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 amount||Effective interest rate|
|Microfinance NGOs||5,000 – 300,000||60%-90% p.a|
|Cooperatives||5,000 – 300,000||60%-90% p.a|
|Cooperatives||300,000 to 5,000,000||9%-36% p.a.|
|Rural banks||5,000 – 300,000||60%-90% p.a|
|Rural banks||300,000 to 5,000,000||9%-36% p.a.|
|Credit card companies||5,000 – 5,000,000||60%-90% p.a.|
|Commercial banks||>1,000,000||9%-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 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.
Sources of information and practical tips on money management
Mga bagay na dapat mong malaman sa insurance
Mga iba pang babasahin tungkol sa insurance:
- Iba’t-ibang klase ng insurance
- Must-have insurance for people in their 30s
- Ang pinakamatatag na insurance company sa Pilipinas (Part 1)
- Ang pinakamatatag na insurance company sa Pilipinas (Part 2)
- Anong insurance dapat mayroon ang mga bata?
- Gusto kong paghandaan ang future ng anak ko, tama bang investment-linked insurance ang kinuha ko?
- Paano gumagana ang ibinabayad na premium sa insurance para mabigyan tayo ng proteksyon sa panahon ng emergency
- Kung akala mo insurance ang education plan, basahin mo ito
- Insurance para sa mahirap
- Bakit mahal ang VUL o investment-linked insurance
Mga bagay na dapat mong iwasan sa insurance
Ito ang listahan ng mga articles na isinulat ko at videos na nagawa ko tungkol sa VUL para makakuha tayo ng mas sulit at mas epektibong insurance coverage.
- Bakit mahal ang VUL?
- Bakit mas maganda ang BTID kaysa VUL?
- Epektibong paggawa ng BTID upang masulit ang pinaghirapang pera sa insurance at investment
- Paanong mas maliit ang fund value sa VUL kaysa sa BTID?
- Ok ba talaga ang VUL kasi protected ka nito beyond 65 years old compared to term?
- Ok ba talaga ang VUL para sa estate taxes?
- Why Not VUL?
- Anong gagawin ko kung may VUL na ako? Paano ko ito ititigil?
- Pagkakaiba ng savings sa VUL
- Mga terms and conditions na kailangang hanapin kung bibili ng VUL
- Paano pumili ng mabuting insurance agent
Different kinds of investments
Preparing for retirement
How are articles on retirement
- 10 Commandments of retirement
- Mga kinakatakutan ng retirees at paano ito paghahandaan
- Magkano ang matatanggap mong SSS pension upon retirement
Watch videos on money management
Get in touch with Sir Vince
Join online groups of Sir Vince
Join Sir Vince blog newsletter