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10 years ago out of college I helped set up some microfinance banks in Coffee producing communities in Honduras. At first your taken aback that people are payin
by oisino 6y ago
10 years ago out of college I helped set up some microfinance banks in Coffee producing communities in Honduras. At first your taken aback that people are paying 40%+ annual interest rates on small loans for these banks. But when your in the communities talking to people you realize their opportunity costs are like 400%+. Example is in most coffee producing communities in Central America farmers have to sell their products before they even grow them for 4-10x bellow the market rates if they just waited and banded together as co-op. Their issue is no access to financial products and they are substance farmers with no option but sell to coyotes to get money for food. In this world micro finance is a game changer in their quality of lives for it creates options
- trophycase 6y ago"micro fiancé" Sorry, hate to be reddit-esque here, but this auto correct was too funny.
- hakfoo 6y agoIn a way, the finance part is the easy part. The borrowers do the research for you, so all you need to do is gatekeep the applications and write cheques. More advanced change, like setting up co-ops, improving relationships with suppliers and buyers, or product diversification to tap into non-local demand, is likely to be much more abstract, require much more hands on intervention, and will by necessity look more like charity work or statecraft than a quantifiable business venture.
- nelaboras 6y agoThree counterarguments: - if the opportunity costs are high, would it nonetheless not be better to have fair rates? - if you believe in the market, why are there not already offers with more acceptable rates? Is there just not enough capital (which seems wrong, if you believe in your own claim that it's so profitable to invest), or because the risk is so high? - most importantly, even if 40% was in fact an acceptable rate, what happens to those that can't repay? Say your crop is eaten by a bug or the local militia steals your harvest or you get injured and can't do the work - what happens to a poor person with a 40% loan? The answer is eternal, ever growing, unrepayable debt and suffering. No thanks. This is not a kind gesture, this is Russian roulette - two chambers: you get even, two chambers: you make an enormous and sustainable profit, two chambers: your family is in debt for generations.
- jacquesm 6y agoBefore figuring out what rates are fair you should take all the variables into account, the big one is probably the default rate. If enough of these small businesses go out of business the survivors will have a more difficult situation as well because their loans will have to make up the shortfall. A typical default rate for these kind of loans is 5 to 10%, that's a lot of principal losses.
- ancientworldnow 6y agoOf course the default rate is artificially higher because only loans with high interest are available and a more widely available reasonable rates would likely lower those defaults.
- tamiral 6y agoNot to mention C Market price of coffee per lb is $1 on average and selling below that means the basically work for free! The opportunity cost of some $$ to maintain or build up a farm and institute good farming practices for higher quality / yield coffee makes sense because benefits are realized YoY off the first loan !