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The high cost of moneylenders

The high cost of moneylenders

THE COST of using an alternative method of rural financing, such as going to a moneylender,

can be breathtakingly high. In one recent example, a farmer in Svay Rieng (who is

now a happy client of an MFI) described how he bought a bag of fertilizer, on credit,

from a local shopkeeper. At the end of the agricultural season (approximately six

months later) he went back to the shop to pay back the loan and the interest. He

paid 14,000 riel. The original cost of the fertilizer was 5,000 riel.

"From our understanding, moneylenders and shopkeepers charge between 10 and

30 percent, which is pretty high," said David Leege of CRS. "But the money

lender is a business person, not necessarily unscrupulous," he added. "There

are a lot of risks associated with lending money, and the way they cover those risks

is to charge huge interest rates."

And Neal Youngquist of World Relief says, "People can lose land to moneylenders

very easily when they get trapped in exorbitant interest rates."

Some NGOs that provide financial services charge interest rates, some do not. It

is a continual bone of contention in the microfinance world: some argue that the

poor cannot afford to pay interest, others say that without interest, an organization

can never become sustainable.

"Look at what the moneylenders charge," said Youngquist. "They force

people to pay much higher rates than NGOs. The poor are capable of paying a reasonable

amount of interest."

Leege agreed.

"If you're running a professional operation that provides a service you want

to maintain over time, and you're faced with a competitor who is continually subsidizing

their service [not charging interest], what happens? It's not just that the unsustainable

service collapses in a few years, but that by providing unsustainable services you've

poisoned the well. Clients say, 'They charged nothing, why can't you?'"

And there's one more unexpected side-effect of the lower interest rates, according

to Leege, one which will certainly have a beneficial effect on all the population.

"We found that the rates of the moneylenders and shopkeepers in the areas where

we are doing our projects have dropped significantly - by half or more. Once you

put the competition in the rural market, you start to get the rate to a much more

affordable level."

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