About Microfinance
What is microfinance?
Microfinance is the provision of financial services for poor and low income people who don't have access to financial services in the mainstream banking sector. Besides loans, microfinance includes other services such as savings, money transfer and insurance and allows low-income earners to finance income-generating activities and protect against risks.
The loans given by Deki are very small. How can such small amounts of money make a difference to the lives of borrowers?
A few hundred pounds may seem like a small amount, but loans of this size can make a huge difference to people running small businesses in developing countries. In countries like Nepal and Ghana, staff and overheads are much cheaper than in Europe or North America. This means that entrepreneurs there can accomplish more with less money.
Studies have shown that a loan given to an entrepreneur in the developing world can be worth almost 60 times what it would be worth in a developed country. This means a loan of £500 could be worth as much to a small business owner in Nepal as a loan of £30,000 to a business in the UK.
Successful businesses improve the welfare of local people in the communities where they operate. They generate employment, bringing new money into impoverished communities. This helps people to feed their families, access better healthcare, and send their children to school.
Why can't commercial banks offer these services to poor people?
Poor people in developing countries often don't have bank accounts or credit histories. This makes it hard to apply for loans from traditional banks. They may also lack legal documents enabling them to use their home as collateral. In many cases our entrepreneurs are self-employed and don't have verifiable sources of income.
In most cases, credit bureaus and banks are unable to assess creditworthiness without correct documentation, regardless of whether applicants have good business plans or already run successful enterprises.
In the UK, credit bureaus can access information on 84.6% of the adult population. For people with bad credit this might not be a good thing, but for the majority it makes life easier, helping them access credit and other essential banking services. In regions of the developing world, this infrastructure does not exist, making banking services difficult to access. In Ghana, for example, less than 1% of the population has a formal credit history. In Nepal, only 0.2% of the population is listed with a credit bureau.
This does not mean that these people are not creditworthy. The growth of microfinance has shown that many poor people have good business ideas and entrepreneurial spirit, making them extremely capable of repaying loans.
Why do microfinance institutions charge interest on loans to poor people?
Deki charges no commission or interest on loans. Most of our field partners, small microfinance institutions, charge interest on the loans. They have running costs they need to cover to stay operational and they offer supporting services such as business advice and training with the microloan.
The interest rates of microfinance institutions are often higher than those of commercial banks. Several factors explain this. Firstly, it is generally more expensive to administer smaller loans, and since most microfinance clients do not have regular salaries or collateral, the process of evaluating applications is particularly difficult and time-consuming. Secondly, costs associated with serving clients who are based in hard-to-reach rural areas and need training and support must be considered. Thirdly, though repayment rates can be very good (Deki's repayment rate to date is 100%), micro lending involves more risk than the lending commercial banks engage in.
What sort of interest rates are Deki's field partners charging?
The interest rates charged by Deki field partners vary with their costs. None of our field partners work for profit; all interest is used to enable the continuation of services. We work with our field partners to ensure that costs, and therefore rates, are kept to a minimum.
Hatemalo, our field partner in Nepal, currently charges clients a fixed rate of 12%. This means that if a client takes out a loan of £100 for ten months, they will repay £10 of principal plus £1.20 in interest per month for a total of £112 over the course of the loan.
CEDIS and CODA charge clients 2% of their outstanding principal per month. This means that if a client takes out a loan of £100 for six months, they will pay £2 interest the first month, £1.66 the second month, and progressively less as they pay off the loan principal.
Uniquely, Temwa loans in Malawi are commission and interest free as we have secured funding for a loan officer to work in this remote rural area.