Financial instruments

1. Bond

Bond is like a certificate, shows that certificate holder lend money to the issuer of that certificate. Private companies as well Government collect money from public, by issuing bond certificate. It has a specific time limit to be mature and fixed interest rate.

Different types of Bond:

Coupon Bond: 

Secured Bond:

Callable Bond:

Registered Bond:

Unsecured Bond:

Term Bond:

Convertible Bond:

Bearer Bond:

How to calculate the Effective Interest rate for The MFIs ??

Effective interest Rate: 

Effective interest is simply called actual interest. Most often its varying from the normal interest rate. Effective interest depends on the loan duration and the mode of payment.

Calculating Effective interest of MFIs:

 In Bangladesh and some other countries, Micro finance are spreading each corner of the country, so its become  significant to control on this. Calculating Effective interest will show the real interest rate for the benefits of loan amount. As it is important to calculate the cost to find out the profit. 

It is very difficult to calculate the Effective interest of Micro-finance as there is a  huge no of installment on borrowed amount. But it will be easier by using the following formula. 

Formula:

   EIR = (Total Interest + service charges) / Average loan outstanding

Average loan outstanding is different for flat interest rate method  and declining interest rate method

  Average loan outstanding for Flat rate method:

                                                        = (Principle amount + Principle payment in each installment)  / 2

  Average Loan outstanding for Declining method:

         = (Initial balance + all monthly or weekly balances) / No of payments

Example:

 Flat rate method:

Borrowed amount (P) = 1000 (TK)

Interest rate  (I)  =15%

No of payments (n) = 12 (Monthly)

service charges =20 (TK)

Payments (P) = (1000+150)/12 + (20/12)

Average loan outstanding = Principle amount (1000) + Principal payments (83.33) / 2

                                       = 541.66

 Effective interest rate  (Flat method)

                            = Total Interest (150) + service charges (20) / Average loan outstanding(541.66)

                            = 0.31 or 31% Effective interest.

As the result is for the 12 month so we don't have to convert it yearly. if it doesn't, have to covert yearly to find out the yearly interest rate.

"Micro finance Effects in Bangladesh" Findings of my MBA Research paper

Research findings:

Research was carried out on six MFIs in Bangladesh. Effective interest rate is actual interest rate which is much higher than the Flat interest rate, MFIs charges. Main intention of my research is to find out the actual interest rate of MFIs and how Borrowers are getting effected by this.

Most important findings are given Bellow:

Flat interest: 

Flat interest is a method following the interest on the whole amount once and amount will depreciated by each installment. MFIs in Bangladesh and some other countries are following the Flat rate method. In addition MFIs added compulsory savings, which is great benefits for the lenders. Bellow table showing the flat rate of some leading company and actual interest rate including saving and service charges:

Flat interest and Actual interest differences:

MFIS	Flat Interest rate	Actual interest rate with service charge and savings
Asha	15%	85.77%
Brac bank	15%	69.70%
Buro Bangladesh	15%	85.74%
Deep	15%	54.58%
Grameen Bank	10%	43.44%
Tage	15%	96.70%

Effective interest rate are showing in different stage ( including fees, savings)

Six MFIs effective interest rate in different stage:

MFIs	Nominal rate interest	Fees	savings	Repayment plan	EIR without fees and savings	EIR with fees	EIR with fees and savings
Asha	15% Flat	1%	11.50%	Weekly	33.19%	35.40%	85.77%
Brac Bank	15% Flat	5%	6.13%	Weekly	33.19%	44.25%	69.70%
Buro Bangladesh	15% Flat	0.80%	7.60%	Weekly	33.19%	34.85%	85.74%
Deep	15% Flat	2%	11.50%	Weekly	33.19%	37.61%	54.58%
Grameen Bank	10% Flat	0%	7.33%	Weekly	23.11%	23.11%	43.44%
Tage	15% Flat	1.16%	15.33%	Weekly	33.19%	35.77%	96.70%

Loan overlapping:

Loan overlapping means, taking loan from different MFIs even same institute by different member of a family. MFIs  are also tensed on this meter. due to much debt borrowers are unable to pay any of the loan and ran way. As MFIs has strong policy to collect the installment, forcing them to sell their remaining property. This trend can not drive upward the Bangladesh. In the bellow table showing that 82% borrowers are in loan overlapping. 6% are extremely in danger point.

Overlapping	No of Borrowers	Percentage of Borrower
one MFIs	9	18%
Two MFIs	11	22%
Three MFIs	20	40%
Four MFIs	7	14%
Five MFIs	3	6%
Total	50	100%

From my research i came to know that MFIs can not help the poor by charging high interest interest rate. some people might say that they have seen in news paper or some other research paper , Micro finance help 10 Million people in Bangladesh and did a lot. But if you want to know ask the borrower how much they are benefited? 

Its true that Micro finance is most applicable in south Asia and invented in Bangladesh in a bigger form. so its need modification to make it as a weapon to fight against poverty.