Transcript
Joy: Welcome to Borrowed Money.
Joy: Practical finance for people who lend money they had to borrow first. I'm Joy, and with me is James. Today: what your money costs before you lend it.
James: Good to be here, Joy. Every rate you quote sits on a rate somebody quoted you first.
Joy: James, let's start simple. What is different about lending in a microfinance institution?
James: You do not own the money. You borrowed it — from a bank, from a social lender — and they set the price and wrote it into a contract. Not a dividend voted at a meeting. A rate, a schedule, a renegotiation date.
Joy: And a manager who never adds it up?
James: Prices by copying. Whatever the institution across town quotes, you quote. They may be funded far more cheaply than you are. You find out a year later, when the rate is fixed.
Joy: So where does a price start?
James: Think of a shopkeeper filling her shelves on credit. She prices nothing until she knows four things. What the supplier charged. What the shop costs. What will spoil. What she must keep. You are that shopkeeper.
Joy: The first one.
James: What your money costs you. Not your newest rate — the blend across every source behind your loan book, every loan you have out. Weight each by the share it funds.
Joy: Show me that.
James: Invented numbers, so use your own. Three quarters of the book borrowed at fourteen percent. The last quarter your own capital, at six. Three quarters of fourteen, ten and a half. A quarter of six, one and a half. Twelve percent blended. A plain average would say ten — two points too low.
Joy: So weight by size, not by count. And the second?
James: Exactly. What it costs to run the operation. A year of salaries, branches and field time, over the average size of your book. Call it eight percent.
Joy: Number three. And this is the one I think people get wrong.
James: What you expect to lose. Not last year's losses — what the loans going out this month will cost you. Call it three percent, rounded up rather than down. Nothing sits behind that borrower. No savings, no shares to set the loss against.
Joy: And the last one?
James: Margin. Not a bonus. Your funder reads it before pricing your next line. Call it three percent. Twelve for funds, eight for operations, three for losses. Twenty-three is what the loan costs you. Twenty-six is your floor — what the book must earn across the year, not a number to print on a schedule.
Joy: Give me an example.
James: Say a trader borrows for a year and you quote twenty. She repays every instalment. A perfect loan. But funding took twelve and operations took eight. The twenty is gone before anyone defaults. At twenty-six, those three points pay for the loan beside hers that fails.
Joy: And how often do you redo the sum?
James: Every time your funding changes. A line reprices at renewal, or a new one costs more. Your floor moved the day that letter was written — not the day you read it. A SACCO settles the price of its money with its own members. Yours is settled for you.
Joy: And the platform?
James: In CAMS, portfolio reports show what each loan product actually earns, so a product priced under your floor shows up as a number, not a surprise.
Joy: The takeaway: count all four costs before you quote, weight every funding source by size, and reprice the day your funder does. Thanks James.
Joy: And thank you for listening to Borrowed Money.