Sunday, January 25, 2015

Why do we lend?



I recently spoke with Don Daniel, a small business owner, in Matagalpa. He said to me that he had recently gotten approved for a loan with a 38% APR.


 Don Daniel: "It's great deal!"
 Berly: "I think that sounds rather high. Why do you think that's a good deal?"
 Don Daniel: "The other bank would charge me 10%"
 Berly: "Well, 10% is a much better rate. That's a better deal."
 Don Daniel: "They'll charge me 15% per month."
 Berly: "Whoa! Are you sure? 15% PER MONTH? That doesn't sound right."
 Don Daniel: "Yes, that's the standard here in Nicaragua."

Don Daniel's small construction company is pretty successful. His business wouldn't meet the requirements for a PHPG loan because it's too big. His options for credit are limited. The options for PHPG  clients, are even fewer. Many work informally, and as because of this don't have the credit history to apply for a loan. They don't have wealthy friends that can act as guarantors, They don't need to borrow $1,000 they need to borrow $100.  This is why we do the work we do. Access to credit matters. It's an opportunity and a tool that is much harder to have if you're poor.

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