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

CGAP Ocassional Paper No. 15

28 Pages Posted: 7 May 2009

Date Written: Feb 2009

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.

Keywords: MICROFINANCE, Interest Rates

JEL Classification: Microfinance, Interest Rates

Suggested Citation

Rosenberg, Richard and Gonzalez, Adrian and Narain, Sushma, The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates? (Feb 2009). CGAP Ocassional Paper No. 15, Available at SSRN: https://ssrn.com/abstract=1400291

Richard Rosenberg (Contact Author)

CGAP ( email )

1818 H St NW
Washington, DC
United States

Adrian Gonzalez

World Bank Group ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

HOME PAGE: http://www.doingbusiness.org

Sushma Narain

IFC ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
470
Abstract Views
2,015
rank
68,522
PlumX Metrics