4. Proposed Microfinance Model for Ecuador
4.2. Commercial management
4.2.3. Product and Service
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necessity. The segmentation is not based on gender but in poor living conditions. As mentioned before, Ecuador has three regions and this project could be applied in all of them with the same principles, directed to different types of businesses in each one.
It is almost impossible to implement by once a project that impacts the whole potential population, but it would increase gradually.
4.2.3. Product and Service
Start by providing the poorest of the poor people in Ecuador a small loan to launch their own micro businesses. In a later stage, it would provide not only loans, but also a variety of financial and social services. Give financial services such as savings, money transfers, insurance, and payments. Offer social services such as health care, education, housing, and others.
4.2.3.1 Loan Size
Provide loans that gradually grow from USD 20 to USD 600. The upper limit of the loan is USD 600 mainly because poor people are not used to have or manage much money. The second reason is that at USD 600 starts the microloans at financial institutions such as banks and cooperatives.
Nimal, (2006) says that short loans are more expensive in their administrative costs than large loans. Commercial banks most often deal with large loans, and their transaction costs are lower than those of MFIs on a per unit basis. Thus, commercial banks are able to charge lower interest rates than MFIs.
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4.2.3.2 Loan Interest Rate
Provide loans with a 30 per cent of interest rate. Ecuador’s central bank, recently “changed the cap on annual interest rates to 30.5 percent from 33.9 percent for micro lenders”54. Up to 2014 the average of the effective benchmark lending rate for Microcredit in Ecuador is 27 per cent.
All interests are simple interest, calculated on a declining balance method. This means, if a borrower takes an income-generating loan of say, USD 100, and pays back the entire amount within a year, the borrower will pay a total amount of USD 130, i.e. USD 100 as principal, plus USD 30 as interest for the year, equivalent to 30 per cent.
One of the major ethical concerns in the microfinance industry has been the interest rate.
Grameen Bank interest rates are typically 20 percent but in other countries and institutions they can be much higher. The global average interest rate is estimated at 37 percent, with rates reaching as high as 70 percent in some markets55.
According to Kiva Microfunds56, a non-profit organization with a mission to connect people through lending to alleviate poverty, the annual average interest rate of the microfinance network is 35.21 per cent.
The Transparent Pricing in the Microfinance Industry Organization57, analyze the microcredit
54 http://www.microcapital.org/microcapital-brief-in-ecuador-cap-on-interest-rates/
55
http://newint.org/books/reference/world-development/case-studies/poverty-microcredit-grame en-bank/
56 http://www.kiva.org/about
57 http://data.mftransparency.org/data/countries/ec/data/
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situation in different countries. The following graph is created with the information taken from the Financial Rural Network; it demonstrates the relationship between loan size and interest rate in Ecuador. It shows the differences between the NGOs, Private For-Profit Organizations (Banks), Cooperatives, and others. The effective interest rate includes interest rate, fees and security deposit.
Figure 1. Microfinance Interest Rates in Ecuador
4.2.3.3 Loan Terms
The borrowers must form a group of five persons of the same gender, but not related (not family members or relatives). The first time the loan is given only to one member of the group. When the first member repays, then the first and second member can get their loans.
When the first and second members repay, then they and a third member can get their loans.
The model works with the same mechanism until all the members get their loans.
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Loans are given in a period no longer than a year in two payments a month. The first time borrowers must repay in a period no longer than three months. For experienced borrowers the loan term and amount can vary depending on the credit history of each borrower.
4.2.3.4 Collateral
There is no financial collateral. The most important guarantee is the solidarity and interaction of the group formed by five borrowers. Because it is a chain, the members of the group need that the person who has the loan makes the repayment in order to get their loans.
Another type of control is the period of the loan and the loan amount. At the beginning the borrowers are allowed to ask for a maximum loan of USD 100 for three months period; it means that 1.4 years each member is allowed only for asking once and no more than USD 100.
The staffs in the loans disbursement and the analysis of the availability of the business and supervision are also very important since they are going to be monitoring the micro business and the repayments.
Some of the people in this segment may receive the welfare bonus from the government.
The project works with the government, so if there are more than three arrears (one and a half month), the welfare bonus should be stopped. Additionally, the Central Bank in Ecuador establishes a mandatory provision of one percent of the portfolio as a guarantee of the unrecoverable loans. Since this business in theory tends to have a higher risk, in the financial projections the provision is considered of 1.5 per cent over the portfolio.
4.2.3.5 Loan Purpose
The purpose must be for a business with a short term return (one week), especially in rural
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areas. The most important lines of a micro business may be buying tools to sell a service and buying thing to resell them. For example, buying tools to paint houses, paint the nails, clean houses, make desserts or candies, wash cars, make candles, wash dogs, haircut, repair furniture, buy a printer and sell copies, buy food in general (hot dogs, tacos, patties), buy costumes to animate children's parties, locksmith, sewing, shoe polish, and others,. When people borrow for buying things to sell, it could be candies, fruits, vegetables, recycling products, flowers, bottles of water, music in cds, handicraft, low cost jewelry, make up, cards, small toys, and others.
As in the previous examples, there are many different types of business that a borrower can start with a microloan everywhere; but in Ecuador, there are others, depending on the region at which the borrower locates. For instance, in the Coast, people can sell the beach fruits (mango, watermelon) or other products such as beer, snacks, or hats, and make tattoos or piercings. In the Highlands people can start small business especially in food and coffee because the weather is cold and also raising pigs and chickens and selling eggs or milk. In the forest the most important source of income is the tourism, therefore a rentable micro business is selling many types of souvenirs.