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Q: Microlending default rates and why ( Answered 5 out of 5 stars,   0 Comments )
Subject: Microlending default rates and why
Category: Business and Money > Finance
Asked by: lwc1234-ga
List Price: $20.00
Posted: 06 Dec 2005 12:12 PST
Expires: 05 Jan 2006 12:12 PST
Question ID: 602257
I would like to know what microlending default rates generally are, how their
default rates compare to traditional default rates on things like
credit cards, and I'd like a few articles that clearly articulate why
there is a discrepancy in default rates (if there is a discrepancy).
Subject: Re: Microlending default rates and why
Answered By: wonko-ga on 06 Dec 2005 13:32 PST
Rated:5 out of 5 stars
Microlending in the United States differs from microlending in
developing countries in terms of the interest rates charged and the
minimum amount required for a loan.  In the United States, which
requires larger loan amounts at higher than normal interest rates to
offset for greater risk, the default rate is about 4%, which is
characterized as being similar to bank loans.  Credit card charge-off
rates have ranged between 5.7 and 6.9% in recent years.

"Microloans Can Make a Big Difference" by Louise Witt, Fortune,15704,1048190,00.html

"U.S. Credit Card Quality Index: September Performance Stays Strong;
Awaiting Impact From Bankruptcy Filings" Standard & Poor's (November
4, 2005)

Microlending in developing nations is quite a bit different from that
in the United States.  Many lenders have no minimum loan amount, and
while they still charge high interest rates by United States
standards, it is typically much lower than locally prevailing rates
(20% rather than 150%, for example).  The default rates are estimated
to range between 2-8%, compared to 60-70% for similar loans made by
traditional lending institutions in these regions.  Many programs are
described as having default rates of as little as 1%.

"Up From The Rubble; Can $2,000 loans help revive a war-torn economy?"
by Kerry A. Dolan (April 18, 2005)


The reasons for the relatively low default rates are described as
being based in distinctive features of the loans.  "How can this
apparent miracle be explained? The answer, according to Ghatak, lies
in several distinctive features of the Grameen Bank's group-lending
programme that help it to reduce the transaction costs associated with
lending. In particular, borrowers are asked to form small
self-selected groups from within the same village. Loans are given to
individual group members, but the whole group is jointly liable for
the repayment of each member's loan. Since borrowers from a given
village are likely to have much better information about each other
than an outside lender, the bank is able to induce the borrowers to
screen out the bad risks using the instrument of joint liability."

Another important consideration is the motivation of the business
people themselves.

"And the story is the same the world over as is the demographic of the
microloan borrower ? based on everything that I have seen to date ?
these borrowers are like us. The core of so many societies.

Who hasn?t heard the adage that says ?give a man a fish and he?ll eat
for a day; teach a man to fish, etc. etc.??I take that one ? no ?
several steps further ? give a woman the knowledge and means to fish,
or bake bread or make clothes and she will sell you the excess.
Provide for her family, build her community.  That?s entrepreneurship
and market development in one simple stroke."

"Superintendent Taylor Remarks on Microfinance and Microlending" State
of New York Banking Department (October 19, 2005)



Search terms: "credit card" charge-off rates 2005; microlending default rates
lwc1234-ga rated this answer:5 out of 5 stars and gave an additional tip of: $4.50
Excellent answer, exactly what I wanted.

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