Loan

  With a growing market, better economics of scale and increasing efficiency the cost will reduce and lower interest rates are able. For a financial institution to scale and remain sustainable, at a bare minimum it has to cover its costs. A large bank can charge lower rates in order to recoup its costs. Because of smaller loan size and more transactions, the MFI has to charge higher minimum rates. Data from the MicroBanking Bulletin reports that 63 of the world’s top MFIs had an average rate of return, after adjusting for inflation and after taking out subsidies programs, of about 2.5% of total assets. This lends to the hope that microfinance can be sufficiently attractive for investors, as well as the mainstream in the retail banking sector. Typical microcredit products look like this (the numbers are only hypethetical): Product Purpose Terms Interest rate Income Generation Loan (IGL) Income generation, asset development 50 weeks loan paid weekly 12.5% (flat) 24% (effective) Mid-Term Loan (MTL) Same as IGL, available at middle (week 25) of IGL 50 weeks loan paid weekly 12.5% (flat) 24% (effective) Emergency Loan (EL) All emergencies such as health, funerals, hospitalization 20 weeks loan 0% Interest free Individual Loan (IL) Income generation, asset development 1-2 years loan repaid monthly 11% (flat) 23% (effective) The Income Generating Loan is used for a variety of activities that generate income for their families.

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swastik micro LOAN

The microcredit loan cycles are usually shorter than traditional commercial loans with terms from typically six months to a year with payments plus interest, payed weekly. Shorter loan cycles and weekly payments help the borrowers stay current and not become surprised by large payments. Clearly the transaction-intense nature of weekly payment collections, often in rural areas, is more expensive than running a bank branch that provides large loans to economically secure borrowers in a metropolitan area. As a result, MFIs must charge interest rates that might sound high. In order to be able to lend out money, the microfinance institutions must in addition borrow from the traditional finance sector with commercial perspective. There´s always about 1-2% loss on loans due to people not paying back. To be able to expand business the MFIs must also make some profit, at least 1-2%. All in all it´s easier to understand why the MFIs charge their customer interest rates which in first sight might appear high. With a growing market, better economics of scale and increasing efficiency the cost will reduce and lower interest rates are able.