Are Microcredit Interest Rates Excessive?
High microfinance interest rates is a hotly debated topic in a lot of places. Obviously, the answer for a given MFI depends on its particular circumstances–see for example the CGAP study of the controversial Mexican MFI Compartamos. Now, can we say anything about the overall picture worldwide? CGAP has published a new study based on data from the Microfinance Information Exchange. Individual observers will have their own criteria for judging what is excessive, but empirical data do shed important light on the question:
- The very high rates that get so much publicity are rare: for instance, less than 1 percent of microborrowers worldwide pay rates as high as the 85 percent for which Compartamos has been pilloried. In fact, the median rate for 2006 was about 26 percent.
- Very high profits for MFIs are uncommon; the median profit on MFI owners’ equity was about 12 percent in 2006, compared with 18 percent for banks.
- MFI interest rates have been dropping fast–about 2.3 percentage points a year in 2003-2007, probably due to some combination of learning curve and competition. Commercial bank interest rates have dropped, too, but far less.
- Underlying that drop in interest rates are drops in administrative costs (about one percentage point per year) and profits (about 0.6 percentage points per year).
- There is strong empirical support for the commonsense notion that it is inevitably more expensive to make many tiny loans than to make a few large ones.
I hope those interested in this question will take a look at the data we developed and form their own views. My own appraisal is that the worldwide picture of microcredit rates is an encouraging one. Given thousands of MFIs, there will always be some whose interest charges and profits might seem hard to square with the best interests of clients, but I can’t find any indication that this is a common problem. I have a list of things that might worry me about the development of microfinance, but price gouging is a long, long way from the top of that list.