Paper
Are Interest Rates Required by Microfinance Institutions Justifiable?
What makes microfinance work?
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4 pages
This discussion paper explores why high interest rates are needed for microfinance to work in an economically sustainable way.
The author describes microfinance as provision of very small loans to poor families to engage in productive activities or in small business.
The author argues that high interest rates of 2-4% per month are justified because:
- Service cost is high as size of loans is very small;
- Clients have to pay even higher rates for other sources in the informal market.
The author further suggests that microfinance should be used only for a certain type of clients as:
- It serves best those who have identified an economic opportunity;
- Extremely poor people who do not have any stable income are not ideal microfinance clients as they will only be pushed further into debt and poverty by loans that they cannot repay.
The paper concludes that interest rates can come down if microfinance institutions continue to increase sales and improve leverage by improving efficiency levels.
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