Essentials of loan products on MYC4

At MYC4, the loan products are at the core of our engagements with both new and existing providers. One key reason that products are critical on the MYC4 platform, is that they spell out how revenue generated from each loan is to be distributed. A provider must be satisfied that the revenue offered through the product is sufficient to make business sense to the institution; while at the same time offering decent returns to the investors/ lenders; and still provide competitively fair priced capital to the borrower. The products also define eligibility criteria, risk assessment methodology and other features.

Agreeing on the product pricing is usually a bargaining process that has several give and takes. Three factors that slightly complicate product pricing are:

1. Most Microfinance Institutions price their loans on flat rate basis, while on MYC4 the loans are priced on reducing balance basis. There is also a slight twist on the reducing balance computation, in that MYC4 utilises effective interest rate (compounding effect), while the industry standard on reducing balance computation utilizes simple/ nominal interest. The effect of this is that the interest rate and APR appear higher on MYC4. We are in process of harmonizing the computation methodology.
2. The concept of APR is not well entrenched in the financial system in Africa; yet APR is crucial in ensuring transparency in lending. It is not unusual to find that top management of an MFI have limited or no idea about APR. It is thus a task to agree on the appropriate APR, given that MFIs mostly focus on the interest element of pricing.
3. Generally speaking, the higher the loan amounts the lower the interest rate should be. This is because the cost per unit is lower on the larger loans (the assumption being that the same effort is used to produce a large as is used on a small loan). However, on MYC4, the larger loans need to offer higher returns to investors in order to attract sufficient capital – thus the larger loans will have higher interest rates. The providers are thus forced to forego part of their mark-up on the larger loans in order to offer fair priced capital to borrowers.

So what exactly is a product? According to Phillip Kotler (a marketing guru), all firms are in the business of satisfying customer needs, and they do this through a product. He defines a product as “anything that can be offered to satisfy a need or want”. Thus we can say that in the financial sector, a product is any offering or proposed solution that has distinct characteristics.

The essential characteristics of a loan product are highlighted here below. The product features on MYC4 are essentially developed by the providers, with MYC4 largely providing an advisory role.

1. Loan amount range: This is essential as different loan products are targeted at different market segments from micro enterprises to small and medium enterprises. The trend on MYC4 is that lower loan amount ranges fund at lower interest rates, because they are easily fully funded by auto-bids from the more socially inclined investors. Larger loans, on the other hand, require crowd-pooling of more investors per loan, and often attract the more commercially oriented investors.
2. Pricing: The pricing component has two elements; the upfront fees (referred to as closing fees on MYC4) and interest (referred to as repayment fees on MYC4). The upfront fees are spread over the duration of the loan so as to arrive at one comparative annual percentage figure, the APR. The total cost of loan to the borrower is the sum of interest income due to investors, MYC4 and the provider mark-up.
3. Loan repayment period: We have flexible and fair repayment terms on MYC4. We recognize that revenue generation patterns may differ; we thus allow a grace period where necessary, and have repayment periods of upto 36 months.
4. Loan terms and conditions: Different loan products have set eligibility criteria, risk assessment criteria, collateral requirements among others. On MYC4, the bidding period is also an essential feature (large loans generally require more days to fundraise).
5. Other features such as insurance and forced savings: Most loans on MYC4 are insured against death and permanent disability of the key person (thus shielding the deceased estate from legal tussles to recover borrowed fund). Most MFIs that offer group lending require borrowers to save a certain portion so as to access funds (this forced savings add to the cost of borrowing, thus a loan with forced savings has a higher APR).

All in all the loans on MYC4 are priced such that the total cost is the same as what the borrowers were paying on the MFIs other loans, or less; but never higher. MYC4 never seeks to cannibalize the market or the provider’s other products; but through use of APR and transparent pricing aims at engaging providers towards lower costs to borrowers. In certain markets, borrowers prefer waiting for longer to receive a MYC4 loan than receive an instant loan from the provider’s other products: the attraction being lower interest rate and reducing balance methodology (which means they only pay interest for the period the loan was outstanding).

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Introducing a new MYC4 Provider: Tujijenge Uganda

Today we have some exciting news to share: Tujijenge Uganda joins the platform as a new MYC4 Provider.

The name may be familiar to some of you; most likely because its sister company, Tujijenge Tanzania, is already operating on the MYC4 platform and has been a Provider since early 2009. Tujijenge Uganda brings something new to the platform though: a focus on small farmers and agricultural loans.

Its head office is located in the small border town, Busia, in Eastern Uganda, but Tujijenge Uganda’s MYC4 loans will primarily be managed from its branch in Soroti, about 300 kilometers from Kampala, where more than 90 % of the clients are rural. Loan sizes will range from a minimum of €200 up to € 7,000, with a maximum payback period of 12 months.

