The efficiency of credit-granting NGOs in Latin America
- R. H. Schmidt and C. P. Zeitinger (1996). Savings and Development, 353-383
- Abstract: For more than ten years now, the importance of small and very small, or micro, businesses has been recognized by the major donor institutions, and Non Governmental Organizations (NGOs) have come to be considered as particularly well-equipped to provide credit to this target group. However, there is, so far, no systematic evidence which would shed light on the questions of whether NGOs are indeed able to perform this function, how efficient they are as financial intermediaries, and whether they can be financially viable. The paper reports the results of an empirical investigation into the efficiency of a sample of 15 credit-granting NGOs in eight Latin American countries which was undertaken in 1992, and discusses implications of the results for the policy of donor institutions in the field of small and micro-enterprise financing. The NGOs studied in the paper fall into two groups. One group follows the traditional approach of providing a comprehensive package of services and does not consider it feasible - or, indeed, important - to cover costs, while the NGOs from the other group follow a "commercial approach" which consists in concentrating on the provision short-term loans at interest rates which are supposed to be high enough to cover the total costs of lending. Loans from credit-granting NGOs are quite expensive for the borrowers. The average cost of borrowing from the 15 NGOs in the sample is found to correspond to an inflation-adjusted (or real) annualized interest rate of 45%, while the average loan from the NGOs of the second group cost 88%. The surprisingly high costs of the loans for the borrowers are, at least in part, explained by the surprisingly low productivity achieved by the NGOs and, correspondingly, the high costs of lending they incur. The margin between the financing costs of the NGOs and the rate of return which they would have to earn in order to be able to cover their administrative and risk-related costs amounts to 72%, and total lending costs, which in addition include the cost of funds, are even slightly above 100% (annualized and not adjusted for inflation). A comparison of productivity reveals that the NGOs from the second group are only slightly more productive than those from the first group. Although some of the efficiency-oriented NGOs of the second group charge their customers exorbitant rates of interest, only one NGO in the entire sample could, in 1992, cover its total costs. On average, the NGOs belonging to the first group required subsidies - or incurred losses - during the course of a year which amounted to roughly half of their loan portfolio. But also those from the second group had total costs far in excess of their revenue. The credit-granting NGOs in the sample are neither efficient providers of loans nor are they anywhere near financial viability. The paper concludes by arguing that despite these findings it would be premature to conclude that donors should not try to use NGOs for channeling their funds to the target group. There is still a need for the services of credit-granting NGOs, and other types of institutions do not seem to do much better. However, if they wish to remain active as financial intermediaries between donors and target groups, NGOs will have to adopt a different and more efficient credit technology and undergo far-reaching institutional changes. Donor agencies should support these changes and help the more efficient NGOs to become small formal target group-oriented banks.
- Theme: Finance
- Keywords: credit delivery, donor policy, microenterprise finance, NGO performance, Latin America
- Reference type: Journal Article
- Geographic location: South America, Global South