Lendwithcare only works with local partners that charge responsible interest rates (or other charges). Partners must ensure the cost of borrowing is affordable for target communities and is communicated transparently. We regularly check to ensure the interest rates that our partners charge are reasonable and fair according to the local context, which often includes providing very small loans to isolated rural borrowers. You can find detailed information on each of our local development partners, including the interest rates charged, here.
This is a key part of Lendwithcare's eligibility criteria, which all local partners must meet to work with Lendwithcare. Although a solid financial performance is among the requirements, of paramount importance is a strong social development mission, which includes targeting low-income populations who are usually excluded by commercial banks.
We also actively promote an ethical lending policy. Although it is impossible to screen each and every loan that a partner disburses, we do carefully review each loan featured on Lendwithcare and it is very important to us that Lendwithcare funding is used in a socially and environmentally responsible way. For example, we will not fund loans that involve poor animal welfare, such as caged egg production, or could be destructive to the environment, such as charcoal production. At the same time, we proactively encourage loans that create employment opportunities for the very poor, promote sustainable agriculture, recycling, and renewable energy and energy efficiency.
Why do microfinance institutions charge interest on loans to people living in poverty?
Microfinance institutions generally charge annual interest rates of between 10-40%, although some charge lower or higher than this range. Apart from working in environments where inflation is higher, there are a number of reasons why the interest rates charged can sometimes appear high:
- The administrative cost of making many small loans is much higher than making fewer larger loans. For example, it takes less time for staff to make one loan of £10,000 than 100 loans of £100 each.
- Loan officers must work longer and harder to assess the feasibility of each loan application and thereby reduce risk because borrowers cannot generally offer traditional collateral nor do they have regular salaried income.
- Organisations providing microfinance services often operate in geographically remote areas with low population densities. This means that they incur greater operational costs, especially when they often travel to each borrower to disburse loans and collect repayment.
In recent years, microfinance institutions have focused increasingly on making their operations financially sustainable by charging interest rates that are high enough to cover all their costs. This approach can ensure that they can continue to operate and indeed expand to serve more people. If they do not make their operations sustainable then they must continually be reliant upon subsidies from donors, which may or may not be forthcoming, or they may have to close down altogether since they cannot cover their costs in which case many low-income people would certainly be worse off. Lendwithcare provides loans at zero interest with the aim of helping our local development partners to increase their loan books and the number of low-income people they can reach without adding additional administrative costs to the organisation and ultimately the end borrower.
We're proud to introduce a new way to support low-income families most at risk of climate change through Lendwithcare. Find out more about making a grant today.