Tujijenge Uganda describes its main product like this;

“The agricultural loans are advanced to support a grossly under-served population regarding financial services. The target market is small farmers focusing on the keeping of livestock like goats, chicken, piggery, apiary and citrus fruit farming. Loans are advanced to buy animal feeds, the animals, pesticides and bee keeping equipment.”

Tujijenge Uganda Borrower

Throughout this week MYC4’s Nairobi staff will be training the Tujijenge Uganda team on how to be a Provider on the MYC4 platform. We expect the first loans to be opened for bidding Wednesday or Thursday. If you want to know more about Tujijenge Uganda, you can visit the new MYC4 Provider Profile here.

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Gatsby Uganda introduces new loan products in response to the sliding shilling

It is no secret that MYC4 investors have been hit hard by currency losses this year. One of our biggest providers, Gatsby Uganda, has decided to act on this fact by introducing new loan products which offer a higher interest rate to investors. Titus Kuria, MYC4’s Credit Operations Manager has worked closely with Gatsby over the last couple of weeks to ensure that the new products are well thought through.

-The Investor Interest Rate is a key determinant of funding. The key thing here is to strike a balance between offering an attractive interest rate to the investors while maintaining a healthy APR to borrowers, Titus explains.

APR means Annual Percentage Rate and is an expression of the effective interest rate that a borrower pays on a loan annually. To accommodate this balance, Gatsby has reduced its own closing fee from 5 to 2 % on selected products and increased the maximum investor rate from 16 to 20 %. The cost to the borrower is thereby unchanged, but investors will have a greater opportunity to make a positive return on Gatsby’s loans.

Gatsby's CEO, Christopher Lumala, in his office

The new products can already be seen on Gatsby’s profile page and the first loans with higher investor interest rates are expected on the platform this afternoon.

As we reported here on the blog last week in a post about the East African currencies, MYC4 wants to encourage investors who invest with an objective of making a positive return to take currency risk into account. This may be done either through demanding higher interest rates or through investing in countries with more stable currencies.

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Susu collectors – an ancient banking system soon ready for MYC4 investors

CEO of Premier Resource Capital in Ghana, Felix Quansar

If you go to a market in Ghana you can hardly avoid meeting some of the Susu collectors. They have conducted their trade, which originates in Nigeria, for at least three centuries. The concept is not only old, it is also simple and a useful service for small traders.

In short it is a system where Susu collectors handle the cash management of micro entrepreneurs or traders – both their savings and their loans. The Susu collectors, who typically have 500 clients, collect an agreed daily amount of savings from the trader every day and deposit this on a bank account. The collector’s fee is the sum of one day’s collections every month.

There are approx. 4000 Susu collectors in Ghana collecting from 650,000 savers, 60% of whom also obtain loans through the Susus and the repayments are recalculated to a daily repayment amount which is collected along with the savings.

Traders pay a small sum to register with a Susu collector. The collector makes his daily rounds and collects a similar amount over a 31-day rolling period from each of his customers. At the end of the period, the collector pays out lump sums to the customers, while retaining one day’s payment from each customer for his services. The system runs so well that people from Senegal, Tanzania and Kenya have come to Ghana to study it, as Ghana has a record of good implementation and governance of it. But as simple as it may be it isn’t always simple or cheap to set up a Susu operation.

Samir knows all about that, he’s the CEO of a small company called Uniplux Ghana Ltd., where Susu is the key. Samir and his partner have had a tough time getting started. They saved money for five years but still needed capital to launch their business, and the banks were either shutting the door on them or demanding a very high interest rate. They’d have to pass on the high interest to their clients which wouldn’t work as they could put their clients at risk of becoming over-indebted instead of helping them grow their micro businesses.

– That’s why we came to you, says Samir, who’s hoping that MYC4’s investors can help.

Same thing with his colleague, who’s running a company called Royal Gold Investment. He had to sell some property to get going and to put in his car as collateral for a loan in a bank – and not only did he have to give it as collateral, he had to hand it over to the bank and park it there for six months.

During a meeting in Accra in February 2009, the GCSCA (Ghana Co-operative Susu Collectors’ Association) confirmed their interest in using MYC4 as one of the loan options to offer their members to access even more affordable financing. Hence MYC4 and GCSCA are working to start supplying the first SUSU collector pilot loans with Premier Resource Consulting as Provider. The project has been long underway, but the first Susu product was approved for the MYC4 platform earlier this month. The first loans are expected to be opened for bidding in the next two weeks’ time.

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