Does the Macroeconomic Context Affect Microlending Rates? An Investigation of Potential Channels

Abstract

Microfinance institutions (MFIs) are essential for promoting financial inclusion in developing countries but face challenges in staying profitable while serving the poor, especially during downturns. This study examines if MFIs adjust interest rates with the business cycle, hypothesizing higher rates in bad times. Using data from 1,830 MFIs over 16 years (2003–2018), we find a negative relation between interest rates and the business cycle, notably for for-profit MFIs, which raise rates during stress. MFIs using proximity lending or receiving subsidies show less cyclical rate behavior, enhancing stability. Our findings are robust across various methodologies.

Keywords: Business cycle, Microfinance, Microloan rates, Group lending, Subsidy.