Loans for Gold and Fierce Competition

24 August 2010 at 01:30 14 comments

Gold was not one of the topics I would have guessed I´d be immersed in as a Kiva Fellow. But last week I found myself in a tiny backroom at Fundacion Espoir in Cuenca, Ecuador learning the details of what is perhaps their most innovative product: gold-guaranteed loans or “prenda oro.”

Sound like a pawn shop? It´s not. For one, Espoir offers a significantly lower price for gold than it´s competitors. This means they attract customers who are more concerned with getting their jewelry back than getting the highest price possible. The result? Aligned interests. Espoir wants to return their clients´ jewelry. Low interest rates (3% for a 1 month loan) makes this highly probable. More than 98% of clients reclaim their jewelry. Loans range from 1 to 3 months and Espoir offers a significant grace period after the end of the loan for clients to reclaim their gold. 

Espoir has an in-house “tazador,” or appraiser — that´s Claudio in the photo above. He determines the value of the gold by appearance, weight, and using a chemical reaction of salt and nitric acid.

Why gold?

1) Cuenca and the Azuay province in Ecuador are rich in minerals, including gold, so lots of women (and men) have it on hand (pun intended).

2) Microfinance competition in the province is fierce and Espoir is the only microfinance institution or “MFI” to offer this type of loan product. Next door to Espoir sits another microfinance organization (green banner in the photo below) and there´s a money lender permanently perched on the steps of an office halfway down the block.

3) Good for Espoir´s clients: The gold guarantee enables a rapid loan disbursment with low interest. The busiest time of the year for Espoir´s “prenda oro” or “gold guaranteed loan” is August as parents get their kids stocked up on school supplies, and right before Christmas. 

4) Good for Espoir:  There´s an extremely low cost of administration. It´s a one-time appraisal, no credit check is required, and clients pay on a monthly basis directly into the Foundation´s bank account.

The majority of Espoir´s loan products are available through village banks where clients are provided with education on topics ranging from healthy living to business acumen. Prenda oro is a great add-on for clients who need an extra bit of fast capital.

Make a loan an entrepreneur in Ecuador here.

Tara Capsuto is a roaming Fellow in Ecuador currently serving at Fundación Espoir. Since gathering the content for this posting in Cuenca she has since moved north to the province of Manabí where the gold is scarcer but the beaches more plentiful.

Entry filed under: Americas, blogsherpa, Ecuador, Fundación ESPOIR, KF12 (Kiva Fellows 12th Class).

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14 Comments

  • 1. caseykoppelson  |  24 August 2010 at 14:59

    Thanks for your comments, everyone! This is such an interesting thread I thought I’d ask the Partners Team here at Kiva to weigh in.

    First of all, in response to Antoine’s comment: annualizing the interest rate can be misleading, because of the length of the loan term (1-3 months). ESPOIR’s interest rate of 3% is comparable to what pawnshops in the US or UK charge: anywhere from 2-10% per month.

    Secondly, while these gold-backed loans are not posted on Kiva, they provide a much-needed social service. In emergency situations, people in low-income areas tend to borrow from predatory businesses focused on making a profit. By offering short-term loans (some MFIs call them “emergency loans”), ESPOIR will attract members of its target population and can direct them towards the other services it provides: small business loans, affordable medical care, and financial and health education.

    It’s interesting to note that these gold-backed loans can be found all over the world– we have a partner in Mongolia who provides a similar product.

    Tara, thanks so much for shedding light on how gold loans work. I look forward to reading your next post!

    Casey Koppelson
    Kiva Fellow, United States

    • 2. Terrence Cummings  |  24 August 2010 at 23:24

      Sigh. This will be my last post on this topic then I am done. Clearly Kiva and I are not on the same page. As an intermediary in a lending enterprise I would hope to see more familiarity with basic finance.

      The annual interest rate is not misleading, it is a mathematical fact and the accepted way to present interest rates so that they can be easily compared. Saying that it is not appropriate is like saying that you weren’t going 55 mph on the way to the grocery store because you didn’t travel 55 miles nor drive for one hour. It is the presentation of the monthly interest as ONLY 3% which is INTENTIONALLY misleading because it causes the initial reaction of “hey, that’s not so much” (as you all at Kiva have demonstrated) when in fact it is extremely high. That is why regulations in the US require stating interest rates as equivalent annual rates to specifically avoid this type of misrepresentation/misleading and so that interest rates can be readily compared. You have fallen for the oldest trick in the book, as they say.

      I have no doubt that pawnbrokers exist everywhere and that Espoir is not atypical for a pawnbroker in its practices or the interest rates it charges. My problem is that a) Tara insisted it is not a pawnbroker while at the same time repeating almost cliched pawnbroker come-on lines, and b) Kiva considers this a legitimate “MFI” worthy of my funds rather than what it is which is a business set up to charge exorbitant rates to people that have few alternatives. The very same people for which Kiva aims to provide an alternative to this type of predatory lending.

