Having read Meg’s excellent blog post “Bad Roads, Interest Rates, and MFI Sustainability” and the ensuing comments from Kiva lenders, I admit that I was rather baffled. Particularly by comments that varied upon the theme of: “In the U.S. you can get loans for ~8%! You can get credit for 18% interest, which we find high and oppressive! So how can MFIs charge 36% interest rates on loans to their poor clients, it is usurious, it can’t be justified…” so on and so forth.

I believe that if you were to plunk a U.S. bank into a developing country with limited infrastructure, where most clients don’t have ready access to the internet that lets them transfer money from one bank account to another with the click of a mouse, where you have to ask employees to constantly risk their personal safety by carrying huge amounts of cash over uncertain roads and territories, those banks would not be charging 8% interest or even 18% interest, but a much, much higher rate.

Still not convinced? Let’s try a quick breakdown of some actual numbers -

HSPFI, my host MFI and Kiva field partner, charges 3% interest a month on loans. So for a first-time borrower with a loan of P5,000 to be repaid over 5 months, in one month the HSPFI borrower would be paying back P1,000 on the capital, and P150 in interest. (The current exchange rate is 46 Philippine pesos to 1 U.S. dollar, so the USD equivalent is $21.74 in capital, and $3.26 in interest.)

The P150 interest collected on that loan covers salaries and benefits of not just the project or loan officers who collect the client repayments on a weekly basis, but also the salaries of admin staff members like the branch cashier, accountant and assistant accountant, as well as the branch manager. Let’s say our first time borrower lives in Camiguin. For HSPFI’s Camiguin Branch (which is HSPFI’s smallest but one of its most efficient branches), total salaries and benefits for their five staff members (three project officers, one admin staff, and one officer-in-charge/branch manager) in January 2010 came to roughly P27,500 (or $598 USD).

Apart from the salaries and wages of the branch staff, the P150 interest will also go towards salaries and benefits of the Head Office staff – HSPFI’s Executive Director, Director of Operations, HR staff, tech staff, community development staff, internal auditors, Kiva Coordinator(!), etc. – as well as Head Office’s administrative costs (for printing, office supplies, utilities, trainings and conferences…). Unlike the branches, HSPFI’s Head Office does not give out loans or collect interest from clients, so the branch offices make monthly contributions to help cover Head Office’s costs. HSPFI Camiguin Branch contributed P53,400 (or $1,161 USD) in management fees to Head Office this past month.

Still with me? Remember that our first time borrower is paying P150, or $3.26 USD in monthly interest on his or her loan of P5,000. But salaries and wages are hardly the only things that a functioning MFI has to pay for. Camiguin project officers spent about P4,500 (or $98 USD) on travel this past month. And to round out the estimated operational costs, total administrative expenses for necessities like utilities, phone, office supplies, rent, taxes/licenses, etc. for the branch came to about P26,150 (or $568 USD).

Note that this is PARTIAL operating costs for HSPFI Camiguin. Kiva is not HSPFI’s only (or biggest) funder by any means, and other funders (e.g. Oikocredit, SEAD, PCFC, SBGFC) actually do charge interest on loans to HSPFI. I left that line item out of the above calculations for the sake of argument that Kiva’s funds are interest-free, but if I were to add that line item in Camiguin’s operational costs would increase by about P49,800 (or $1,082 USD).

By now you’re probably tired of me repeating that our first-time HSPFI borrower is paying P150, or $3.26 USD in interest this month on his or her loan of P5,000 – 0.13% of operational costs. Surely you have to account for repeat borrowers who have taken out higher loans and are correspondingly paying higher interest fees. So if we increase the loan amount to P30,000, our now long-time, repeat HSPFI borrower would be paying P3,000 on the loan capital and P900 (or $19.57) on interest this month – 0.8% of operational costs. This P900 definitely goes farther towards contributing towards operational costs, but note that borrowers with P30,000+ loans only make up about 10% of HSPFI’s total portfolio.

The above is very condensed and much abridged, to keep this post from being three times as long. But by listing out all these figures, I wanted to show that running an MFI is not cheap. It’s easy for us to condemn 3% monthly interest rates are high, but it’s just as easy for us to forget that staff, utilities, rent and a whole range of other operational expenses need to be paid in order for an organization – any organization – to run.

Also, working conditions for MFIs in developing countries are very different from banks in developed countries. This may seem like huge duh point, but it bears pointing out that MFIs’ operational costs are high in part because you need enough project officers to visit hundreds of clients every week and collect cash repayments, and you need enough admin/other staff to support the project officers. U.S. banks don’t need employees to visit every one of their clients on a weekly basis to collect repayments. Furthermore, banks in the U.S. have access the excellent technology/infrastructure in place that allows for automated payments (and greater automation in general) – which helps keep interest rates low. To say that MFIs in developing countries have “high” interest rates in comparison to banks in developed countries with “low” interest rates ignores the fact that banks in developed countries have certain operational advantages that MFIs in developing countries don’t have, and need to compensate for.

