What is the difference between Lenders Without Borders (LWB) and Community Microfinance (CML)?
Even though LWB and CML work closely together they are two different entities with two different roles. CML as a microfinance company manages the loans to the business owners. The CML staff assess potential clients, disburse the loans and handles repayments. LWB is a platform for investors. LWB´s role is to attract investors and provide them with interesting opportunities. LWB does not do lending itself.
Is Lenders Without Borders a profit driven organization?
Yes. At Lenders Without Borders we believe that the people of Uganda need a global community that believes in them and what they are doing rather than pity them. We want to show that Uganda is a country that is moving forward and where opportunities for profitable investments are many. Therefor it would be a bit contradictory if LWB itself was not a for profit organization.
When it comes to choosing partners, LWB will only work with for profit organizations. In addition to fitting better into our company profile, the incentives for profit driven organizations to avoid credit losses are higher. In the current setting, both LWB, its partners and you share the same goal of finding business owners with the potential to benefit from and also repay loans.
Isn´t the interest rate charged to the borrowers; 36%, very high?
A yearly rate of 36 % is low, both if you compare to what other microfinance institutions charges and if you take into consideration that the average lending rate at the formal banks in Uganda is around 20%. But off course, compared with what you might pay for your mortgage loan in Europe, the interest rate seems high.
When thinking about interest rates and microfinance, you have to have in mind that there is a reason why formal banks don´t see the typical microfinance client as profitable. Partly this is because they lack the kind of securities that banks usually use and the loans are therefore riskier. But also because the operational costs associated with assessing and monitoring clients is not proportional to the loan size. The cost is about the same for a loan of $ 200 as for a loan of $ 20 000 and as a consequence, the relative cost for the small loan is significantly higher.
Can I instead make a donation?
What happens if my business owner default on his/her loan?
As an investor, you invest in one particular business owner. However, CML does not keep your money in a separate accounts on each investor. That means that if one business owner defaults, the credit loss will be shared among all investors. And since CML uses some of the interest rate charged from the borrowers to put in a loan provision fund, there will still be funds for paying back the full amount to each investor.
Who carries the currency risk?
You as the investor take the currency risk. That means that if the Ugandan shilling depreciates relative to the currency in your country, you will get less back. It can also be the other way around – if your currency depreciates you will get at higher return than expected.
At LWB, we are currently looking into how we can be able to provide hedging, that is loans with zero currency risk. Follow our blog for updates!