I was browsing away on the internet last night when I came across an NGO that was complaining about the lenders here in the Philippines who operate on a 1 – 2 month cycle as loan sharks and something they are trying hard to rid the country of. Problem they were having which showed through on the article was that more often than not the NGO is driven out of business before the people doing high interest loans, why is that?
Firstly you have to look at a culture that is used to short term loaning and don’t want it over 12 months. A lot of this is due to the fact they are buying wholesale and want to get another loan in 1 – 2 months when they want to restock again 10 – 20 % interest to them seems reasonable as at the end of the day they pass it on to the customer.
Then there is the fact the high interest loans are given to people who have no other opportunities of funding, they lack the correct documents to go to the bank and may not even have a bank account. They also may have a history of bad credit which is why no one else will lend to them.
You then get a money lender who has lived in the community for along time who they will approach as they already know there is little choice or nowhere else to turn. The loans are then collected daily and normally at a high rate of interest. Reason being that high interest also means “high risk” of non payment and maybe also a risk of robbery/death.
An NGO typically has lending partners operating at around 40% per year according to the amounts they are charging interest on the money i lend at 0% on Kiva.org which in the West you would think is a huge amount of interest but here it may even be too low depending on its client base. For example to reduce your risks you would start to screen out your potential customers to ones that suit your criteria. Suddenly the “we are helping the poor” moves more to a way a bank works where the most needy and worst payers will be screened out of the process. Where do they go? back to the 5/6! Then the fact is if you don’t screen them out yout 40% profit will quickly disappear as its easy to give money out here the hard bit is getting it back!
So why do the NGOs struggle with this system? purely because NGOs are supposed to be “helping” people the financial sector is one of those beasts in the world that does nothing but help itself. It can’t afford to be nice as being nice you will be bankrupt within months.