      Clearly we have different opinions on this matter. In my view Kiva has not exercised appropriate due diligence even when given the opportunity to do an on site review. I will be looking for alternative ways to help. Maybe finance and philanthropy just don’t mix.
      Regards,
      Terrence Cummings

    • 3. Antoine S. TERJANIAN  |  25 August 2010 at 05:04

      I wish to start by commending Kiva for providing this free, unmoderated forum, where questions and criticisms of Kiva are freely posted, and I have learned a lot reading them. I also commend the Kiva Fellows who volunteer their time for this charitable and needed initiative.
      Having said that, I agree totally with Mr. Cummings analysis and the facts he presents. I am sorry to see that the ‘Kiva Partners Team’ who ‘weighed-in’ on this discussion has continued to avoid being transparent on this isssue.
      I have checked some of the loans posted on the Kiva lend webpage for Ecuador (incidentally, the ones financed by Espoir that I had seen yesterday have disappeared today), see: http://www.kiva.org/lend#/?&pageID=1&perPage=20&status=fundRaising&regions%5B%5D=All&sectors%5B%5D=All&gender=All&sortBy=Popularity&queryString=&countries%5B%5D=EC&partner_id=null&borrower_type=All , and notice that there is no information at all being given to Kiva lenders about the exact interest (rate) charged to the borrower. There is a “schedule of repayment”, but the amounts marked add-up to exactly the same nominal amount of the loan being raised, giving the impression that no interest is being charged by the MFI.
      Take for instance Digno Franklin Alvarado Licoa, who is borrowing $600. If you look at his expected repayment and add the repayment amounts up, they total exactly $600. I had noticed the same fact on loans promoted by Espoir yesterday.
      I appreciate very much the opinions expressed by specialists such as Mr. Cummings and would be sorry to see him leave this forum. Mr. Cummings, please don’t leave us, but if you find a better way to help alleviate poverty in developing countries, please let me know. I can be reached by email aterjanian (at) yahoo.com.

    • 4. tcapsuto  |  25 August 2010 at 11:27

      Just to be entirely clear, these are not posted to Kiva. Further, Espoir is regulated by the Ecuadorian government as a not-for-profit organization. Espoir also offers a host of services and benefits to its clients, including access to a medical clinic and health and financial education. You can find more info on their page: http://www.kiva.org/partners/137. I encourage you to check the “Borrowing Cost Comparison,” where you´ll see the average interest rate charged by ESPOIR (24%) compared to the median for the region (29%).

      If any Espoir loans have “disappeared” from the site then great! That probably means they´ve been fully funded. You should still be able to find them on the website in the “lend” tab if you change the drop down menu called “status” to “fully funded” or “paying back.” We´re working hard to get lots of new loans posted to Kiva very soon.

    • 5. Carlos  |  25 August 2010 at 12:04

      Also wanted to chip in the interest rates discussion… when I first saw the interest rates I was a little disturbed but looking a little bit deeper into what is factored to make these annual interest rates, they started making more sense. Some factors considered to make up the final interest rates are:
      Inflation – 9% for 2009 in Ecuador.
      Cost of capital – for Kiva loans this is zero regardless of the risk rating of the country but above zero for the loans highlighted in this blog (found a 2006 number for Ecuador at 8.25%).
      Exchange rate – zero in this case, as Tara mentioned Ecuador adopted the US Dollar as their currency.

      Just adding the Inflation and cost of capital, the interest rate is already at 17.5%. On top of that institutions have to cover costs and with very few payments the burden of fixed administrative costs becomes much more significant in terms of an annual percentage rate. What I learned was to look closer at the local context.
      Now as a Kiva Fellow I hope to help Kiva’s field partners to decrease these administrative costs and hopefully offer lower interest rates to Kiva borrowers.
      Carlos (carlos.cruzmontano@fellows.kiva.org)
      Kiva Fellow, Paraguay

  • 6. Terrence Cummings  |  24 August 2010 at 13:18

    EB,
    I work in finance in developing countries. I seriously doubt that microfinance companies in Ecuador are regulated. You and I rely on Kiva to ensure the MFIs are not profiteering with our money. A 42.5% APR on a secured/overcollateralized US$ loan is usury. This is a pawn shop ala “Pawn Stars” and late night TV infomercials peddling cash for grandma’s wedding ring (your cash I might add). I can tell you this is not normal. This is not due to expenses (Tara herself touts the low cost of administration). Tara actually boasts that they give the customer less for their gold as if this is a good thing! Walks like a duck, talks like a duck…it’s a pawn shop.
    I am seriously disappointed. I’ve been on Kiva 2 days and made 14 loans. I won’t be making any more. I may be wrong but so far I have received no well thought out or in emails to Kiva. I felt good, now I do not.
    Terrence Cummings

