The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?

Abstract:     
This paper explores whether microcredit borrowers are charged unreasonably high interest rates. It draws on data from Microfinance Information Exchange and the MicroBanking Bulletin.

The paper does not find evidence suggesting any widespread pattern of borrower exploitation by MFIs charging high interest rates. Findings include:

MFI interest rates have been declining by 2.3 percentage points since 2003, much faster than bank rates;
MFI rates are significantly lower than consumer and credit card rates as well as rates charged by informal money lenders in most countries;
MFIs have to pay more than banks when they leverage their equity with liabilities;
Administrative costs are the single highest contributor to interest rates, but they have been declining since 2003;

Interest rates, profits and administrative costs have shown a downward trend in recent years. Finally, there is strong empirical support for the proposition that operating costs for microloans are much higher than that for normal bank loans. Therefore, sustainable interest rates for microloans have to be significantly higher than normal bank interest rates.

Number of Pages in PDF File: 28

Keywords: MICROFINANCE, Interest Rates

JEL Classification: Microfinance, Interest Rates

Accepted Paper Series