By Jerry Harter, KF13 Indonesia

A micro-finance institution (MFI) is a social enterprise.  Unlike ordinary for-profit businesses, a social enterprise’s measure of success is its social agenda.  Nonetheless, it needs to be financially viable in order to continue doing its work.  The social agenda of micro-finance institutions is to alleviate poverty through the use of financial services for the poor, such as credit and savings services.  Koperasi Mitra Usaha Kecil (MUK), the MFI I’ve been working with as a Kiva Fellow in Bali, is a cooperative that operates much like a savings and loan in the US.  In order to be financially viable over the long term, MUK and other MFI’s charge interest on the loans they provide.


When I first heard that MFI’s charge their clients interest on the money they lend – even the money that was provided interest-free from Kiva lenders – it really took me aback.  It didn’t seem right, especially considering that the rate of interest can be upward of 35% apr.  I first learned of this when I was applying to become a Kiva Fellow and felt a need to come to terms with it before committing to the program.

The first source of understanding came from an online course offered by the United Nations Capital Development Fund – UNCDF. Kiva requires all Fellows applicants to take this course before being accepted into the program.  The course made a couple of points that were helpful to me.

  • Credit must be available when it’s needed.  A farmer needs to buy seed at planting time.  A vendor needs to take advantage of low prices and then buy in bulk.  Medical emergencies require immediate cash to avoid selling income producing property like a cow.
  • Credit needs to be convenient.  Farmers, for example, cannot afford to take time off from work and pay for public transport to borrow and pay back loans.
  • Informal sources of credit (i.e. loan sharks) are very convenient, do not require complex agreements, are there when needed, and can offer large loans.
  • For those living in poverty, convenience, timeliness of credit, and size of loan are generally higher priorities than the interest rate and other costs of credit.
  • If a micro-finance institution is going to be a good alternative to the loan shark, it needs to be around for the long term, providing convenient credit that’s there when needed. It is therefore important that a micro-finance institution is financially viable.

Okay, so charging interest is necessary if a micro-finance institution is going to be able to provide a service in the long run – and be a good alternative to the informal sector.  But how much is reasonable for an MFI to be financially viable?  Here are a couple of the justifications for the rates.

  • Relative to the amount of the loan, the overhead to service a small loan is significantly greater than to service a large loan.
  • MFI’s often provide special services for the entrepreneurs.  For example, MUK the MFI I’m working with in Bali has a veterinarian on staff to help train the pig farmers about the proper care and feeding of the animals.
  • Borrowers are often in remote areas.  They cannot afford to make regular trips to town by public transport, nor can they afford to take time off from work to make the trips.  For an MFI to truly provide services to remote areas, it is important that the MFI staff do the traveling.  Without this type of accessibility, the higher rates of a loan shark can be more appealing.
  • For accountability and quality control, MUK requires at least two staff members at all meetings with the client.  This includes trainings, support for the formation of groups, loan disbursements, and repayments.
  • There is a lot of leg-work involved in servicing micro-credit.  A good deal of training is required to make sure that the borrowers understand the terms of the loan and what their responsibility is.  And then there is the time spent in disbursement and repayment of the loan.
  • Inflation can result in a significant loss in the value of the principle over the term of the loan.  In order to be sustainable, the cost of inflation needs to be covered by the interest rate.
  • The cost of foreign exchange needs to be covered somehow.  It costs money to send dollars back and forth to the US for example.
  • The MFI’s sources of funds have a cost.  They may pay commercial rates to regular banks, pay interest to saving depositors, or in the case of Kiva, require extra staffing to create profiles and journals for the Kiva website.

But I’m a bit of a skeptic.  So when I started working with MUK in Bali I looked for clues as to their sincerity of purpose – things like administrative environment, how loan officers and clients relate to each other, and whether owners wear Rolex watches. This is what I saw.

Click to view slideshow.

MUK is pretty much of a bare bones operation.  There’s nothing fancy about the work environment – small shared office spaces, simple desks, and mostly plastic chairs.  They do have nice computer equipment, but not excessive.

When I go into the field with the loan officers, I notice an easy rapport between the MUK staff and the borrowers.  I get a sense the MUK staff genuinely see themselves as partners with the entrepreneurs and care about their success.

I’ve also been in the field with the founder and chairman of MUK.  He’s showed me how to order food from street vendors, eat with my hands, and is well-informed about the basic operations of many small entrepreneurs.  He also gives a consistent message about the mission of MUK and doesn’t wear a Rolex.

MUK is a Christian organization that serves a largely Hindu and Muslim community.  Every morning begins with a half hour service.  I appreciate how MUK staff start their work day with an intention of acting in accordance with their values. Yet they do not allow religious beliefs to eclipse the social mission.

In regard to interest rates in Bali, I talked to a taxi driver shortly after arriving in Bali.  He had recently secured credit from a regular commercial bank at the same rate that MUK was offering for their micro-credit loans.

And here are the rough numbers.  A single loan officer at MUK manages a loan portfolio of about 200 clients with an average loan size of about $250.  At 24% apr interest he/she will gross about $1200 per month for the MFI.  This needs to cover:

  • Salaries of loan officer and administrative staff
  • Loan reserves
  • Rent of office, office equipment, supplies, and utilities
  • Computers, printers, software
  • Transportation, compensation for use of employee motorbikes, fuel and maintenance

MUK is on the lower end of what MFI’s typically charge for interest. While I do not know first-hand whether the rates at other MFI’s are justified, I do know there are at least two reasons why rates might be significantly higher in other countries – costs of energy and cost of inflation.  Indonesia has moderate inflation and its energy costs are relatively low.  Another reason is that some MFI’s are servicing loans in far more remote places than MUK in Indonesia.  See ‘How’s the Weather’ and ‘Deciphering a Treasure Map‘ .

So, while I’d prefer lower interest rates, I think the rates being charged by many MFI’s are reasonable and justifiable. I would certainly vouch for MUK’s.  Nonetheless, we should continue to ask the questions.  Are rates too high?  Who are the real beneficiaries of the system?  Can the poor be better served?  How can Kiva best support fair and effective micro-financing?

Jerry Harter is a Kiva Fellow working with Koperasi Mitra Usaha Kecil  (MUK) in Blimbingsari, Bali, Indonesia.   Interested in alleviating poverty by supporting small entrepreneurs?  Visit Kiva.


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