Fair interest rates and ethical lending



© CARE/Emilie Bailey



There has been a lot written in recent months about the high interest rates charged by certain microfinance providers. Thankfully, such instances are still relatively rare. Lendwithcare only partners with those microfinance institutions (MFIs) that charge ‘fair’ interest rates, but we go further and also promote an ethical lending policy. This process starts by selecting MFIs that comply with a set of eligibility criteria. Although solid financial performance is among the requirements, paramount importance is given to a strong social development mission including targeting low-income populations who are usually excluded by commercial banks. We check at least once every six months to ensure that partner MFIs continue to meet criteria. CARE also maintains a presence on the Board of some of the MFIs to ensure that social development objectives remain at the fore in institutional decision making.

Although lendwithcare provides interest free capital to our MFI partners, the MFIs do charge interest (or other fees in the case of Shari’ah compliant institutions) to entrepreneurs. However, we do check to ensure that their interest rates are ‘reasonable and fair’ according to the local context. If they are to survive then MFIs must of course cover their operational costs. And the costs associated with providing very small loans, on occasions supported with training and other services, to often geographically isolated borrowers, especially when they visit them at their homes to disburse loans and also collect repayments, can be considerable. Indeed if they wish to grow and develop MFIs will need to make a profit. However, while there is an obvious need to ensure financial security for themselves so that they can continue operations, they are rarely under pressure from shareholders so do not need nor desire to make ‘excessive’ profits.

What the interest free capital allows the MFIs to do is extend their operations and lend to poorer clients than they might otherwise, or to move into more remote areas - this has been the case with our MFI partner in Togo for example which is now lending in more isolated rural areas.  In other cases, such as the Philippines the MFIs have actually passed on the benefits of receiving interest free capital from lendwithcare to their clients through much lower interest rates.

Lendwithcare also has an ethical lending policy. Although is impossible to screen each and every loan that a partner MFI disburses, we do carefully review each loan featured on lendwithcare. In this regard, we will not promote loans that, for example, focus primarily on selling alcohol, involve inhumane animal husbandry techniques, and are environmentally unsustainable. At the same time, we proactively encourage loans that, for example, promote sustainable agriculture, recycling, renewable energy and energy efficiency . For example, Geoliopsalme Comedia (http://www.lendwithcare.org/entrepreneurs/index/910) supplies timber for the construction industry in the town of Asturias on the island of Cebu in the Philippines. All the wood she supplies is sustainably sourced and her business is licensed and accredited by the relevant government authority.

On occasions we must also adopt a more practical and common sense approach. For example, many of the entrepreneurs featured from Cambodia are rice farmers and they often seek loans to purchase fertiliser. Their preference is to produce or purchase natural organic fertiliser; in fact many of the farmers have been trained by local non-governmental development organisations in how to produce organic fertiliser.  However, there are usually insufficient quantities available, particularly as it can take at least three months to be ready. Therefore, we accept that loans will often be used in part to purchase chemical fertiliser.

We also try to more broadly understand the types of activities that MFIs finance. For example, our partner MFIs in West Africa provide some loans that finance the production of red palm oil. It has been pointed out that the rising demand for palm oil has been associated with deforestation. However, while this may be an issue among the large plantations of Indonesia and Malaysia, the situation in Togo and Benin is quite different. The United Nations in its ‘Human Development Report 2007-2008’ emphasised that the production of palm oil in West Africa is actually largely sustainable, mainly because it is undertaken on a smallholder level without resort to diversity-damaging monoculture. In fact, the United Nations Food and Agriculture programme is actually encouraging small farmers across Africa to grow palm oil, because the crop offers opportunities to improve livelihoods and incomes for the poor.

By Ajaz Ahmed Khan, microfinance advisor at lendwithcare.org