Can they afford to borrow? Rates of return and the cost of money
In this lesson you will learn how to calculate the return on capital for a business enterprise. You will be reminded how business owners invest capital in different types of assets and how profit is both the owner’s income and a return to the capital and labour he or she has invested.
Then you will be invited to estimate the returns made by some micro-enterprises with which you are familiar and work out what return on capital that represents. We supply you with some additional examples.
Once you know the return on capital for a business, you can assess the level of interest they can afford to pay on borrowed capital. This information is critical for people setting interest rates in microfinance institutions. Financial service providers need to cover their costs but not put their clients out of business.
You may be surprised by the results of your calculations, and should be able by the end of the lesson to debate the question of interest rates with those who believe that the poor need cheap, subsidised credit in a more informed manner.