    • 7. Johnny Wesch  |  27 October 2010 at 19:39

      I made a loan through KIVA at the recommendation of a friend. I didnt investigate very thouroughly, my bad. I assumed the loans were actually interest free since the objective seemed to be to elevate the financial status of the borrowers and lift them out of poverty, not further enmire them in poverty and debt. I did tknow KIVA had this forum, i just watched Jessicas TED talk and happened to read the comments, in which it was said interest on these loans was sometimes astronomical. I googled KIVA and USURY…sad to say, here i am, and I am very dissappointed and disgusted. it all seems like a nefarious plot now to further enrich the banks and money lenders at the expense of the poor. Like Christ, i wish i had a whip. I believe I am going to KIVA’s site to determine how to retreive my money and find a better way to use it. id rather gift it to some of these people than this BS.G’day.

  • 8. Tara Capsuto  |  24 August 2010 at 06:58

    Antoine, Thanks for your comment and for your attention to interest rates. As you obviouly know, keeping interest rates reasonable is essential for microfinance to achieve its goals. You are correct, the loans are in US dollars. That´s because that’s the local currency here in Ecuador. The government switched from Sucres in 2000 as a means to help stabilize the economy. In the sign in Spanish pictured above, the only number listed is $30, and the sign reads, “credit from $30,” that´s the minimum loan a client can receive with the gold guarantee. As for your calculation of the annual interest rate, annualizing the interest rate for a 1 month loan actually doesn’t reflect what the client is charged, nor what Espoir receives. I’m happy to discuss further. Again, thanks for reading and keep following the fellows blog.

    • 9. Terrence Cummings  |  24 August 2010 at 07:17

      Tara, thanks for the article. I second Antoine’s comment regarding interest rates. I am a financial professional who has worked in developing countries and 3%/mo. is certainly astronomical (42.5%/apr being very much correct as Antoine points out). If that is, as you state, not what the client is charged or what Espoir receives then I’m not sure the point in mentioning it. Can you please clarify?

    • 10. Antoine S. TERJANIAN  |  24 August 2010 at 07:18

      Tara, if my calculation of the annualized interest rate is incorrect, I am eager to be corrected. Please tell us in your own words what is the actual annualized rate paid by the borrower. Please explain what is what Espoir actually receives, if it is different. To me charging a borrower 3% interest per month/repeat PER MONTH is worse than loan sharking and exploitation, specially when the loan is made in US$ and the MFI gets its funds at 0% interest from good-hearted Kiva lenders.
      I appreciate the fact that you are volunteering and have no personal gain, and would value your sincere opinion if you wish to continue this discussion.

    • 11. Terrence Cummings  |  24 August 2010 at 08:49

      I hate to belabor the point because I am certain your heart is in the right place. But this is exactly what a pawnbroker is! The fact that they offer significantly less than the gold is worth makes their interests ‘aligned’ with the customer’s? Really?! This just ensures that they will make a lot of money either way. Quick dispersement, guaranteed loan…you could read the exact same tag lines in any pawnbrokers window. If Kiva funds are capitalizing a pawnbroker I for one am very concerned. I very much hope I have misunderstood practically everything in this post. Please, please clarify. This is disheartening.

    • 12. EB  |  24 August 2010 at 12:43

      I think an important aspect of microfinance to remember is that the cost of administering these loans can be quite high. This is due to escalated transportation costs to reach otherwise excluded clients, increased interaction with clients with frequent repayments, and a large volume of paperwork among other things that come from the reality of issuing a large amount of small loans. These factors also contribute to relatively high interest rates in many microfinance organizations.
      One major difference between microfinance organizations and loan sharks is that the microfinance organizations are typically regulated, whereas loan sharks may not be, providing clients access to a safer place to look for loans – a feature that many may be willing to pay more for in the form of higher interest rates.

  • 13. Antoine S. TERJANIAN  |  24 August 2010 at 03:07

    Dear Tara Capsuto:
    Please tell me I misread what you wrote: “Low interest rates (3% for a 1 month loan) makes this highly probable”. And the poster says “Tus joyas por… and shows dollar bills” so it seems the loan is not in a local currency.
    When I do the calculation, 3% for one month, makes it an interest rate of 42.5% per year. In Canada, loan sharks charge less than that and go to jail when caught!
    I find this, if it is true, to be unscrupulous to say the least. I have no doubt that this is “good for Espoir”, who gets Kiva lender funds at 0% interest.

  • 14. brittanygoesglobal  |  24 August 2010 at 03:04

    This is super interesting and informative Tara, thanks for sharing it!


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