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Breaking down moneylenders’ loan rates

While we have started lending to social enterprises in the “missing middle”, we are by no means the first to provide capital to this group. Today, the largest group of capital providers to these social enterprises are money lenders. Their typical interest rates range from as “low” as 15% to 50% or above. Despite these absurdly high rates (especially to one from countries where the cost of capital is much lower), some of these money lenders call themselves social enterprises – and surprisingly, when you break down their numbers, it is not hard to see why.

In this article, we will breakdown the average cost structure and the 15-50% interest rate of such money lenders and examine it further:

% Cost/ Profit Centre Explanation
9-12% Cost of capital In many countries such as India, cost of capital is often very high. For example, just putting your money in the bank might yield you between 6-10% in interest rates. It is usual for these money lenders to be charged between 9-12% in interest when they borrow from banks.
2-5% Non-performing Loans (NPLs) In any lending operation, there will be credit risk and defaults which must be accounted for. A 2-5% default rate is by no means the exception and may be higher in some situations.
2-10% Operational Costs Operational costs here vary depending on the ticket size of the investment and the efficiency of the money lender in operating in the area, amongst other factors.
2-5% Profit Margin To be financially sustainable themselves, they would typically charge a margin for their own profits to keep sustainable.

 

While these are just rough estimates for such money lenders, the numbers are not far from the truth, and in some cases, might be much higher depending on location, sector, and risk profile of the social enterprises.

As you can see, this results in a range between 15-32% in interest rates, even for the money lenders with the best of hearts.

At Givfunds, we believe that there must be a fundamental shift in the business model for these money lenders to provide a lower cost of capital for such impact businesses. Our cost structure is simple and is as such:

% Cost/Profit Centre Explanation
0% Cost of capital Because we take donations and put it in a revolving fund, this lowers our cost of capital to 0%.
0% Non-performing Loans (NPLs) Typically, a spread is provisioned to absorb any losses due to NPLs. Instead, our spread is 0% because the revolving fund would be absorbing the credit risk and any defaults that might happen.
2%< Operational Costs Our leading due diligence model allows us to lower the operational cost to below 2%. Going forward, this rate will be further reduced using technology.
1%< Profit Margin As a charitable trust, we do not make profits to disburse. Instead, any profits are reinvested into the business for us to:

  1. Come up with new, innovative blended finance products
  2. Create greater efficiencies or serve our customers better via technology

 

Together, this allows us to charge interest rates at 0-4%, with an average of 2% interest, far below market rates.

 

Links: (links about microfinance due to lack of data/information in SE lending, see Pioneer Gap article for more information)

  1. https://thediplomat.com/2017/03/inside-the-world-of-indian-moneylenders/
  2. https://www.huffingtonpost.com/elisabeth-rhyne/why-are-microfinance-inte_b_593359.html

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