Click here to Download the spreadsheet in Microsoft Excel format. (Uses data current as of 5/10/11)
What You’ll See
There is just one sheet, “Interest Rate”, which contains 5 distinct variable areas which I will describe in detail below.
How It Works
The Variables come from an industry standard interest rate formula found in numerous places, but using one of our favorite sources it is from page 149 of Microfinance Handbook .
Administrative Expenses include such things as Operating Costs, Cost of Funds, and Loan Loss. These are shown as a % of Average Outstanding Portfolio (as are all variables).
Loan Loss includes the total amount written off as an aforementioned percentage.
Cost of Funds includes the costs of financing operations, such as payments on loans we may have taken, assets, inflation, etc.
Capitalization is simply the rate at which we wish to grow as an institution.
And finally, Investment Income if we are trying to finance our operations through the stock market or other market value mechanism.
This tool is fully customizable, so feel free to experiment on your own. It is currently set up to reflect La Ceiba’s values.
For La Ceiba, Administrative Expenses is where the bulk of our interest rate value comes from. Operating Costs, including our Loan Officer’s salary, has been estimated at $1500 annually. Cost of Funds are low, since our funds are donor-based. Loan Loss will be discussed below. All these components are subtracted, and taken as a percentage of Average Outstanding Portfolio, determined to be $5866.47. This produces an AE value of 0.26
Loan Loss is the second largest component to our interest rate. It takes the annual value written off (amount written off per year), over the average outstanding portfolio, providing a Loan Loss value of 0.25, which contributes to Administrative Expenses.
Cost of Funds are Zero, since we have not taken a loan for ourselves or have any other similar liabilities.
We set a Capitalization rate of 5% because we want to be a growing institution. Feel free to adjust this number and see how it affects the result.
Finally, we have no investment income.
The Formula for calculating the interest rate is complex, but can be found in the Microfinance Handbook on the page indicated. This formula, with the given variables, provides an Interest Rate of 72.99%
If La Ceiba does not make changes, we need an interest rate of 72.99% to run an annual profit. This is far higher than most comparable micro-finance institutions, and not a desirable recourse to some of the changes we’ve proposed. It is far better for our clients to reform the program itself, rather than to keep it but with much higher interest rates.