In the near future I’ll be taking a few days and visiting Nicaragua. I’m going as a member of a team to assess micro-finance implementation and complete a needs assessment. The micro-financing project was started over a year and a half ago. The capital that was used to initially start the program has been paid back with interest to over 60 borrowers. The loans have been averaging over $100 per borrower. As the loans have been repaid new loans have been issued with some interest income set aside for operating costs.
Why we Need to Assess the Process
We are hoping to extend the program and infuse an additional $100,000 by the end of the year. By refining the processes that were used during the testing phase we’re going to be more prepared to manage a larger amount of capital. Problems or shortcomings that exist with a small amount of money are going to be greatly magnified as the loan portfolio grows. We are offering really small loans so keeping costs low is a top priority.
Micro-Finance Sustainability
Micro-finance is a great way to have a positive impact on communities around the world. If a micro-finance program isn’t sustainable then it creates a vacuum for funding which can create a drain for small and large organizations alike. In order to ensure that our program can sustain itself we need to keep our operating costs as low as possible yet still be able to manage growth.
Small Loans Cost More
Dependent upon your experience with micro-finance you’re going to have different understandings about an MFI. The micro-finance program that we have initiated is targeted at the poorest of the poor, we’re working with really small loans, which is really expensive as a percentage of total loaned dollars. The cost of screening, loaning, and collecting each loan is going to be pretty much the same no matter how large the loan is. Larger loans result in more interest income and therefore lower costs to manage overall. Small loans cost about the same amount of money to administer but the income is lower which eats away at the profit margin quickly.
| Loan Amount (example) | Interest Income (annual) | Total Cost to Administer | Profit (loss) |
| $100 | $20 | $30 | ($10) |
| $1000 | $200 | $30 | $170 |
So the solution for many people may be obvious: Lend larger loans. The other solution is to raise the interest rate. In many case people may not want a larger loan or be in a position to efficiently use more capital. There are many variables and our assessment is going to give us more information to make better informed decisions about what is happening and the best next steps.
James,
Good luck on your trip. Went to Nicaragua about a year and a half ago with Lutheran World Relief and thoroughly enjoyed the country. Let’s chat when you get back. Microfinance is an area of interest and I’ve been considering some requests to bring that knowledge to my friends in Haiti.