher interest rates = higher profits” But that simply isn’t the case. We would have to say “for MFIs with very similar average loan amounts, e.g., $900, and similar cost structures and operating efficiencies, then higher interest rates = higher profits. To summarize: The first graph showed that Compartamos is a bit more efficient than other MFIs in the $900 loan range. The second graph showed that Compartamos is generating a yield much higher than other MFIs in the $900 loan range (i.e., their interest rates are higher than other MFIs with a similar loan product). Therefore, as shown in this last graph, that gap is what helps Compartamos generate such high profits.
One final comment. Compartamos talks frequently about having lowered their interest rates in the past six years. And they have. However, they also increased their average loan size from $100 in the year 2000, to $900 currently. Look at the $100 loan range on that last graph. With loans that small, they did need to charge high interest rates. But as their loan sizes increased dramatically (nine-fold in six years) their interest rates should have dropped dramatically as well, if they had chosen to follow that curve. Instead they chose (as they state) to keep interest rates high, generate high profits, and use those profits to fuel growth. I don’t like to write emails so long that nobody reads to the end, so even though there are lots more interesting-and-fascinating points that I could draw out, I’ll wrap things up. Chuck Waterfield
From:
Development Finance [mailto:devfinance@ag.ohio-state.edu] On Behalf Of
Richard Meyer
Mark: Thanks for info. Are
higher interest rates associated with higher profits? One would expect so. If
that is the case, another explanation for rapid growth is the high profits
generate funds for needed for rapid expansion (e.g Compartamos) and aggressive
marketing to generate more profits. Also if it is true in the Compartamos case
that the rate is high due to limited competition (that observation has been made
contrary to your comment below about competition in Mexico), the rapid expansion
can occur even in the face of high rates. That would not likely be the case if
there was more competition to hold down rates. |
This website is managed by Chuck Waterfield. If you have any questions or comments about the website, please email waterfield@microfin.com |
