Microfinance Interest Rates


Brett asked me why are microfinance interest rates so high? Turns out there has been lots of good discussion on this, the first is that "ADB":http://microcapitalmonitor.com/cblog/index.php?/archives/284-Why-are-Microfinance-Interest-Rates-so-High-Asian-Development-Bank-Paper-Explains.html says rates at 30%-70% are effectively covering the high operational costs. It takes people to manage these microloans, so the banks don't operate at a profit in effect, they are just covering.

While it might be nice to cap rates, this just reduces credit inflow. Miracles of competition really but the infrastructure cost of administering a $500 loan is probably the same as a $5,000 or a $50,000. Certainly true in the developed world.

And "UNCDF.org":http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/july_2004/voice.php has a great definition of what too high an interest rate is. Basically, says that covering the banks cost is the minimum set.

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