At this point maybe some of you are thinking, “I don’t really care about MFIs needing to cover operational costs, I only care about how this 3% monthly interest affects Kiva borrowers!” Leaving aside the fact that there would be no Kiva borrowers without field partner MFIs, I had previously met a Kiva borrower who decided to stop borrowing from HSPFI, and I know she’s not the only person to have ever done so. The interest rate might have been a factor behind her decision to stop borrowing, although there might’ve been other personal factors as well.

But on the other side of the spectrum there are Kiva borrowers like Ms. Mellianita Moron. Since this topic of “high” interest rates had been weighing on my mind, I brought it up during her interview. I explained that businesses in the U.S. can get loans at much lower interest rates, so there are Kiva lenders who are worried that MFIs like HSPFI are charging overly high interest rates to borrowers in the Philippines. I asked what she thought about HSPFI’s interest rate – was it indeed too high?

HSPFI’s 3% monthly interest rate is ok! Mellianita exclaimed. Especially in comparison to other MFIs who she had borrowed from that charged 10% interest a month! And to top it all off the other MFI collects repayments on a DAILY basis, in comparison to HSPFI which collects repayments on a weekly basis. When I then asked if there are any additional services that she would like to see from HSPFI, Mellianita laughed and said that she wished HSPFI could increase loan amounts and release more loans at a faster rate, so she won’t have to borrow from MFIs that charge truly exorbitant interest rates and can just borrow from HSPFI. I looked around at the various center members and extended family who had gathered outside Mellianita’s sari-sari store to watch (and occasionally interject), as they all nodded their heads in agreement.

Eva Wu would like to thank HSPFI for generously allowing her to use figures from their latest financial statement in this blog post. She has lots of thoughts on the (unsexy) topic of MFI interest rates, but hopes for now that people can understand that asking why MFIs in developing countries can’t offer interest rates as low as banks in developed countries is a bit like asking why apples can’t be oranges. Or to use a more Filipino analogy, why lanzones can’t be rambotan.

As a Kiva Fellow, I’ve seen the successes. I’ve visited businesses and interviewed clients who have succeeded because of microfinance. These borrowers were able to grow their businesses that not only provide the owners with a comfortable living, but also provide additional livelihoods for hired employees. Abhijit Vinayak Banerjee and Esther Duflo of M.I.T, and Dean Karlan of Yale wrote in their New York Times op-ed “The Role of Microfinance,” microcredit is generally viewed as either “transformative” successes, or “ruinous” failures. Having seen the former, I believe that much of the latter is caused by over-high expectations – that poor people all over the world would be lifted out of poverty through lending. When recent research failed to support this concept of global poverty alleviation, people started to lose faith in microfinance.

Again, from “The Role of Microfinance” (which I highly recommend reading if you haven’t already):

…as we see it, microcredit seems to have delivered exactly what a successful new financial product is supposed deliver—allowing people to make large purchases that they would not have been able to otherwise. The fact that some people expected much more from it (and perhaps they are right, may be it will just take longer), is perhaps inevitable given how eager the world is to find that one magic bullet that would finally “solve” poverty. But to actually blame microcredit for not promoting the immunization of children is no different from blaming immunization campaigns for not generating new businesses.

Microfinance is a tool, like a hammer. Some people have natural creative skill with a hammer, whereas others have to invest some time in learning how to put the hammer to best use. Still others might decide that they don’t like using the hammer at all and opt for another tool. Overall though, has the hammer made people’s lives easier? Yes, it has – so it is a successful tool. Can a tool like microfinance be transformative? Yes, for some people. Should the tool be completely discarded (or discredited) because it does NOT transform the lives of everyone? No, definitely not.

In a previous blog post “The Savings Behind the Interest” I had written that the microfinance arena in the Philippines is crowded with players, and that there are a lot of microfinance institutions jousting for clients by offering a variety of attractive programs apart from loans. My host MFI HSPFI for example offers savings, insurance, business training, a small competitive scholarship program for clients’ children, as well as community development initiatives. Other Kiva partner MFIs in the Philippines also have a similar array of programs, as several Kiva Fellows have shared. In other words, if you take product diversification and competitive commercialization as indicators of maturity, the Philippine microfinance industry has clearly “come of age” – largely to the benefit of microfinance borrowers.

To be honest, I believe that most microfinance critiques focus mostly on the effects of lending to the poor. Many other programs like savings or insurance offered by microfinance institutions are ignored, so the critics are out of step with the maturing of the microfinance industry. Case in point – much of the recent public fallout over microfinance was fueled by randomized control trials (RCT) that measured the short-term impact of microcredit on clients, and most of those studies found no evidence of microcredit bring about a transformative improvement in household income or consumption. However, in “Does Microcredit Really Help Poor People?” Richard Rosenburg of CGAP noted that “Interestingly, the only RCT study of microfinance so far that found short-term welfare improvements looked at microsavings, not microcredit (Dupas and Robinson 2009).”

It’s important to remember that “microcredit” or lending is part of a suite of services that makes up “microfinance.” Especially in areas of the world with a mature microfinance industry (like the Philippines), microsavings is a part of microfinance. When you’re making a loan through Kiva to a Filipino borrower, it’s safe to assume that many of those borrowers are utilizing additional programs from partner MFIs in the Philippines, and are receiving other benefits that branch out beyond the loan itself.

