Microlending 5 – Default Rate?

Continuing from the last post, the default rate is one of the simplest and most straightforward metrics for evaluating the quality of a loan portfolio. In North America, the default rate for consumer credit is generally over 3%, and in the aftermath of the 2008 financial crisis, it even exceeded 6% at its peak. In Kenya, the default rate for traditional credit is reportedly in the double digits. But guess what the default rate is for the microloans issued through the M-Pesa system that Ruddy’s company operates?

2.7%!

Yes, you read that right—just 2.7%, which is actually lower than the default rate for consumer credit at major North American banks. 😂

Ruddy explained that the main reason for such a low default rate is the small size of each loan—only $30 to $50. Paying back such a small amount isn’t particularly burdensome for borrowers. Moreover, their interest rates are among the lowest in the market. “If borrowers are going to default,” he joked, “they’re not going to default on us since we are one of the lowest rate providers!”

I asked, “So what’s your interest rate?”

He said, “Other microloan companies usually charge 10-20% or more, but we charge around 8-12%.”

I responded, “8-12%? That sounds pretty average. Doesn’t that mean the return for lenders isn’t that high?”

He smiled and said, “Don’t forget, our loan term is only 30 days. In other words, the interest rate is 8-12% per month!”

I was stunned. “Wait, so what’s the return rate for your lenders?” Till next time!