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Interest rate analysis of microfinance institutions in the Philippines

The Department of Trade and Industry defines small enterprises as businesses with assets, excluding land, equivalent to PhP3 million up to PhP100 million. In contrast, microenterprises are businesses that have assets of less than PhP3 million.

Microfinance institutions: how much do they charge?

Microfinance institutions are typically microfinance NGOs, cooperatives and rural banks that provide loans ranging from PhP5,000 to PhP300,000 to microenterprises. They typically charge 60%-90% per annum. Credit card loans, like microfinance loans, do not require collateral, also charges a similar interest rate. 

Loan amountEffective interest rate
Microfinance NGOs5,000 – 300,00060%-90% p.a
Cooperatives5,000 – 300,00060%-90% p.a
Cooperatives300,000 to 5,000,0009%-36% p.a.
Rural banks5,000 – 300,00060%-90% p.a
Rural banks300,000 to 5,000,0009%-36% p.a.
Credit card companies5,000 – 5,000,00060%-90% p.a.
Commercial banks>1,000,0009%-18% p.a.

Why interest rate is high…

Microfinance charge high-interest rates to cover high administrative incurred in the process of financial service delivery microenterprises. The huge volume of transactions, micro amounts involved and “high touch” in financial service delivery makes it more expensive. 

In this regard, interest rates from commercial banks to small enterprises are not comparable to the interest rate that microfinance institutions charge to microenterprises. Small enterprises have larger loan amounts involved and do not require regular and frequent visits. 

Commercial banks start entertaining loans to small businesses when the loan amount is PhP1 million. Anything lower, they consider it expensive in terms of loan administration. 

In contrast, the country overview of the Philippines in MIX Market, reports that the average microfinance loan in the Philippines is PhP12,000 as of 2015. In a conservative comparison, loan size of commercial banks to small enterprises is at least 83 times larger than loan sizes of microfinance institutions to microenterprises.

Commercial banks require collateral when small businesses access loans from them. Microfinance institutions do not ask for collateral since the poor do not have marketable collateral to offer. 

Social collateral

Social collateral is used instead which means more intensive community organizing, more intimate relationship building through frequent client home visits and even more frequent client meetings. The lack of collateral as security against delinquency and more intensive client relationship building contribute to higher interest rates charged to microfinance clients.

Need for affordable sustainable interest rate

There is clearly a need to provide financial services to microenterprises at sustainable interest rates. It is a delicate balancing act to achieve financial sustainability and at the same time the institution’s social mission. 

Without microfinance, microenterprises access loans from informal money lenders that charge an annual percentage rate that ranges from 250% to 1,800%. Microfinance interest rates are at least 4 to 30 times cheaper than informal money lenders. Popular informal money lenders are five-six, Bombay and Turko.

Most microfinance clients are engaged in businesses that require low capital but have good profit margins and high turnover. For example, a sari-sari store can have an average profit margin of 10% on fast-moving consumer goods such as carbonated drinks, noodles, alcohol, and cigarettes. 

The turnover per month is fast which is about 100% in a month. For turnover and profit margin alone, sari-sari stores make 120% per annum when properly managed. If leverage is included, say at twice the equity of the borrower, this jumps to 240% return on equity. Sari-sari stores account for more than 60% of the client base of most MFIs.

With this illustration, micro-enterprises can afford to pay current interest rates microfinance institutions charge. The ideal, of course, is to get it at the lowest possible cost so that they can use interest paid to improve their quality of life.


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One Comment

  • Jay Espinoza says:

    Hi Sir Vince, any idea where we can invest in these MFIs? I want to explore other investment options also not only stocks and mutual funds. Please advice where we can join MFIs or Coops that give high returns to investments. Thanks.

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