Keeping it Real!
So in an effort to keep things local and practical to the students here I had a guest lecturer today named Frank Onwuachi from the Microfinance Bank of Oba. The idea was to get away from my theory and knowledge of what works in Canada and get some hands on training for here in Nigeria.
The presentation was a great success! The students seemed to have enjoyed it and got a lot of information out of it and Frank left saying he was happy to come and would be willing to do it again. All in all it seemed like a great win win for everyone.
Some of the things covered: The bank will give loans of up to 10 to 1 the cash you are willing to leave on deposit with them. So if you put 5,000 Naira on deposit they will loan you up to 50,000 Naira. So you don’t need a ton of collateral, which is a big problem for most poor people. You do need to have one guarantor for the loan but this can be anyone; your friend, brother or neighbor. The maximum amount they are willing to loan out is 200,000 Naira or around 1,250 USD.
The interest rates are shocking though. They offer two types of loans of 4% per month or 6% per month. These translate into 60% or 100% effective annual rates if compounded for 12 months. That is a lot of interest! I am told though that this is cheap compared to the 10% per month or 214% effective annual rate the money lenders outside of the banks charge.
The normal banking institutions charge 22% annually but are not accessible for the 65% of Nigerians who are still too poor to use them.
Frank’s family lives in Houston and he moved back to Nigeria a year ago to start his bank. Part of me looks at the effective annual rates and is shocked and appalled at them. Almost makes me think he is a crook. Then I look at the alternatives and think maybe he is a hero. At the end of the day I think he is an entrepreneur who is trying to provide loans to people who value them at more then what he charges. He told me his current delinquency rate is around 10% so not everything always works.
As much as I would love to see entrepreneurs have access to cheaper money this seems to be a win win for Frank and the people who borrow the money. Frank understands this and wants to make sure everyone is happy and he is servicing his customer. That is more then a lot of Nigerians! Truly he wants to do well and help out here, for that I applaud him.
May 9th, 2009 at 9:44 am
Darren
I have been following your blogs for a bit and this one struck a cord. It is a conflict between my entrepreneurial spirit and my giving spirit. As much as I know Frank is an entrepreneur and doing a good thing in comparison to other lenders, the giving spirit inside of me is in shock.
There is enough abundance in this world to feed the world; to give them shelter, provide access to affordable health care, to create and sustainable environment.
It is developing processes for re distributing that wealth in effective, integral ways.
It bothers me that once again, we are de valuing people in developing countries by letting them know they have to be charged outragious interest rates to ‘become’…
Bev
May 10th, 2009 at 10:21 am
The claim is that this is the interest rate that is needed to cover the default and high overhead of loaning out in small amounts…
I agree with you that there is enough in the world to do great things and I hope that the next generation will have ‘enough’ and start to redistribute. I don’t know if I want to hold my breath waiting for this to happen.
The reality may be though that if we can find a way to create incentives for the rich to truly empower the poor to make themselves better off change may come a little earlier. Is there a way for the rich to win a little, so that they want to do it, and the poor to win a lot?
May 11th, 2009 at 7:36 pm
If the borrower needs to put up 1/10 of loan and the default rate is indeed 10%, then it seems like the MicroBank can’t lose, particularly with 60-100% interest rates.
It seems very difficult for any business to generate that kind of return, especially new business, with such high loan rates. Being less than the 200% going rate doesn’t make it more palatable.
Perhaps a “venture capital” model would be better.
What new businesses lack a “board of directors”… strong management connected people networks.
A very successful model is Y-Combinator, (http://ycombinator.com/about.html). It was start by several Paul Graham who sold Yahoo Stores to Yahoo for hundred plus million. They provide seed capital in return for a small share of the company. The most valuable aspect is the guidance, networking with other startups, legal help, and introduction with second round investors.