Interest (and Patience)

The debate on the interest rate so far has been more complex than it should be. Unfortunately, no one is equipped with the knowledge or skills required to make an informed decision. Even we in performance team are having a difficult time grasping the concepts of APR, which are at the heart of the debate. Every number mentioned so far has been arbitrary because it is not based on anything. What we hope to impress upon La Ceiba at large is, first and foremost, that the original 30% figure was completely arbitrary, not based in any fact, and was an incorrect number. It should be discarded wholesale, and should not be considered in the debate as it moves forward. Second, future numbers need to be based on something. 15% is another completely arbitrary figure: The most we could earn on a 15% scheme (2000L under the 6-month, monthly assumption, to be referred to as 6M) is one quarter of the least we could earn on a 500L loan on the old system. This deviation is absolutely unacceptable, and Performance Team feels that the optimal interest rate lies somewhere between the figures.

But, as mentioned, we need to be patient and get someone with expertise. Hugh Connelly is the President of a Bank, which executes many loans: He has knowledge and expertise far exceeding those combined of everyone in La Ceiba. Rather than jump the gun and make a fast decision grounded on nothing but whimsy, let us take our time, consult Hugh, and return with a figure that not only makes sense, but will work in the long term.

6 Responses to “Interest (and Patience)

  • Ashley Hess
    13 years ago

    I just simply think we should try out the 15 percent…even if my reasoning is kind of whimsical as you were saying. We don’t know until the future if we will fail or not. Might as well see what happens, and deal with what happens when it happens. I think we can make it work somehow if we run into problems; we have back up. I like that we are different and can try things out our own way…aka the clients’ way. I don’t think that this decision would hurt them at all even if we do fail in the future, the worst we could do is freeze the loans until we figure things out, but if other groups can do 15 then so can me. At no time would the clients be losing any money or be in debt or have extra stress – we would. It’s not up to the clients to keep us sustainable with their interest dollars, its up to us. I think a lower rate will make clients happy for now and we will hopefully see some good results in terms of clients’ well-being and repayment.

  • Nicole Cochran
    13 years ago

    I was under the impression that Dr. H had already consulted Hugh because Dr. H said that he and Hugh had discovered that the difference between the effective interest rates of 30% and 15% was a matter of pennies.
    That being said, I understand that La Ceiba’s sustainability will be compromised if we institute an effective interest rate lower than 60%. Furthermore, my research over the semester has shown that MFIs that rely on subsidizations are less sustainable. The risks have been made very clear.
    With an interest rate of 60% we will make enough money to survive, but in doing so we will compromise our integrity as an organization. This institution is committed to the wellbeing of our clients, and I firmly believe that an effective interest rate of 60% is not in their best interests. Microfinance interest rates are significantly larger than those found in the formal credit market, but we are not a traditional MFI. We put our clients before ourselves. By instituting an interest rate higher than 15% the interests of the institution would usurp those of the clients. We have also already told them that we will be lowering the interest rate, and by rescinding this pledge, we will violate the trust they place in us, and that is truly unacceptable.
    Furthermore, as Dr. H has already stated, we would lose much of the support that is equally important to this institution’s survival if we institute a 60% interest rate. This organization exists because it is capable of attracting volunteers, and these volunteers enter the organization because they want to make a significant and positive difference in the lives of those who are less fortunate than themselves. No matter how you market it, a 60% interest rate looks terrible to anyone considering sacrificing his or her time, energy, and significant effort to a worthwhile cause.
    As I stated in class, I would not get involved in an organization that essentially gouged it’s clients with such a high interest rate. If we did institute a 60% rate, my return to La Ceiba would be questionable.
    Also, we would likely lose the support of the university, which provides significant services that it could not survive without. I do not think that the loss of these services has been adequately taken into account in this discussion. The university also opens the door to the outside academic world. It provides validity that others take into account when they evaluate La Ceiba. Additionally, we have access to donations and other forms of subsidization through the alumni base. Again, without these things, La Ceiba could not exist.
    La Ceiba is more than a profit-making, or losing, institution. The outside world has to approve of our work in order for us to continue to do it. An effective interest rate of 60% would likely alienate all support.
    Ultimately, despite the risk to sustainability, I do not believe that this organization can afford to institute anything higher than a 15% interest rate.

  • Clearly this an issue that must be resolved quickly, as we are holding loans till January (I believe) because of the restructuring this program. This isn’t fair to our clients and we should strive to provide the services we promise as soon as possible. In regards to this issue, I stand in favor of raising the interest rate. Not egregiously, but enough to provide even a tiny level of income for La Ceiba. I would not want to go above 30%, but perhaps 20% instead of 15%. My reasoning for this is that La Ceiba faces an impending crisis, we don’t/very soon will not possess the ability to continue our program in Honduras. I fear for the continuity of La Ceiba because we don’t have a stable source of income, we make next to nothing off of our loan programs. While we possess other avenues of fund-raising, these avenues could too easily be taken away/run out and our reliance on them makes me uneasy. I realize that we are not here to make money, but if we want to continue to grow, changes such as these will have to be made to ensure our sustainability. If we were to raise it to a sustainable level it would be at 60%, therefore I don’t feel that it is asking too much to raise the interest rate to 20-30%, This solution does not solve the problem of our sustainability, but it does help alleviate it a little bit without entirely compromising our integrity.

