A Bump in the Road

Potholes are commonplace in the streets of Maputo. The bump that I hit today was more figurative, but no less frustrating.

A few weeks ago, I was excited about the possibility of partnering with an existing micro-credit lending institution, leveraging its existing infrastructure and experience for maximum results. In Sunday's blog posting about Graduation Day, I first expressed the possibility of a chip in the veneer:

The participants [of our first micro-enterprise training program] challenged the bank's business model and interest rates, and provided suggestions to one another about credit options that might be superior.

I spent this morning exploring micro-credit options that exist for poor entrepreneurs in Maputo. I didn't expect to run up against such discouragement.

There are three micro-credit banks officially registered with the government of Mozambique: Banco Oportunidade, at which my comments in the previous posting were directed (operated by Opportunity International); NovoBanco, which is operated by Pro-Credit; and SOCREMO, which until recently was owned by the state.

All three offer similar loan terms: they require the lender to have a track record of success as demonstrated through an existing business, and they charge crippling rates of interest: for the smallest loans, the three charge from 5.5% to 6.5% per month. That's 90.1% to 112.9% per year. Business success is a lot more difficult to come by with such a high cost of capital.

Not to mention that, in Canada, those rates would be a Criminal Code offense.

(For the armchair economists in the group, you're right -- developing nations do have higher interest rates than we would expect to have in a developed nation. But not that high. The Banco de Moçambique, Mozambique's central bank, reports that its overnight rate is just below 16% per annum, and inflation has been slightly negative for the past quarter.)

Micro-credit is supposed to be a broadly-accepted development tool. It's supposed to have freed poor entrepreneurs from the grips of money lenders and their usurious interest rates. Last year was even declared the International Year of Microcredit by the United Nations and a cadre of other well-respected multinational organizations.

Why, then, are the poor still faced with such steep interest rates? And what requires an organization such as Opportunity International -- operating as a registered charity in developed nations, receiving donations from well-intentioned Westerners -- to charge such a high rate of interest?

There must be a good explanation, but I haven't heard it yet.

The potholes in Maputo are numerous and deep, but none yet deep enough to have swallowed my hope. Tomorrow we'll start looking for alternatives.