Originally posted by vinvestor2010
The loans are at an average rate of 20-30%.
So if the poor have a cost of capital of 30%, do their businesses earn return on capital greater than 30% because only then they get richer i.e. return on capital is greater than cost of capital then we get richer.
Something to think about |
Their micro businesses are typically a combination of capital and their labor invested and hence the returns cannot be computed in terms of the capital invested alone.
For eg, a poor person might use the loan to buy, say, a rickshaw and vegetables and then sell those from door to door. The returns he will get would be a combination of the capital invested and his full time labor in selling from house to house.
Hence, the returns here (if calculated merely in terms of capital invested) would be very high, maybe more than 100%.
Incidently, in my opinion, the best investment in the micro / small finance space is Shriram Transport Finance Company, even though it is generally not looked at as a micro finance lender as their loans are typically a bit higher than the generally accepted microfinance threshold.
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