ANÁLISIS DEL POZO PREVIO AL CAMBIO DE LEVANTAMIENTO

Microcredit interest rates are typically higher than conventional credit rates, especially for informal sources like moneylenders, pawnbrokers, ROSCAs, etc. For example, a recent survey of 13 developing countries showed that informal credit lending rates are commonly between 40% and 80% per annum (Banerjee & Duflo, 2007, 2010), and from 10% to 100% per month in many other countries, (Robinson, 2001, p. 16). Even big microfinance institutions (MFIs) such as Grameen Bank charges 20% per annum, and other MFIs in Asia and the Pacific usually charge 30% to 70% per annum (CGAP, 2002).

The key principle of running any financial business including microfinance is that, for long run viability, revenue should cover all administration costs, costs of capital, risk, and increasing equity (CGAP, 2002). Only sustainable institutions are able to provide permanent access to their resources to hundreds of millions of clients, and they are therefore forced to charge higher effective-interest rates to cover all the costs and earn reasonable profits to survive in the long term (CGAP, 1996; Morduch, 2000). In practice, the poor that are excluded from formal credit providers due to insufficient collateral would be well served by the sustainable microfinance institutions (Morduch, 2000).

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On the other hand, only microcredit institutions that receive preferable sources or subsidies from governments and donors are able to offer low-interest-rate loans. However, these generally benefit only a small number of borrowers for a short period (CGAP, 2002). Subsidized loans have low repayment and high default rates in many countries such as Vietnam, India and China (Robinson, 2001) because the borrowers think that their loans are „gifts‟ so that there is no motivation to repay. There is an argument that only MFIs that stand on their feet without subsidies from governments and donors and follow the “win-win” proposition are able to serve more poor clients; these MFIs therefore have to charge high interest rates in order to cover the costs and earn some reasonable profit (Morduch, 2000).

Other reasons for microcredit providers to charge higher rates than conventional banks are: Costs of paperwork to make a small loan are not significantly different from larger loans; this leads to higher costs charged on each unit amount of small loans than costs for the larger loans (Morduch, 2000). In addition, poor clients often live in backward (geographical/physical or socially isolated) areas where infrastructure, such as road systems and telecommunication facilities, is poor. Thus, transaction costs are higher due to difficulties in administering, loan monitoring and the travel required by credit lenders to reach borrowers‟ places (Morduch, 2000; CGAP, 2002). This makes lending costly and riskier. Moreover, clients often have no collateral, low education, and lack legal documentation so that they are likely to be deemed greater risk (Armendariz & Morduch, 2010; Morduch, 2000). Consequently, the rates should be high enough to offset the higher likelihood of credit default.

On the demand side, poor borrowers can accept higher rates of interest because they earn a higher rate of return to additional unit of capital borrowed relative to richer households because of decreasing returns to capital. Armendariz and Morduch (2005, 2010) argue that the poor entrepreneurs have a higher marginal return on capital and thus higher ability to repay than the richer entrepreneurs. However, very high interest rates applied by moneylenders and pawnbrokers do not necessarily reflect higher returns on capital, they may reflect the urgent need for money and riskier loans. Borrowers have no option other than „hot‟ or „urgent‟ loans to survive today, although they may suffer serious destitution tomorrow. On the other hand, running businesses requires many things more than capital; skills, other inputs, market information, social networks, etc, of which the richer likely have more than the poor. In this case, the poorer borrowers may have lower marginal returns than richer borrowers; thus, risk-adjusted interest rates for the poorer clients may be lower than for the richer (Armendariz & Morduch, 2005, 2010; Morduch, 2000; Weiss & Montgomery, 2005). Furthermore, there may be

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“insider” factor blocking capital flows from lower demand locations (low interest rate) to high demand locations (Klonner & Rai, 2010). These are likely causes for interest rate differences between the microcredit (informal) credit markets and the traditional (formal) credit markets. Thus, the interest disparity always exists. In other words, the interest rate differences between credit markets for the rich and the poor do not create the capital flows between them.

Nevertheless, Fernando (2006) states that we should not consider microcredit interest rates too high by comparing microcredit interest rates with that of commercial banks because such comparisons are inappropriate because the poor sometimes have to pay extra money to access formal (subsidized) sources due to credit rationing and rent- seeking practices by credit officers. If these costs are added, real interest rates of the loans may be much higher, and the comparison therefore may be misleading.

In some developing countries like Vietnam, to avoid high interest rates the government has set up interest rate ceilings and introduced massive subsidies on interest rates. The consequence of this policy is that there has been a shortage in credit supply, and the outreach has been low for lenders (Morduch, 2000). To reach a targeted number of poor customers, governments have to add on to interest rate shortfall or provide preferred credit funding to credit lenders. As a result, the subsidized institutions have heavily relied on subsidies and government fund sources to keep their operations going. For instance, the Vietnam Bank for Social Policies (VBSP) in 2005 received about USD55.38 million of subsidies for interest disparity and transaction costs, accounting for 51.2% of total revenue of the bank. An increasing reliance on subsidies has been evident over time, from 32% of total bank revenue in 2003, to 44% in 2004 and 51.2% in 2005.28 This means that self-sufficiency of the bank is about 50%, and the bank has had a very high rate of losses at 13.7% (i.e. return on equity is -13.7%) and the profit margin at -97.6% in 2006.29 Therefore, subsidies to microcredit institutions result in inefficiency in terms of operating costs per borrower, and subsidy level is strongly correlated with lower profit rates (Cull, Kunt, & Morduch, 2009, p. 14).

Interest rate ceilings may improve the affordability of financial sources for the poor; however, interest rate ceilings may lead to losses to microcredit providers if they are without subsidies from sponsors (NGOs or governments), since the regulated rates are not high enough to cover all costs of the loans. This will undermine viability of microcredit institutes in the medium and long term. Furthermore, according to Fernando

28

Annual Report of VBSP, available at http://www.vbsp.org.vn/Icon_BCTN/36.gif

29 _{Microfinance – The MIX market – profile for VBSP available at}

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(2006, p. 5), interest rate ceilings cause a shift to more short-term loans to avoid risks such as high inflation. In addition, interest rate ceilings create an excess demand for credit, and thus result in credit rationing and rent-seeking/bribe opportunities for credit officers (p. 4). Finally, interest rate ceilings, if without subsidies, force the microcredit providers to lower their mobilisation or saving interest rates in order to survive, and the lower saving interest rates in turn will discourage the poor from saving (Morduch, 2000). Interest ceilings suppress the poor‟s savings and are not the answer to improve access to financial services for the poor (Fernando, 2006).

Governments‟ intervention like subsidisation and interest ceilings are associated with inefficiency; subsidized credit programs have failed globally (Morduch, 2000). They have led to high default rates, government budget deficit, undermining savings mobilisation, mis-targeting to richer and politically-connected entrepreneurs, and eventually high costs for targeted clients (p. 620). Especially, government interventions in subsidised credit programs have diverted cheap credit sources far away from targeted poor households but have brought the cheap loans to politically powerful groups of non- poor households. This is evident in many countries such as Thailand, Vietnam and China (Coleman, 1999, 2006; Morduch, Park, & Wang, 1997; Nguyen, 2008). Thus, minimizing roles of government, especially direct involvement, is necessary to improve the transparency and accountability of programs and guarantee properly credit allocation to targeted poor and low-income households (Morduch, 2000).