Interest Rates on Microloans in Russia: How Much Is Too Much?
This post kicks-off a three-part series on Russia’s financial inclusion space. This short series will feature prominent voices from Russia’s microfinance industry and discuss new developments and implications for the global industry as a whole.
Just as the dust settled after a controversial entrance of new players in the Russian microfinance sector about a year ago – those claiming themselves to be ”microfinance organizations” and yet charging 730% interest per annum, another “innovative microfinance” product has totally shocked visitors of the Russian Post, as reflected in a multitude of blogs and in numerous media articles published in recent weeks. Promotional booklets found in post offices in several major Russian cities were advertising microloans in the amounts starting from $100 that, if taken for one week, would cost 2772% p. a. (and a “special offer for low-income pensioners” – at 2598%). The largest amount of 5000 rubles (about $167), for a one-month term, is offered at a “mere” 720%.
The public indignation is not just about the interest rates – though certainly all agree they are outrageous– but also has to do with the fact that the Russian Post is a government entity that administers disbursement of social and pension benefits and is considered a “social” establishment in the eyes of the Russian public.
On February 6 the Russian Post published an official disclaimer explaining that it has nothing to do with these loan products but rather acts only as an agent for two commercial microfinance companies – Mini-Loan Express and Home Money; and it is the lender – not Russian Post – that is to blame for these controversial products. (public records under Russia’s newly implemented microfinance law disclose that Mini-Loan Express is owned by an individual entrepreneur and a Cyprus-registered joint stock company; in a particularly ironic twist, Home Money is a member of one of the new “self-regulatory organizations” provided for under the law – voluntary for microfinance institutions – and one of the first to adopt a “Charter of Professional Ethics.”
Despite the explanation, the public has questioned the very ethics of the agreement signed between the Russian Post and these commercial companies, given that users of the Russian Post’s financial services (limited, until recently, to mostly government benefits, domestic money transfers and utility payments) are mostly low-income and financially illiterate people – many of them vulnerable pensioners — who could easily believe that the services come from the government and could be trapped in debt. A few days after the incident had gained publicity Arkadiy Dvorkovich, assistant to President Medvedev, Tweeted that he would “sort things out”. But at this point it is not exactly clear what the government can do about it as the contracts of the “microlenders” with Russian Post are apparently enforceable, and the law in Russia does not prohibit lending activities, nor does it prescribe interest rate levels. Instead, it looks like it will fall to the responsible microfinance community in Russia to make a statement about such market (mis)conduct.
In our next Friday’s blog post, we will let you know how the microfinance community responded to the situation and what recommendations were made to the regulatory and supervisory authorities.
Also in this Series
Interest Rates: What Are the Lessons from Russia on "How Much Is Too Much?"
The situation in Russia and other countries is now leading us to want to revisit each of these factors, “deconstructing” the concept of “sustainable” interest rates and review factors, to see if this process sheds some light on whether any given interest rate can be considered responsible.
Comments
Olga Tim,& Kate
Olga Tim,& Kate
It is very shocking for the people observing Micro finance activity to read the high interest rate by a post office( as an agent) a public entity for serving social benefits. It is not clear their agent role on behalf of Micro credit companies ? Do all low income pensioners deserve to be MF clients? Why should all these happen under the brand name ‘Micro finance’ polluting and belittling its values ?
Post office in general with extensive networking geographically , can do micro financial services directly adopting MF norms as one of social financial services but not necessarily as agent for money lending MFIs. India case, India Post, a government entity, does directly MF services like micro savings, micro insurance, transfer services, and micro pensions to the rural poor ( though not exclusively for the poor ) Now NABARD is experimenting micro credit facilities to Self Help Groups through post offices.
Even contextually having differences in the approach for MF services for the poor, minimum global norms for the usage of the term ‘Micro Finance’ need to be ethically adhered and for this a kind of ‘surveillance’ is not a bad idea.This would help avoiding mis use of the brand term for commercial purposes and ensuring uniformity for global monitoring (MIX) micro credit data.
