Interest rate cap will hurt rural families

Phnom Penh Post, 21 March 2017

On March 13, the National Bank of Cambodia announced a major new policy. Starting April 1, all microfinance institution operating in Cambodia will be required to lend at interest rates no higher than 18 percent per year. This is a deeply misguided regulation that will undo over a decade’s worth of successful financial policies.

At the dawn of this century, Cambodia’s financial sector was largely nonexistent. There were no ATMs, few bank branches, and equally few customers. In rural areas, there were no banks at all, and moneylenders held a monopoly on lending.

How times have changed!

Today’s village household has far greater control over its finances and is deeply connected to Cambodia’s growing economy. A farmer can borrow from a microfinance lender to buy seeds and fertiliser and set aside savings to help pay for his kids’ school fees. He can finance a solar panel to charge the phone that lets the family stay in touch with older children in the city, who themselves can send money home to the parents cheaply and reliably. None of this even requires the three-hour trip to town – a loan officer from a microfinance institution visits the village each week, while the village shopkeeper doubles as a microfinance agent who can send and receive payments. This picture is repeated in house after house, village after village, from the outskirts of Phnom Penh to the remotest corners of Cambodia. Today, in rural areas alone, half a million clients hold savings at microfinance institutions, and over a million borrow from them.

The new regulation puts all that under threat. more →

A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?

Next Billion, 25 January 2016

Podcast with Anna Kanze, Grassroots Capital Management. more →

Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

Financial Access Initiative, 5 June 2013

My last two posts described the high risk of a repayment crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world.  But here is the good news: thus far there is no crisis, and one could still be avoided.

I have argued before that DFIs and other funders could leverage Smart Certification to enforce client protection practices and thus avoid the kind of overlending that’s happening in Chiapas.  However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.

The answer to avoiding a repayment crisis in Mexico will thus require government action, most likely new legislation that would bring all lenders under a common set of regulatory standards.  Specifically, there are two key areas that must be addressed:
more →

The Day After Chiapas: Imagining a repayment crisis in Mexico

Financial Access Initiative, 27 March 2013

A month ago I wrote a post singling out the Mexican state of Chiapas as a potential site of a coming repayment crisis.  No, this is not a follow-up announcing that it has begun, nor am I rooting for one to start.  In my next post, I will review the options that the Mexican microfinance sector has to avoid it, and what the global microfinance community can do to help.  But for now, let’s dig a bit deeper into what a Chiapas crisis might mean, and why I continue to focus on Mexico, as opposed to the broader issue of excessive credit and over-indebtedness.

Let’s be blunt:  not all countries are created equal.  Some remember my warning three years ago about the danger of a credit crisis in Andhra Pradesh.  Back then I compared a possible crisis in India to the crisis in Bolivia a decade before:  “India is no Bolivia – if the bubble bursts there, the entire global microfinance sector will find itself reeling.”  Well, Mexico is no India.

A full-blown crisis in Mexico would be unlike anything we’ve seen, easily surpassing the negative impact of Andhra Pradesh. more →

From Responsible Lending to Responsible Profit

Financial Access Initiative, 16 November 2012

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.

With few exceptions, his critique that microfinance investors are investing in MFIs charging exorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don’t belong in your portfolio or you should learn how to explain those investments.

Rates in excess of 100% (in APR terms) are not unknown in microfinance.  more →