Research & Analysis

The New Moneylenders: Are Microcredit Interest Rates Too High?

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.

Nevertheless, accepting the importance of financial sustainability does not end the discussion of interest rates, and where to draw the line is a complex issue. An interest charge represents money taken out of clients’ pockets, and it is unreasonable if it not only covers the costs of lending but also deposits “excessive” profits into the pockets of an MFI’s private owners. Even an interest rate that only covers costs and includes no profit can still be unreasonable if the costs are excessively high because of avoidable inefficiencies.

High microloan interest rates have been criticized since the beginning of the modern microfinance movement in the late 1970s. But the criticism has intensified in the past few years, and legislated interest rate caps are being discussed in a growing number of countries. Part of the reason for the increased concern about rates is simply that microfinance is drawing ever more public attention, including political attention. Another factor is that quite a few MFIs are now being transformed into private commercial corporations.