Are Microcredit Interest Rates Excessive?

February, 2009     Richard Rosenberg, Adrian Gonzalez, and Sushma Narain

Over the past two decades, institutions that make microloans to low-income borrowers in developing and transition economies have focused increasingly on making their operations financially sustainable by charging interest rates that are high enough to cover all their costs. They argue that doing so will best ensure the permanence and expansion of the services they provide. Sustainable (i.e., profitable) microfinance providers can continue to serve their clients without needing ongoing infusions of subsidies, and can fund exponential growth of services for new clients by tapping commercial sources, including deposits from the public.

In today’s microfinance industry, there is still some debate about whether and when long term
subsidies might be justified in order to reach particularly challenging groups of clients. But there is now widespread agreement, within the industry at least, that in most situations MFIs ought to pursue financial sustainability by being as efficient as they can and by charging interest rates and fees high enough to cover the costs of their lending and other services.