Archive for March, 2011

would you knowingly pay 4000% in interest for a loan?

March 23, 2011 1 comment

Most of you would probably answer the above question with a resounding ‘NO WAY!’ 4000% does sounds like quite a rip-off interest rate for a loan but you would be very surprised to learn that  over 100,000 people a month in the UK have been paying this level of interest when they sign-up for pay-day loans with new lending site, Wonga .The site lends funds to people who do not have enough liquidity to tide them over until they receive their paychecks at the end of the month and require money for funding consumer needs. They say that they process over 100,000 loans a month since they were established. All borrowers need to do is sign-up, provide their details for a credit check , request for a maximum of 400 pounds and within 15 minutes they are able to receive the funds they need in their bank accounts. I am not sure if most borrowers are actually aware of the effective annual rate of interest that they are paying as something tells me that anyone seeing the 4000% interest rate tag would rather call up their mate or family member and borrow money from them instead!! 

Wonga  seems to be very successful and all its lending capital is provided by a venture capital firm that has been backing it since it was established. The CEO of the firm confirms that the reason for their success is that ‘people now realise that they no longer need the services of a retail bank’. Although the interest rates seem quite exploitative, I would say that most borrowers on the site would probably not qualify for loans from a retail bank due to their poor credit history which means that Wonga is probably the only choice they have left.  Watch this space there will definitely be competitors wishing to replicate Wonga’s success in this market sector!

microfinance and political interference: is it unavoidable?

March 16, 2011 Leave a comment

The founder of Grameen bank (and now ousted chairman) and 2006 Nobel prize winner is currently being referred to as a blood sucking parasite by the government of Bangladesh. A man who has accomplished such so much in this poverty-stricken nation has moved from being referred to in saint-like terms to this. We are all smart enough to see that this is political interference at its best:  a few years ago, fresh from his Nobel Prize win, Yunus made a veiled threat to set up his own political party in Bangladesh and ever since then the government (namely one Sheikh Hasina) has done everything in their power to attempt to discredit by accusing him of corruption and theft to blaming him for stealing from the poor. (8.9 Billion poor women have benefitted from Grameen’s loans in teh past 10 years!)

The question is: is politics and microfinance  indelibly inter-twined or are they no-go areas for each side? On the one hand, regulation of microfinance institutions is extremely relevant and necessary to ensure that they are operating within their stated missions and not fleecing the unbanked, but on the other hand, independence between the government and microfinance is of extreme importance as it is not suitable for governments to exercise control over credit programs as this must remain the preserve of the Microfinance sector. There are some governments that get involved once they realise how successful the microfinance programs are as they also want ‘a piece of the action’ as has been seen in some parts of Africa. One example of favourable intervention by government was a few months ago in Nigeria where the state close over 200 microfinance institutions due to poor governance practices.

As with everything, a balance is called for: character assassination and elbowing occurs as we have seen in the case of Yunus then that’s the point that one has to say to the government ‘butt out’.  The microfinance community is 100% Yunus and hope that this situation is not repeated elsewhere.