Asunción Quispe is a single mother with two school-age children, who lives in her parents' house, in a marginal area of the city. Its only source of income is the ambulatory sale of sweets, where it has invested between candies, cookies, chocolates, cigarettes, sodas, etc.; an average of S /.400.00 (approximately US $.145).
The daily routine of Asunción implies being located, during the day, in areas with a high influx of people, such as recreation centers (parks, sports complexes, clubs), study centers (colleges, schools, institutes, universities), restaurants, public transport parking (buses, colectivos, taxis), among others; and on weekend nights, on the outskirts of discos, pubs, entertainment centers, etc.
Asunción has intended, for some time, to make some repairs in her home, but her only source of financing is an informal lender who charges "10% interest per month", with daily payments; which in practice mean an effective monthly rate of 20.60%.
However, a neighbor has commented that the Microfinance Institutions - MFIs can also serve her, despite being informal; He has even offered to accompany her; to which Asunción has agreed with some disbelief.
At the MFI they were received by José Arrascue, an experienced Credit Analyst; that after the rigorous consultations and the visit to the Asunción home, he has offered to lend him S /.1,000.00, for a period of 18 months at a Monthly Effective Cost Rate - TCEA of 5.00%, considering that "he has no credit history and it does not have properties in its favor ”. The only requirement is to present the Official Identity Document and the merchandise purchase tickets for the last month.
Joel Herrera, an aspiring Credit Analyst at the IMF, who has been following the credit evaluation process, is somewhat confused: He does not understand how Asunción will be able to pay off the loan if it only sells sweets on public roads.
Joel's concern is also shared by many outside the world of microfinance, who do not understand how informal people can pay back their loans, even at interest rates well above the market average. This article tries to explain how it happens.
Asunción rotates its merchandise every 7 days, on average. That is, she buys S /.400.00 of merchandise 4.28 times a month; that make a total of S /. 1,714.00 per month.
The margin of Assumption amounts on average to 50%; which gives a business profit of S /.857 per month. On the other hand, their family expenses amount to S /.700, which implies a monthly surplus for the economic - family unit of S /.157; that versus the monthly installment of the loan (amounting to S /.85.55) means a coverage of 184%.
And how does this happen?
Simply, why the turnover of the goods of the microentrepreneurs is high, due to its versatility; which allows them to obtain returns on equity (ROE) higher than the TCEA they pay. For example, in the case of Asunción, you earn 2.14 times the amount of your investment per month. That is, it obtains a monthly ROE of 214% Vs a TCEA of 5.00%.
Situation that explains why microentrepreneurs value more the speed of granting the loans they request, rather than the interest rate they pay. Especially when it comes to business opportunities, they can't wait.
However, when businesses grow, margins are reduced, because they have to cover operating and tax costs; as well as supporting slower rotations of its merchandise.
Finally, we must not forget that MFIs have allowed many microentrepreneurs to have access to the Financial System and put aside informal sources of financing, improving the profitability of their businesses and their quality of life.