  • Emily Sherman
    13 years ago

    Seeing La Ceiba struggle with the choice between our ethos and our sustainability was a hard thing to sit through. In the little research that I have done about marketing non-profits, it seems like every well intended organization has to sit down and make difficult choices that consistent of comprising their goals for reality’s sake. Sustainability and the motivation behind La Ceiba are both equally important, and this was a hard decision for me to come to. You can’t ignore the reasons why La Ceiba materialized in the first place, but you cannot ignore the future of La Ceiba. Not taking both of these into equal consideration would be unfair to our clients, to us, to past volunteers, and to donors who made this organization what it is. That being said, I think that our interest rate should be lowered to 15%. My reasoning for this is not because I think that ethos has more of a place in La Ceiba than sustainability, but because I see that there is potential for both staying true to our ethos and reaching sustainability if we look for money in other areas.

    It is important that we don’t compromise the goals that we set for ourselves when La Ceiba was first developed. It’s expected that little things may happen over time that require us to be flexible, but when La Ceiba was formed there was a goal in mind, and conforming that goal is not option. We set out to do something that hadn’t been done before. When people ask me why La Ceiba over every other MFI the answer is a relatively easy one to answer: we are the most personable group of volunteers and from what I’ve seen we’ve come into this with the purest of intentions. What we offer to our clients is something that they cannot get else where. The reason that we exist in the first place was to offer something that they hadn’t been able to get before.

    I was talking to a few other people in the class while I was struggling to come to a decision myself. One of the points made which resonated with me strongly was the fact that most charities aren’t sustainable within their business structure alone. If all of a non-profit’s donors were to stop funding them, that non-profit wouldn’t be able to function from its own income. Why is it ok for those charities but not ok for us? We don’t have a sustainable source of income. We have t-shirt sales in the Spring, and the research grant from UMW is reliable, but our donations are not constant and they fluctuate drastically over the course of the year. I think that we can be sustainable if we focus our efforts on finding a sustainable source of money rather than being dependent on large influxes every so often.

    We can reach the security of being a sustainable organization if we can reshape our idea of sustainability. It is very possible to get the money else where if we devote a little more time to it. But we need to make the promise to ourselves that we will be devoting that effort to it we agree to lower the interest rate. There are lots of avenues, but more hands are needed to make this a reality. Fundraising and advertising to students, faculty, staff, alumni, community members, and other MFIs can all bring in a good amount of money, but it takes time to build up that consistent background of support that we can always depend on.

  • The debate over La Ceiba’s interest rates is about sustainability, but it is also very much about the organization’s ethos. While I was not one of La Ceiba’s founding members, I can confidently say that La Ceiba has always (to me) been about our clients—their prosperity and their family’s sustainability. As far as I know, it has never been La Ceiba’s intention to make a profit or survive off the interest rate we procure from loan repayments. In fact, until we discovered the flaws in our previous interest rate scheme, I never really considered to what extent interest payments contributed to our bottom line. I always saw them as a technical tool for legitimizing our loan program. I realized that my notions about the interest rate were true when the Performance Team informed us that the amount La Ceiba has earned from interest payments has amounted to approximately $200.00. This amount isn’t completely insignificant, however when compared to our operating costs it is barely a fraction. The fact that our interest rate (in its inflated state) only added $200.00 to our organization’s revenue illustrates how little we can/should rely on interest to meet our operating expenses. It is obvious that La Ceiba is by no means a conventional microfinance, therefore the organization’s income generating activities should also be unconventional—fundraising, grant-writing etc.
    La Ceiba’s sustainability dilemmas should be shouldered by the organization not our clients. It is our responsibility to provide our clients with the lowest feasible interest rate. The interest rate should both prepare them for transition to the formal sector and also allow them the flexibility to make manageable payments. Based on La Ceiba’s history and the fluidity with which we make improvements to our programs, it is unfair to structure interest rates so that they subsidize our operating costs. I simply do not think it is feasible or fair to expect that of our clients. Undoubtedly, La Ceiba will decide upon an interest rate that recognizes the organization’s need for sustainability but does so without compromising our client-centered approach.

  • Before tackling the issue at hand, it is first important to mention a few important facts: La Ceiba (LC) is a non-profit student run organization, LC is not a bank or a (not yet) legitimate financial institution, LC is run from a university campus and LC has existed for only a few years. Considering these variables in conjunction with the nature of the repayment rates of LC’s clients it is evident that implementing a policy of sustainability via interest on personal loans would not only be extremely difficult to achieve but also contrary to the purpose of the program.
    Financial sustainability is extremely important for the survival of an institution especially for LC. The question is not whether LC should be financially sustainable but how LC can be sustainable. Implementing a high interest rate on client loans shifts the risk and responsibility of sustainability onto the backs of our clients. If LC’s responsibility is towards the client, their well-being and ultimately their fight against poverty, then LC should find avenues through which to achieve sustainability in other arenas. That is, the burden of keeping the organization afloat should lie upon on the student members of LC and not on the clients. We can find other sources of revenue, a feat that should not be too difficult considering LC’s proximity and connections to the student body and the surrounding community. Perhaps it is in the best interest of the organization to create a new team or expand upon an existing one with the purpose of raising revenues through fundraisers and events that will attract donations from students as well as community members.
    The purpose of the personal loan program is not to make profit or expect the full loan to be paid on time and in its entirety, instead personal loans are expected to smooth over gaps in income and facilitate the consumption of necessary if not essential products that will raise the clients standard of living. Additionally, personal loans introduce the client to a financial reality. That is, the client will have to learn to make decisions with the money loaned to them by establishing savings and budgeting techniques, skills that are invaluable and will last a lifetime. These are the goals of personal loans, that is why LC should have low interest rates and why interest rates should be considered a secondary source of income. The challenge to keep LC alive and stable lies upon us as its members.

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