Please synthesise evidence of the impact of microcredit interest rates on the poor. Is it desirable to place a cap on the interest rates charged by microfinance institutions (MFIs)?
Policymakers have been concerned about the effects of the seemingly high
interest rates typically charged by microfinance institutions (MFI)
lending money to poor people. Available data indicates that microfinance
interest rates typically fall between 20 and 50 per cent per year (in
places where inflation runs no higher than 10 per cent per year). It has
been argued that such interest rates can erode surpluses generated by
borrowers, leaving them with little net gain.
But whilst experts agree that high interest rates intuitively make it
more difficult for poor people to repay micro loans, in practice there
is little evidence of these effects, and little research has been done
in this area. Moreover, the literature concerned with the ‘fairness’ of
interest rates has largely adopted a supply-side perspective. It focuses
on factors affecting the pricing of loans, typically using large-scale
comparative data to assess what is and is not an acceptable level of
profit for MFIs and establish whether or not the poor are being
exploited by rates charged.
The limited available literature on the impact of interest rates from
the borrower perspective tends to focus on two main issues: the effects
of high interest rates on demand for microcredit (or credit elasticity),
and the effects on over-indebtedness. In both instances, research mainly
takes the form of country-specific case studies.
This report is organised in three sections:
- it summarises the main factors seen to affect interest rates in the
microfinance sector from a supply perspective
- it presents available case study evidence of the impact of interest
rates on borrowers
- it synthesises the debate about whether or not capping rates is an
appropriate policy response and presents some evidence of the impact
of caps where they have been implemented.
Mcloughlin, C. Impact of microcredit interest rates on the poor (GSDRC Helpdesk Research Report). Governance and Social Development Resource Centre, University of Birmingham, Birmingham, UK (2013) 12 pp.