Thanks to Olga Tomilova for
Thanks to Olga Tomilova for this exposition.
The question that comes to my mind, is that, when shall wo(men) be freed from this inhumanity? I am very sure these disguised microfinance practitioners are not regulated. The operators has never heard nor read any write up like SMART campaign.
The SKS case of AP in Indian will be a miniatures of things to come if not checked now. The cruelty and injustice to the low-income Pensioners from this write up was connivance of “Social“ Russian Post with Profiteering/Exploitative Mini-Loan Express & Home Money as the “Poor Low-Income Pensioners“ will be misled. 53.30% on a loan of $100 in 7 days, 59.97% in 15days and 66.63% in 30days is suicidal as it will lead to over-indebtedness.
It saddens my heart that the Government has boxed themselves into a tight corner whereby there is no rules/referee/ring for interest rate.
May GOD save the “ active poor/low-income pensioners“ of Russian from their “helpers“ and providers of “social cheap loan“.
This is interesting.
Dear Olga and the
Dear Olga and the commentators,
It is surprising that this is happening in Russia, one of the BRICS countries, supposedly with better financial deepening, and better litrate people, etc than a typical poor country case like Bangladesh, Peru, Uganda, etc.
I would side by the idea of the need to a sort of ”survilliance” suggested by my colleague above. Although there may not be a need to set an interest rate ‘cap’, a certain kind of checking mechanism is important. … So once again, I would re-introduce Prof. Muhamed Yunus’ earlier (following the Compartamos IPO) suggestion on microcredit interest rate. He proposed a simpler kind of ‘formula’. …. While there is a concensus that for microfinance ‘sustainability’ the interest rate to be charged from borrowers need to cover costs comprising four basic components a) Cost of funds, b) Operating or processing costs, c) Cost of risk or loan losses, d) Net income, surplus or profit. … Yunus’ suggested formula is based basically on the ‘COST OF FUND’ and it goes like this –
Cost of money plus 10%, that is an acceptable “green zone” of business. Cost of money plus 15%, and you are entering the yellow zone, bordering on being questionable. More than 15% over the cost of money, and he has no doubts – that is the red zone.
Can this ‘formula’ perhaps be updated, built upon, reformulated, etc to serv as a kind of ‘survilliance’ mechanism….??? I strongly believe that some sort of monitoring is better than nothing….
Regards, Getaneh (getanehg2002@yahoo.com)
Dear Getaneh
Dear Getaneh
Thank you for endorsing my views on the need to have a sort of ‘ surveillance mechanism for using the term ‘Micro finance’at global and national level.In this regard, WB, CGAP Global Micro credit summit, could initiate discussion or seminar on this subject. Let us safeguard the noble values and the sanctity of micro finance concept for the cause of vulnerable poor from the clutches of unethical money lending market.
In Micro finance realm, among other micro services ,sequestered micro credit alone has more complexities in the process of management for responsible social cause and business trade off without influencing poverty cure substantially. Most of the time the latter over rules the former in the free market economy incidentally ?or intentionally? or accidentally ? Eventually, it is a fact that We have enough MF crisis and lessons
Probably had prof.Yunus ventured with micro insurance instead of micro credit, by this time Micro finance would have made a dent in global poverty canvas retaining the social values and business trade off without any unethical and sordid events in this industry.
Even now therefore it is not too late for moving the surveillance idea for this industry by institutions like Apex agencies, multi- national development banks, Smart campaign, credit rating agencies, credit bureaus, MIX etc. for ‘better monitoring than nothing’ as you prudently anguished.
Other wise , this industry as a silent spectator, would continue to witness helplessly misleading data under the MF canvas and pollution in the reputed social values of Micro finance and harping over the issues related money lending activities camouflaged under the brand name ‘ Micro finance’
Dr Rengarajan
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