Designing loan products to meet client needs is fundamental to the success of a micro-finance organization. Understanding cash patterns of borrowers and the profitability of their businesses helps to match the loan product to their business cycles. The loan term and repayment frequency are possibly the most significant variables in micro-finance and should be suited to the borrowers’ needs. The effect of an increased interest rate on the borrower is relatively less significant than increases in other costs. The method of calculating the interest rate and fees significantly influences the price of the loan.
The objective of this lesson is to highlight the effect of credit on borrower activities. Topics covered include:
- Cash Patterns
- Loan Term
- Loan Utilization
- Loan Purpose
- Interest Rate
- Fees/Service Charges
When clients borrow money, they incur both financial and transaction costs. Financial costs include interest, fees, forced savings, group fund and insurance fund contributions. Transaction costs include direct costs such as child care and transportation costs to attend meetings, and other indirect costs such as time away from the business, plus the opportunity cost of savings.
The objective of this lesson is to explain the effective cost to clients of borrowing and the related yield to the lender. Topics covered include:
- Cost components
- Effective cost calculation
- Effective yield to an organization
- Role of savings
This subject is covered in more detail in the separate study guide on Interest rates and self sufficiency, which also includes a financial calculator.