Devil is in the Execution
I have been spending the last few days in the beautiful countryside of Armenia, driving through the numerous mountains, valleys and other symbols of rural Armenia. This is a mountainous nation and the infrastructure throughout the country was built (originally by the Soviets and since expanded by Armenia) by blasting through these mountains. After spending the past few years in Middle America, this landscape is awe-inspiring to say the least. Unfortunately, my hosts do not share the same sentiment.
Microfinance is often criticized for having higher interest rates, at least when compared to more developed credit markets. While other blogs have done a great job of explaining why that is, I got a chance to experience it first-hand this week.
The mountains of Armenia are sprinkled with small villages. Basically, a decent sized town (pop. ~25,000) will be surrounded by a dozen villages (pop. 30 – 150) within a 15 – 20 mile radius. As a result, a microfinance organization (“MFI”) will have a satellite office at one of these towns and serve the region surrounding it. Delivering credit to these secluded villages often involves getting into an old Russian-made 4×4 and driving it through unpaved roads and sometimes, no roads at all. Considering the rain and snow in the mountains, this gets even worse in some months. A visit to one borrower can therefore take a team of two (for safety concerns) anywhere from two to four hours. Given that these offices are staffed leanly to begin with and the fact that MFI’s have pretty limited budgets, the cost of servicing a loan can quickly add up.
One could argue that servicing only a handful of villagers in remote locations is not smart business. Certainly, in a profit-driven environment, these borrowers would not be worth the cost. However, MFI’s make a concentrated effort to service the very clients traditional financial organizations do not. I think I can say safely claim that most Kiva lenders are also looking to reach these very borrowers: those with limited access to credit, operating in non-traditional markets and nevertheless, successful business owners in their own right.
This trip has helped me better understand the work that goes behind MFI’s who work in remote locations. While I continue to marvel at the beauty of Armenia’s countryside, I hope this gives some of the readers (and lenders) an example of one of the drivers of pricing in microfinance and the circumstances under which local loan officers often do their work.
Abhishek Banerjee is a Kiva Fellow (KF13) currently based in Yerevan, Armenia. Want to volunteer with the Kiva Fellows Program? Learn more here and apply to be a Fellow!