Paper
Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus
Identifying solutions for bringing affordable credit to the poor
Download
6 pages
This paper critically examines the new methodology that Prof. Mohammed Yunus has proposed to evaluate microcredit interest rates.
Prof. Yunus has proposed a methodology that calculates interest rates based on interest rate premium as a solution to current debate on MFI interest rates. The methodology categorizes MFIs into three zones, namely, green zone (poverty-focused MFIs), yellow zone, and red zone (profit-maximizing MFIs, moneylenders and loan sharks).
The paper analyzes global MFIs using this methodology. It states that the methodology is an imperfect tool for understanding an MFI’s operations. Key conclusions include:
- Categorization into zones can be explained by operating expenses, rather than profits;
- Evidence to prove that institutions in any zone are taking super¬normal profits is not found;
- Removing all profits from all MFIs would not substantively change the distribution of MFIs into green, yellow and red zones;
- Most MFIs that have low average loan sizes, suggesting that they reach poorer clients, are being mislabeled and placed in the red zone;
- Nonprofit NGO MFIs are more likely to be in the red zone than for-profit MFIs and credit unions.
About this Publication
Published
