Interest Rates in Microfinance


Do you remember walking to class in college and that same guy would ask you if you needed a credit card?  I think his name was Timmy. For me at least, it came down to easy cash from Timmy or the blood bank.  Books (beer) weren’t getting any cheaper. After maxing out the first and then second card on books (beer), my father patiently explained if I continued to only pay off the minimum balance, I would be 50 before paying for my Econ 101 book (hangover).

Surprisingly when I went looking for Timmy, he didn’t care and didn’t even remember me. 

Some people today think all credit is the same, just like our “friend”, Timmy’s offer. But microcredit is different. While the credit card companies allow us to consume beyond your means, the microfinance institutions (MFIs) that Whole Planet Foundation (WPF) work with use credit as a tool to alleviate poverty. 

Some people wonder why those that have the least are charged any interest on microcredit at all. It was the Noble Peace Prize winner, Muhammad Yunus, that proved not only are the poor capable of repaying a loan, but can help create a sustainable system of opportunities that is able to reach millions more.

“Microcredit ignites the tiny economic engines of the rejected underclass of society. Once a large number of tiny engines start working, the stage can be set for bigger things.”

-Professor Muhammad Yunus, founder of Bangladesh’s Grameen Bank

To understand completely the reasons for interest rates in microcredit, we first need to understand the realities in the developing world and the most appropriate and efficient ways to deliver credit to the very poor. Important factors that impact interest rates are:

  • Risk: Many of these countries are viewed as high risk. Whether it is recent war, poor government, weak economies, or lack of infrastructure; these costs are passed onto their citizens. 
  • Inflation: In some cases these countries may have inflation rates that exceed 20%.
  • Delivery model of microcredit: The banks go to the poor, which requires an army of loan officers and transportation to reach isolated communities.
  • The Design of Effective Microcredit: Small, frequent repayments are essential to creating a system that works for the realities of the poor. This requires weekly or monthly visits to often times very remote parts of the country to collect payments from the poor.
  • Other services: Many WPF partners offer additional services like health, savings, insurance and education services. These are other opportunities that the poor would often not have access to otherwise.
  • Sustainability: It is critical that the interest rate be set to cover the above while still ensuring there is enough of a surplus to expand their services.

Interest rates are something that we closely monitor at WPF. We have 3 guys in the field – Costa Rica, Senegal, and Thailand – who work one-on-one with all of our MFI partners to ensure that their missions and services closely align with the needs of the poorest of the poor.

To understand why the poor are charged interest on microcredit, we must first have a better understanding of the cost that are involved and the desire, from both MFIs and borrowers, to expand this opportunity to others in their communities and around the world. Creating this sustainable system is important to alleviating poverty. Microcredit is not a hand out, but it provides a hand up to millions around the world, empowering them to lift themselves out of poverty.

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