Devil is in the Execution

15 November 2010 at 10:00 4 comments

I have been spending the last few days in the beautiful countryside of Armenia, driving through the numerous mountains, valleys and other symbols of rural Armenia. This is a mountainous nation and the infrastructure throughout the country was built (originally by the Soviets and since expanded by Armenia) by blasting through these mountains. After spending the past few years in Middle America, this landscape is awe-inspiring to say the least. Unfortunately, my hosts do not share the same sentiment.

Microfinance is often criticized for having higher interest rates, at least when compared to more developed credit markets. While other blogs have done a great job of explaining why that is, I got a chance to experience it first-hand this week.

The mountains of Armenia are sprinkled with small villages. Basically, a decent sized town (pop. ~25,000) will be surrounded by a dozen villages (pop. 30 – 150) within a 15 – 20 mile radius. As a result, a microfinance organization (“MFI”) will have a satellite office at one of these towns and serve the region surrounding it. Delivering credit to these secluded villages often involves getting into an old Russian-made 4×4 and driving it through unpaved roads and sometimes, no roads at all. Considering the rain and snow in the mountains, this gets even worse in some months. A visit to one borrower can therefore take a team of two (for safety concerns) anywhere from two to four hours. Given that these offices are staffed leanly to begin with and the fact that MFI’s have pretty limited budgets, the cost of servicing a loan can quickly add up.

One could argue that servicing only a handful of villagers in remote locations is not smart business. Certainly, in a profit-driven environment, these borrowers would not be worth the cost. However, MFI’s make a concentrated effort to service the very clients traditional financial organizations do not. I think I can say safely claim that most Kiva lenders are also looking to reach these very borrowers: those with limited access to credit, operating in non-traditional markets and nevertheless, successful business owners in their own right.

This trip has helped me better understand the work that goes behind MFI’s who work in remote locations. While I continue to marvel at the beauty of Armenia’s countryside, I hope this gives some of the readers (and lenders) an example of one of the drivers of pricing in microfinance and the circumstances under which local loan officers often do their work.

Abhishek Banerjee is a Kiva Fellow (KF13) currently based in Yerevan, Armenia.  Want to volunteer with the Kiva Fellows Program?  Learn more here and apply to be a Fellow!

Entry filed under: Armenia, blogsherpa, KF13 (Kiva Fellows 13th Class). Tags: , , , , , , , , , .

O is for Opportunity Great Expectations, Unexpected Revelations


  • 1. Jerry Harter  |  19 November 2010 at 20:30

    Hi Abhishek- Nice post. Armenia was a complete unknown to me. I wasn’t aware of it’s beauty. I agree, I was initially shocked by high interest rates for micro-finance. But it certainly makes more sense when considering the significantly higher overhead that’s required for small loans, especially in remote areas.

  • 2. abanrjee  |  16 November 2010 at 03:41

    Mr. Terjanian,
    I will only speak for SEF International as that is the MFI I am working with. Generally speaking, SEF charges between 18% – 22% on their loans. They tend to charge a nominally lower rate on the loans funded by Kiva as opposed to their other loans.
    As I am sure you realize, SEF is in the lower range of MFIs globally. As SEF operates with a social mission as well as a financial objective, they have chosen to price their loans lower than competing MFIs in the country but still higher than traditional banks. This results in lower profitability than most MFIs but they believe it is a better business practice in the long run.
    Hope this helps put some perspective around the issue.

    • 3. Antoine S. Terjanian  |  16 November 2010 at 06:20

      Mr. Banerjee:
      Thank you for disclosing the interest rates charged by your MFI in Armenia. The rates you quote (I assume you mean 18% per year and not 18% per month) are reasonable, in my opinion, given the difficulty of the terrain. When I expressed shock at the interest rates being charged in other countries by Kiva partners, Kiva fellows were mentioning (without blinking an eye) rates of 3% per month (repeat per month) and up. In my calculation this translates into an annual interest rate of 42.6%, more than twice what you quote for your MFI in Armenia.
      Thanks again for volunteering and for the valuable information.

  • 4. Antoine S. TERJANIAN  |  15 November 2010 at 20:52

    Dear Mr. Banerjee:
    Thank you for volunteering in Armenia, for an interesting post and for a beautiful photo. Can you please enlighten us as to the interest rates being charged by Kiva partners in Armenia at this time.
    Thank you

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