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In Ecuador, Cap on Interest Rates Pressures Microlenders to Increase Loan Sizes

Published on May 19, 2010

Ecuador’s central bank, Banco Central del Ecuador (BCE), recently further reduced the cap on annual interest rates to 30.5 percent from 33.9 percent for retail microlenders, and to 27.5 percent from 33.3 percent for all others lenders. Since 2007, when the national government enacted banking reforms allowing the central bank to set a maximum interest rate for all banking institutions, the cap for microlenders has been dropping.

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In Ecuador, Cap on Interest Rates Pressures Microlenders to Increase Loan Sizes

Ecuador’s central bank, Banco Central del Ecuador (BCE), recently further reduced the cap on annual interest rates to 30.5 percent from 33.9 percent for retail microlenders, and to 27.5 percent from 33.3 percent for all others lenders. Since 2007, when the national government enacted banking reforms allowing the central bank to set a maximum interest rate for all banking institutions, the cap for microlenders has been dropping.

According to Javier Vaca, the executive director of Red Financiera Rural (RFR), an Ecuadorian network of organizations that is focused on facilitating and promoting access to financial services, this forces microlenders to increase the average amount of their loans. Some are left with no choice but to sell their portfolios to larger institutions with lower fixed costs. Mr. Vaca claims that four unnamed microbanks have increased their average lending amount to USD 2,500 from USD 1,500. Meanwhile, smaller lenders have increased their average loan size to USD 600 from an average of USD 200. There is an increasing risk that people needing small loan amounts will no longer be served.

Ecuador’s central bank, Banco Central del Ecuador (BCE), recently further reduced the cap on annual interest rates to 30.5 percent from 33.9 percent for retail microlenders, and to 27.5 percent from 33.3 percent for all others lenders [1]. Since 2007, when the national government enacted banking reforms allowing the central bank to set a maximum interest rate for all banking institutions, the cap for microlenders has been dropping. According to Javier Vaca, the executive director of Red Financiera Rural (RFR), an Ecuadorian network of organizations that is focused on facilitating and promoting access to financial services, this forces microlenders to increase the average amount of their loans. Some are left with no choice but to sell their portfolios to larger institutions with lower fixed costs [2]. Mr. Vaca claims that four unnamed microbanks have increased their average lending amount to USD 2,500 from USD 1,500. Meanwhile, smaller lenders have increased their average loan size to USD 600 from an average of USD 200 [3]. There is an increasing risk that people needing small loan amounts will no longer be served.

Ecuador’s microfinance sector is dominated by four commercial banks; 15 NGOs; 40 larger, regulated co-ops; and about 1,200 smaller, unregulated co-ops. The credit portfolio of the microfinance institutions in Ecuador that report to the Microfinance Information Exchange (MIX) Market is worth approximately USD 1.2 billion. These institutions have USD 1.5 billion in total assets, approximately 693,000 active borrowers with an average loan balance of USD 1,287 per borrower, and 1.2 million depositors with USD 671 million in total deposits [4]. By Conner Brannen, Research Assistant Sources and Additional Resources: [1] Banco Central del Educador (BCE): http://www.bce.fin.ec/ [2] Red Financiera Rural (RFR): http://www.rfr.org.ec/ [3] Business News Americas: “Ecuador Caps Interest Rates, Forces MFIs to Increase Loan Amounts,” by Peter Krupa, May 6, 2010: http://www.bnamericas.com/news/banking/Interest_rate_caps_forcing_microlenders_to_increase_loan_amounts [4] MIX Market: Ecuador: http://www.mixmarket.org/mfi/country/Ecuador [5] MICROCAPITAL BRIEF: Government of Bangladesh to Limit Interest Rates for Microfinance Institutions (MFIs), April 13, 2010: http://www.microcapital.org/microcapital-brief-government-of-bangladesh-to-limit-interest-rates-for-microfinance-institutions-mfis/ [6] MICROCAPITAL CATEGORY: Interest Rates: http://www.microcapital.org/category/interest-rates/ Browse the MicroCapital Universe and add your entry to the wiki at http://www.microcapital.org/microfinanceuniverse/

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