Definitive Measurement of Grameen Interest Rates

MFTransparency just released the definitive analysis of the interest rates of the Grameen Bank. Bottom line: Grameen's rates are low---close to 20% for the standard loan product---and accurately disclosed. And the report is excellent, a model of the transparency it preaches to others.MFTransparency sets itself apart from past analysts of Grameen's interest rates by obtaining precise descriptions of microcreditors' lending products (hidden fees, whether clients must deposit savings as they repay credits, etc.), checking against actual transaction logs, like this:19...and then crunching the raw data in spreadsheets like this:Technically, this is not the first study to dig down to primary data on the Grameen Bank's interest rates. But I believe it is the second, and the first to do it right. (The first one treats savings deposits as if they disappear into a black hole.) Because MFTransparency exists to measure interest rates, it does that very well, having honed its methodology on hundreds of microcreditors over the last couple of years.In December, the Grameen Bank invited MFTransparency to measure Grameen's rates. I assume they did this in response to Tom Heinemann's documentary, which generated negative publicity about Grameen, and in particular claimed that Grameen charges 30%/year. That figure, as I wrote in blogging the documentary, includes an estimate of client transaction costs, such as the rickshaw ride to the weekly meeting; it is interesting but becomes misleading when cited without explanation.The simulations and computations in the report are complex, but the bottom line is simple: what the Grameen Bank advertises as a 20% rate for its standard loan really is 20% (or 22% with compounding). There are no hidden fees. Additional services such as life insurance and savings are optional and therefore should not be construed as part of the price of credit (but see below). And the Bank has a careful bookkeeping system to compute how much interest is due each week as a loan balance declines. At the end of a loan payment cycle, it reconciles what was and what should have been paid, charging or reimbursing for the difference, and assuring that the effective interest rate really does stick close to 20%.In the same way, the report analyzes other kinds of loans: those for education, housing, and struggling members (beggars), which together account for just 8.7% of Grameen's portfolio. In all cases effective interest rates are very close to advertised rates---except for education loans, where effective rates are significantly lower than advertised because of a grace period. As a result, Grameen scores a perfect 100% on MFTransparency's Transparency Index. That's off the charts:

It is extremely rare for an MFI [microfinance institution] to have even one product with a perfect score on the Transparency Index, let alone do so on all their products.

This sterling verdict enters a political environment in Bangladesh that is increasingly hostile to the Grameen Bank. Back in 1997, as she chaired the pivotal Microcredit Summit, Bangladeshi prime minister Sheikh Hasina declared microfinance "one of the great humanitarian movements of history." After Tom's documentary, Sheikh Hasina, once again prime minister, was a tad less kind: "Micro-lenders make the people of this country their guinea pig. They are sucking blood from the poor in the name of poverty alleviation." Today, her government announced the formation of a committee to investigate Grameen. Unclear to me is whether the agenda is more about truth or power. You can guess my prior. Even less clear to me is how far the government will dare go in clipping Grameen's wings.I congratulate the Grameen Bank for its high rating from MFTransparency. Indeed, in my own experience, Grameen Bank is more transparent than its peers. Witness the monthly data disclosure on its website.That said, I hope this does not create the impression that Grameen (and other Bangaldeshi microfinance institutions) have no room for improvement on transparency. Grameen hid the dispute with Norway that Tom Heinemann uncovered. Despite several approaches, it has been entirely unresponsive to me in my attempts to learn more about the plunge in repayments a year ago, the sharp reversal thereof after I blogged it, the appearance of counting bad debt write-offs as loan repayments, and the possibility of capital inadequacy. And, most importantly, the Grameen Bank and other large microcreditors in Bangladesh reportedly are opaque with poor people about the rules that govern their products, such as under what circumstances clients can withdraw savings. Generally, loan rules are complex and not written down for clients. This gives male loan officers discretion over, ahem, interpretation of the rules, and power over their (mostly female) clients, which the loan officers can be expected to sometimes use to respond to the incentives they face for keeping repayment rates high and the whole operation running smoothly. I worry, for example, that even though Grameen clients are officially no longer required to save as they repay loans, that the reality on the ground may be different. Perhaps loan officers commonly mislead clients into believing that they must save, in order to build up a cash buffer at the local bank branch and smooth over missed payments.On that point, a quote from my draft chapter 7:

In Dhaka in 2007, [Stuart] Rutherford introduced me to a client of his SafeSave microfinance project who lived in the slum around the corner from a SafeSave branch. He took pride in showing me the rules for the woman’s loan and savings accounts: in plain Bengali, on a single sheet of paper folded into her passbook. She could not read it but she and Rutherford took further pride in showing me that her school-age son could. Through its transparency, SafeSave implicitly criticized business-as-usual microfinance in Bangladesh.

Those of you with a good memory and the patience to read my previous posts know that I first estimated the Grameen interest rate at about 24%/year, then revised downward to 17--23%. (Though I did not reveal it at the time, both of these posts came out of e-mail conversations with Tom Heinneman, the documentarian.)Here are the differences between my computations and MFTransparency's:

• For reasons just stated, I conservatively assumed that clients must save an amount equal to 2.5% of each loan (as they had been historically, as a matter of policy). Since Grameen pays 8.5% on savings while charging 20% on credit, this raises the cost of credit--about 2.3% in my calculation. But in my spreadsheet, you can change that to 0, in cell B2.
• I tended to emphasize compounded rather than uncompounded rates, which adds perhaps 2.2% more.
• On the other hand, I factored in the requirement that new members buy a 100 taka share in the Grameen Bank, and that those shares have lately paid 30 taka/year in dividends. This ample 30% return reduces the cost of credit by about 1 percentage point. That factor too can be zeroed out in my spreadsheet, in cell B5.
• Finally, and most significantly, as the MFTransparency report convinced me, I made a mistake. Coincidentally, just hours before I learned about the report today, Daniel Clarke delivered the same bad news to me by e-mail. The thrust of my second blog post was that Grameen's unusual and flexible "topping up" mechanism, whereby someone who has repaid at least half the loan can borrow back the repaid principle, raises the average outstanding loan balance (since the balance less often dwindles to zero) without raising the interest cost. That, I argued, reduces the effective rate. It turns out, according to the report, that Grameen adjusts its interest charges to prevent this effect:

  ...the client’s interest payment is only the amount due up to the payment date, again reflecting conventional practice and not altering the APR [annualized percentage rate] of the loan should the client choose to pay early.

So, no need to trust me any longer on the question of the Grameen Bank's interest rate. It is indeed in the low 20's. And as I've emphasized before, that's against an inflation rate that's typically 4% higher than in the West. So if that's where you live, subtract another 4% to adjust your intuition.