Archive for: lending

March was a tough month for the financial system, in Yemen, where half the population lives below the poverty line. The U.S. dollar/riyal exchange rate rose from 205 in January and February to about 230 by the end of March. To encourage people to go back to using local currency, the central bank on March 29 raised the index interest rate for savings accounts to 20% (from 15% on March 20 and 10% in January-February.)

This meant that the Central Bank would pay 23% on its CDs. Some observers expect this rate to reach 25-27%, a level last seen in the mid-1990s. If this happens, banks and investors would be getting close to 30% on their CDs. Although the exchange rate has dropped back to 204 as of April 7, such an increase in the interest rate would make it more comfortable for commercial banks to continue their old habit of investing their money in CDs instead of lending in the local market. This could dramatically increase the cost of funds for MFIs. Transferring that cost on to poor customers could push already high interest rates above 50%.

Hopefully this last move from the central bank will be the end of the game and the Yemeni riyal to the U.S. dollar will go back to normal rates. Many believe that this rise in rates is not normal for a currency which was floated for so many years and is a reaction to some rumors in the market due to political unrest. Otherwise, the Yemeni poor will be the mostly affected by this.

Can we peer into the soul of an entrepreneur to predict business success/risk in lending? A group of researchers based at the Entrepreneurial Finance Lab at Harvard University is convinced that the probability of willful default by borrowers can be predicted with psychometrics (psycho-metrics literally means measuring the soul).

So instead of screening new borrowers based on collateral–as banks do–or on social reputation–as microcredit traditionally does–Fina Bank in East Africa is to begin screening based on psychometric testing. Applicants for small business finance in Kenya, Uganda, and Rwanda will be screened for entrepreneurial potential or future earning potential based on criteria developed by the Harvard researchers.

Psychometric testing has long been used in recruitment. The Harvard researchers have adapted four key characteristics of psychometric tests–intelligence, personality, cognition, and ethics–that have been linked to entrepreneurial success and show promise for financial institutions to reduce risk. They’ve tested it on a small sample in South Africa, and now they are applying the technique through partners around the world to the “missing middle” of financial services – small traders and business owners (SME, not micro).

What say you? Is personality the best test of business success?

Last Wednesday, the US legislature sent to President Obama new credit card rules that he signed into law last Friday. The law will regulate and restrict deceptive and unfair practices that began in the shadows of the sub-prime credit card market and have gradually crept into the mainstream. Further legislation in the works promises restrictions on payday lending (borrowing against your next paycheck, generally with very high rates and fees on short-term loans that tend to be rolled over again and again as balances pile up).

At first glance, this would not seem to have much to do with microfinance in developing countries.  But are there parallels that should concern us?

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