Loans

International Development written question – answered on 26th February 2009.

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Photo of Annette Brooke Annette Brooke Shadow Spokesperson (Children, Schools and Families), Shadow Minister (Education)

To ask the Secretary of State for International Development pursuant to the answer of 11 February 2009, Official Report, column 2118W, on loans

(1) what assessment he has made of trends in interest rates on microfinance loans in Africa over the last 12 months; and if he will make a statement;

(2) what annual percentage interest rates commercial banks are charging smallholders in Malawi; and what security they require.

Photo of Michael Foster Michael Foster Parliamentary Under-Secretary, Department for International Development

The Department for International Development (DFID) supports the overall monitoring of microfinance through the Consultative Group to Assist the Poor (CGAP), a multi-donor partnership working to expand access to finance, including microfinance.

The most recent detailed research carried out by CGAP on 2003-06 data showed that

"the rates offered by most microfinance institutions (MFIs) compare favourably to informal finance, supplier credit, and the few other alternatives that would be available to MFI clients. In sub-Saharan Africa, interest rates also dropped at a rate of 1.4 percentage points from 2003 to 2006."

This is confirmed by DFID research in Malawi where the commercial banking sector reaches less than 5 per cent. of the population and charges interest of about 16-20 per cent.; down from about 30 per cent. five years ago. Most smallholder farmers do not have anything a commercial bank would consider as security: land is not titled and smallholders in Malawi have an exceptionally low asset base. Microfinance is reaching another 5 per cent. of the households and real interest rates from rural microfinance institutions are estimated at around 45 per cent. However 90 per cent. of Malawians have no access to financial services.

Beyond Malawi, several other household surveys carried out recently in Africa with DFID funding show that the absolute level of interest rate is not one of the detrimental factors that constrain poor people's access to financial services, including microfinance. The promotion of transparency, competition and financial literacy, is very important and in the long run can have a bearing on the level of interest. This is why DFID has recently launched the £4 million Financial Education Fund (FEF), to back the best ideas to help raise financial literacy among poor consumers and small businesses in Africa. The FEF will operate across Africa. In its first round of calls for projects, FEF has received 110 concept notes that are under review.

Further information can be found on the following websites:

CGAP Reference :

http://www.cgap.org/p/site/c/template.rc/1.26.4412

Financial Education Fund :

http://www.financialeducationfund.org/

DFID announcement of the FEF :

http://www.dfid.gov.uk/news/files/alexander-lessons-in-banking.asp

Household surveys :

http://www.finscope.co.za/documents/2008/FSAfricaBrochure08.pdf

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