Are microfinance interest rates too high?
Why do microfinance institutions (MFIs) charge such high interest rates? Nimal Fernando tackles the problem in a new ADB paper targeting policymakers in Asia. From MicroCapital blog:
Interest charged on loans is the main source of income for MFIs. Thus they must be high enough to cover operational costs. Since microlending remains a high-cost operation, interest rates remain high. Mr. Fernando reports that MFIs in the Asia-Pacific region charge rates ranging from 30 to 70% a year. However, he goes on to say that it is important to remember that comparisons with rates charged by commercial banks are inappropriate. In that case, larger loans mean lower transaction costs and result in lower interest rates.
The paper is in line with current thinking that ceilings on microfinance interest rates will only hurt the poor. Evidence from Nicaragua, South Africa and Armenia suggests that MFIs will react to such rate caps by either withdrawing from poor areas or adding extra fees or, more likely, both. So what’s the answer? Competition should be enough to drive down these rates, especially if coupled with moves to help consumers comparison shop.
Comments (3)
Delicious
E-mail
Facebook
Follow us on Twitter
Although we love to mention competition as the solution to many problems, in this case it may be shortsighted. Microfinance interest rates are so high because they need to cover operating expenses that are much higher than those of commercial banks (e.g. door to door collection as opposed to internet banking). In some cases MFIs are viable because there is no competition: since borrowers know that there is no other lender, they face strong incentives to repay their debts in order to continue having credit. Broad competition without the necessary credit infrastructure (e.g. credit bureaus, which are obviously difficult to expand to MFI clients) can actually lead to higher loan losses for MFIs as borrowers can afford to default and switch lenders. Interestingly, the resulting higher loan losses would have to be covered by even higher interest rates nonetheless.
Posted by: Emanuel Salinas | Aug 2, 2006 9:59:16 AM
In the U.S. interest rate are going lower, Gold is going higher, Oil is going higher, inflation is going higher, the dollar is going lower. What is wrong with this? Everything! At some point the FED is going to have to raise rates bigtime. We are in a very, very, precarious situation at the moment. I think Gold will tripple to over $2,000 an ounce when the market finally wakes up and sees the real inflation. Last I checked a lower dollar = higher import prices. There is no inlfation deflator here. With commoditioes on fire you can forget about that. Bernanke should have never lowered rates last week. However, the Fed might be doing something that few have talked about. Maybe the Fed has abandoned the dollar the crush teh trade deficit. Good luck, it will take 20 years to correct our 6% of GDP trade deficit and move it back to under 1% of GDP, unless you want to seriously disrupt the global economy. We are in for tough times people. Very tough!
Posted by: Ames Tiedeman | Sep 22, 2007 1:50:25 PM
The question of the day needs to be this:
Is the ECB going to raise rates next week?
This will kill the market..
Posted by: Ames Tiedeman | Sep 28, 2007 11:03:10 AM