One interest rate to rule them all

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Over on the CGAP Microfinance blog, Rich Rosenberg has a provocative analysis of interest rates charged by microfinance institutions (MFIs). Rich takes a look at a formula prooffered by Mohammad Yunus on how to judge the worthiness of MFIs:

  • An interest margin less than 10%=green zone;
  • An interest margin between 10%-15%=yellow zone;
  • An interest margin greater than 15%=red zone/loan shark

Rich takes a look at data from Microfinance Information eXchange and finds that if you follow this rule, some 25 of Grameen's partner MFI organizations are in the red zone. Rich is quick to point out that using more nuanced metrics, these partner organizations are doing a good job at reaching the poor in a relatively efficient manner. He concludes his post:

We all want to see MFIs charging clients rates that are as low as possible, so we need analytic tools that can do a credible job of separating the sheep from the goats in that regard.

I agree that more nuanced metrics are required to make a sound judgment, but I would go a step further. Not only do we need more nuanced metrics, we need different standards based on the types of clients MFIs are serving. The goal Rich lays out is surely laudable for those MFIs serving the poorest, but microfinance is not a monolith. Experimental evidence from Mexico has found that the returns to capital for microenterprises are in the range of 20 to 33 per cent per month (well in excess of the market rate). For these types of firms, the policy goal should be tilted more toward increasing the amount of capital available to the sector rather than keeping interest rates (and interest rate margins) as low as possible.


Ryan Hahn

Operations Officer

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