Are microfinance providers the new moneylenders? If we are, would that be a compliment or a condemnation? Don’t be too quick to answer, especially if your familiarity with moneylenders is more or less limited to Shylock in Shakespeare’s The Merchant of Venice!
In my last post (#6), I spent some “ink” on describing the Santa Rosa public market in the Philippines, where moneylenders called “five-sixers” play an absolutely critical role in the participation of even relatively poor people as vendors in that market. There were a remarkable number of moneylenders of two very different types operating in that market, despite fairly deep penetration of cooperatives and rural banks in the area. The Filipino moneylenders were often respected members of the communities and often intermediated bank money to make loans—clearly they could help fellow Filipino vendors in a way the bank-like institutions could or would not. The Indian moneylenders were outcasts who nonetheless found enough demand to make it worthwhile business even in the face of communal prejudice and physical threats to their property and lives.
There are many features of the Santa Rosa market that are not duplicated in many other parts of the world. Rural areas in West Africa and the Andes (places Freedom from Hunger is more familiar with), for example, do not have such vibrant economic activity for vendors, nor do they have such dense coverage by banks or moneylenders. Nonetheless, the Santa Rosa example illustrates several common features discussed in Chapter Five (“The Price of Money”) in Portfolios of the Poor.
In the last post, I mapped out four conclusions with the intention to expand on each separately. Unfortunately, they are intertwined enough to make that too inefficient. So let me try a different, introspective approach.
It is better to think of the nominal interest charge as a fixed fee for borrowing. What is important is the total amount that must be repaid. If you’ve ever bought a house with a mortgage, you’ve had the fun of being presented, as required by law, with a statement of what you will pay in total over the life of your loan. Wow! The amount, spread over as much as 30 years, is too large to feel relevant to your monthly and annual rhythm.
Like you, the poor vendor in the Santa Rosa market is sensitive to total price of borrowing, but not nearly as sensitive as she is to the amount of the installment payment (daily, in her case). That is because repayment is all about cash flow being adequate to make each of the installment payments on time.
Your primary concern in getting a mortgage is whether you can afford the monthly payment of principal and interest. That’s a calculation based on expected cash flow from salary and other sources. If you can lower the monthly payment by getting a mortgage with less total cost, so much the better, but for most of us mere mortals, just meeting the affordability threshold is enough to decide to make the purchase.
Like the Filipina vendor, you also want convenience, flexibility and reliability in your financing partner. You want a mortgage banker who has the money you need when you need it, with the minimum of paperwork and wait time. (Have you ever lost a home purchase opportunity because you couldn’t arrange the mortgage in time?)
If you anticipate a reduction in cash flow, you want to be able to renegotiate the mortgage terms. If interest rates have fallen dramatically lately, you want to be able to pay off the current mortgage early so you can take a new mortgage with lower monthly payments. You may get a financial windfall and want to pay off or pay down your mortgage without onerous prepayment charges.
And, of course, you don’t want the mortgage banker to share with your in-laws the price you paid for your house, thank you very much! A little privacy, please.
So it is for the Filipina vendor, too.
Now consider if you have only two options for financing. You can go to the implacable, stony-hearted banker who can’t believe you came through the door to ask for such a small loan and adds insult to injury by treating you like dirt just because of what you look like. Or you can go to your sympathetic but flakey relatives or well-meaning but gossipy neighbors who lecture you on your shortcomings or their own troubles and don’t really have enough money anyway, forcing you to go to one after another until you’re ready to scream.
This yawning gap between the most formal and the least formal financing begs for a hybrid approach. Enter the moneylender.
To be continued in the next post (#8) next week – have a good weekend!