Cutting Microfinance Interest Rate

Abstract

Microfinance is a social innovation to alleviate poverty by providing small unsecured loans to local entrepreneurs and the poor. Many borrowers use the microfinance loans to seed their small entrepreneurial businesses. However, the high interest rates charged by the microfinance institutions (MFIs) are likely to increase the financial burden of the poor. In this study, we adopt a multiple stakeholders approach to analyze what affects microfinance interest rates and argue that every stakeholder could have a significant contribution in this social venture, especially in cutting interest rate to share the social mission. We emphasize the interdependence of multiple stakeholders, such as between the poor borrower and community/ MFI history, between women and government supported institutions, between the manager decision on loan portfolio risk and the rule of law, and between MFIs managers and employees. Within 7,217 organization-year observations from 2003 to 2011 across 105 countries, collected from Microfinance Information Exchange (MIX), the empirical results largely support our hypotheses on interest rate setting. Our multiple stakeholders’ approach significantly extends the current understanding on the microfinance and offers important managerial implications.

Keywords: microfinance, interest rate, stakeholder theory

JEL Classification: A13, C33, D21, D82