Returning to my original question – does microfinance really work? The pragmatist in me says yes – but not in a magical transformative way for every poor person, while the idealist in me adds that the successes would mount if all the other microfinance programs offered by MFIs were taken into account. Rosenburg wrote in “Does Microcredit Really Help Poor People?” that, “For now, it seems an honest summary of the evidence to say that we simply do not know yet whether microcredit or other forms of microfinance are helping to lift millions out of poverty… [but] poor people think this ‘palliative’ is enormously important in helping them deal with their circumstances.” Even as we in the developed world throw up our hands and bemoan the ruinous effects of high interest rates, etc. the poor believes that microfinance has helped improve their lives and are “voting with their feet.” And that, really, is the most important thing.

What I really wanted to write about was how I found myself slipping back into a more commercial/American mindset when I left the Philippines, which manifested itself in the fashion magazines that I pored over and many additions to a mental wishlist of wants. And also when I found myself back in the States at Honolulu International Airport facing an array of eats at the food court. My first instinct was “I want McDonald’s.” Which is not a rational decision because I rarely feel the need to go to McDonald’s and indulge in a Big Mac. I usually indulge in Pringles when I feel the need for junk food – another story for another time.

For me, choosing to eat McDonald’s or some other American fast food chain is (usually) more of a capitulation to what that meal symbolizes (e.g. American culture) as opposed to actually wanting to eat fast food. The fact that I didn’t actually end up eating at McDonald’s in Honolulu because there wasn’t one that I could see, or because I saw mapo tofu instead (way too tempting to give up after 2+ months of no tofu) is irrelevant. I can only shake my head at the commercial success of American fast food companies that makes me crave “something really American and easily accessible” with more regularity when I’m traveling to and from the U.S. – despite the fact that fast food is trashy.

Another thing that struck me when I left the Philippines was how I immediately slipped back into the American mindset of constantly weighing the (perceived) value of my time and how much that time gets wasted on a regular basis. At Hawaiian Airline’s check-in line in Manila Airport, I was stopped by airline employees no less than three times because I had let slip that I was carrying a lithium laptop battery in my check-in luggage. When I finally capitulated and laid my suitcase down to pull out the offending battery, another gentleman slipped past me and cut my place in line. After I quickly pulled out that damn battery I then proceeded to spend the next 15 minutes glaring and feeling generally pissed off at the world. Yes, I had just waited in a line that snaked across the concourse for almost an hour. But was it really worth it for me to spend the last 15 minutes in line feeling angry and sorry for myself? Not really.

As an American who’s just spent a few months abroad, the “commercial” aspect of the American psyche really stands out in high relief when I returned to the States. And this aspect of the American psyche is something I’d like to ditch in favor of something a little more zen. I think I found my zen in the Philippines – now I just need to figure out how to retain it.

Maybe a more fitting title for this post would be it’s harder to be Christian in the commercialized environment of the States, period?

To wrap up with something completely non-related and has absolutely nothing to do with Christmas (since tonight is Christmas Eve) – but will make you laugh – check out the octopus video below!

On a slightly more personal note, right now seems like a good time in my life to try something slightly off the beaten path. At Brown University I was an international relations concentrator with a focus on development studies – very much prompted by my background as a Taiwanese diplomat’s daughter. Growing up I’ve lived in the U.S., Taiwan, Israel, and for a short period in Malawi. However, living with my parents I often felt like I was restricted to the bubble of the international community. Also being much younger then, I didn’t really appreciate the constantly moving lifestyle that being part of a diplomat’s family demanded. I did however grow up with a healthy appreciation and respect of different cultures and the challenges that often come with the clashing of cultures.

Going to Brown University helped further my social awareness. I received a grant to work with a local nonprofit organization called PrYSM the summer of 2005. That ended up being one of the richest yet most emotionally grueling summers of my life – PrYSM works with the local Southeast Asian / Cambodian community in Providence, and they were working on a deportation campaign at the time. It’s very difficult to sum up this experience in a few words, but I usually boil it down again to the word “respect.” Respect for different people, their cultures and lifestyles, and their struggles for a better life and world. Thinking about the possibility of a Kiva Fellowship, I hope to be able to regain that ongoing feeling of “respect” for others.

Since graduating from Brown in 2006 I’ve worked in web management and government consulting. The fields that I’ve entered are interesting, but they weren’t necessarily ones that I would’ve envisioned myself in coming out of college. I believe that I can gain solid experience and knowledge from working in the private sector that would someday translate into value-added work for the public sector. While I’m still trying to work through what my short-term goals are, I’ve always been convinced that I want to work in the public or non-profit sector in the long run.

For all the above reasons I believe that a Kiva Fellowship would be a great opportunity for me at this point of my life. I’ve gained some great experience working in the private sector, but would greatly appreciate the opportunity to work with a nonprofit again – especially an organization with an international development scope that deals with social entrepreneurship, within the cross-section between the private and public sectors.