Hanoi: A little bit of due dili in the markets

Photo: Kat with a potential client in Hanoi markets; Kat with Mr. Duc, Binh Minh credit officer, and potential client in Hanoi market

In order to be able to support microfinance initiatives, it's really important to get a better sense of the economics of our clients' business. So for instance, if our goal is to disburse individual loans to market vendors, it is important to understand how the market vendors' business works: what's the average inventory, what's the turnover, how much do vegetables cost, and how much do vegetables sell for? What is the seasonality, what are the daily margins and profits....Sometimes, the market vendors purchase all of their inventory on credit in the morning from money lenders and the vendors must repay the money lenders at 120% at 4pm the same day. So let us take the example of Ms. Lan. If Ms. Lan purchases $10.00 of vegetables (taking $10 credit), she must repay the money lender $12 later the same day. If she were able to sell the vegetables for $12, she has lost her margin. The money lenders are sometimes called 10:12 men (indicating their interest rates). Often a loan as small as $50 would enable someone like Ms. Lan to purchase her inventory for the entire week, avoid the money lender, and make a nice little profit to expand her business....I must be careful around the markets because I am surely taking away some of their margins!

I would like to make this note a bit clearer. It is easier for poorer people (those living on less than $2 a day) to pay back loans in small installments over the period of the loan as opposed to paying back the loan in one lump sum at the end of the loan. Actually, it is hard for very poor people to pay all of the loan back at the end of the loan. A lump sum repayment plan is not a good product for poor people as it is hard for them to have that much money at one time. It is easier for poorer people to pay back the loan gradually over time, say with weekly repayments of the loan (these are called principal payments). The borrower will be responible for paying back the principal loan as well as paying interest. Let us use the example of Ms. Lan again. Ms. Lan has several different options. She can take out a $10 loan and repay it the same day from a money lender, generally paying back the money lender $12. Ms. Lan can take out a $100 loan from the State Bank for the Poor. She would have to pay interest payments (generally 12%, so $12 for the year) and the loan principle in one years time. It is hard for Ms. Lan to ever have $100 on hand. Her rate of potentially defaulting is quite high. A third option would be for Ms. Lan to take out a loan from a microfinance organisation (for instance, Entrepreneurs du Monde). She would pay weekly interest payments of 25 cents (approx. 15%, or $15 a year) and weekly principal payment of $2. After one year of doing this, her loan is repaid and she can get a new loan. She does not have to worry about having $100 on hand. Also, she can use the profits from the business to pay the weekly repayments.