Logo of Phnom Penh Post newspaper Phnom Penh Post - Micro-finance interest rates

Micro-finance interest rates

Micro-finance interest rates

Dear Editor,

Thank you for Caroline Green's article dealing with some of the serious problems

of micro-finance.

One aspect that requires further explanation is the understating of annual interest

rates that occurs when rates are quoted per month. A loan at interest of 5% a month

is not equivalent to an annual rate of 60% if the loan is repaid in monthly installments.

If I borrow $120 for a year at 60%, at the end of the year I return the $120, plus

60% x $120 = $72. I have bought the use of $120 for a year, at a cost of $72.

But if I borrow according to the "balloon approach" described in the article,

I am required to pay 5% of $120, or $6, at the end of each month, and to pay $120

at the end of the year. This is clearly more disadvantageous to me, because the cost

of the loan is still $72, but I do not obtain the use of $120 for a full year.

To find the real annual interest rate in this case, we need to regard the $6 monthly

payments as repayments of the principal. Then the final payment of $120 consists

of two elements: $72 in interest and the remaining $48 of the principal that has

not yet been repaid.

In this example, I have obtained, not the use of $120 for a year, but the use

of $120 in the first month, the use of $114 in the second month, the use of $108

in the third month, and so on down to only $54 in the twelfth month. Thus the real

amount of my loan during the year is not $120, but the average of the 12 monthly

figures, which comes to $87. Since I have paid $72 to obtain $87 for a year, my interest

rate is 72 divided by 87, or slightly less than 83%.

If the total repayment ($120 + $72) is made in equal monthly installments of $16,

the annual interest rate is of course even higher. In this case, the borrower obtains

the use of an average of only $32 for the year and pays interest of $72, so the interest

rate is 225%. Even if the so-called monthly rate is reduced to 3%, a loan repaid

in this way has an annual interest rate of 95.6%.

- Allen Myers, Phnom Penh

MOST VIEWED

  • Cambodia’s image problem

    In opening remarks at a recent event, Secretary of State at the Ministry of Foreign Affairs and International Cooperation Luy David said information can be a double-edged sword. He told a European Institute of Asian Studies (EIAS) briefing seminar that the media has unfairly presented

  • PM Hun Sen says dangers averted

    Delivering a campaign speech from his home via Facebook Live on Thursday, caretaker Prime Minister Hun Sen said his Cambodian People’s Party (CPP) had carried the country through danger in its latest mandate. He was specifically referring to the threat of a “colour revolution”

  • Kingdom's trade deal with EU questioned before poll

    A European Union (EU) mission met with senior government officials at the Ministry of Interior on Tuesday as the 28-member bloc monitors an agreement under which Cambodian goods reach the crucial European market tariff-free. Some 10 commissioners are in the Kingdom as part of a seven-day

  • A new carrier takes off in capital

    Cambodia Airways, the latest passenger airline to enter the Kingdom, launched its first domestic flight on Tuesday. Flight KR801, carrying 145 passengers, left the Phnom Penh International Airport at 9:50am and landed in Siem Reap at 10:35am in an Airbus A319. Cambodia Airways marketing and branding