Sunday, November 16, 2008

The Ugly Side of Microlending (Part 5 of 5)

Reproduced from an article in Business Week, December 13, 2007.

Full article http://www.businessweek.com/magazine/content/07_52/b4064038915009.htm


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Last year, in a brash move characteristic of Grupo Salinas, lawyers for Azteca went to court rather than comply with a new law requiring banks to inform clients of the total financing costs they are charged. Azteca sought a type of protective order with which individuals or companies can shield themselves from application of a particular law or other government action. A federal judge granted the exception.

Freed of disclosure requirements, Azteca continues stressing weekly payments rather than long-term interest rates. When pressed for its average annual rate, Azteca asserts that it is about 55%. But Chuck Waterfield, a consultant based in Lancaster, Pa., who specializes in financial modeling for micro-lenders, points out that if Azteca's average rate is translated to make it comparable with APRs in the U.S., it comes to 110%. That's because Azteca charges interest on the full amount borrowed throughout the life of the loan, even as the principal declines—not on the declining balance, as is common in the U.S. An adjunct professor at Columbia University's School of International and Public Affairs, Waterfield has no relationship with Azteca.

When Azteca loans go bad, the results can be bruising for borrowers. Porfirio Soriano Pérez and his son Zalatiel bought a $1,435 Chinese-made motorcycle last year on an 18-month plan that required $29 weekly payments. They intended to use the bike to scout out customers for the parsley they grow on several acres just outside San Martín Texmelucan. The Sorianos knew the 68% financing would boost the motorcycle's total cost to $2,289, but they lacked cash to pay up front.

In February, disaster hit. A hailstorm wiped out their crop and with it their $350 monthly income. "Suddenly," says Porfirio, "we had nothing to sell, and no money." They fell behind on payments. Soon a collection agent began showing up at the extended Soriano family's unpainted home. In October, Azteca delivered written warning of legal action. "The problem is that people go into the store and buy out of pure emotion," says Morales, chief of Azteca's local legal department.

The Sorianos already had paid $1,560 on the motorcycle—more than the original sticker price—and owed about $700 more, but ended up returning the purchase. That erased the debt in Porfirio's name. The company will resell the bike and recover the money it's owed. The Sorianos, meanwhile, have nothing left to plant a new crop.

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