Interest Rates and Implications for Microfinance in Latin America and the Caribbean
This study examines ways in which MFI interest rates can be lowered without damaging the industry’s long-term prospects.
MFIs in Latin America and the Caribbean (LAC) charge higher interest rates to the poor than commercial banks. Politicians, policy makers and entrepreneurs complain that these high interest rates stifle business expansion, investment and wealth accumulation. A better understanding of MFI interest rates could help to lower them. The study draws on financial data from 29 MFIs from seven LAC countries over four years to explore MFI costs and efficiency patterns. Study findings indicate that improved operational efficiency, a key driver of lower interest rates, comes primarily from five sources. They are:
- Competition;
- Reinvestment of profits;
- Learning by doing;
- Pressure from donors and investors on MFIs to be socially responsible;
- Absence of interest rate caps.
MFIs can adopt several practices that will allow them to offer lower interest rates to clients while remaining competitive. They include pricing according to market and institutional mission, passing profits on to clients in the form of reduced interest rates and operating in a fair and transparent manner.
