Why do MFIs charge such high interest rates to poor people? FAQ
Why do MFIs charge such high interest rates to poor people? FAQ
The microfinance institution could subsidize the loans to make the credit more "affordable" to the poor. Many do. However, the institution then depends on permanent subsidy. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts, and seldom grow significantly. They simply aren't sustainable, especially if other microcredit operations have shown that they can provide credit and grow on the basis of “high” rates of interest—and along the way serve far greater numbers of clients.
Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. They recognize that their alternatives—even higher interest rates in the informal finance sector (moneylenders, etc.) or simply no access to credit—are much less attractive for them. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors. Many of the economic activities in which the poor engage are relatively low return on labor, and access to liquidity and capital can enable the poor to obtain higher returns, or to take advantage of economic opportunities. The return received on such investments may well be many times greater than the interest rate charged.
Moreover, the interest rate is only a small part of their overall transaction cost of credit, and if microfinance institutions offer credit on a more accessible basis, substantial costs in terms of time, travel, paperwork, etc. can be reduced, thus benefiting the poor. A long series of studies has shown that many programs that charge subsidized interest rates end up using rationing mechanisms to distribute credit in response to excess demand. These mechanisms cause the borrower to have to “jump through hoops”, increasing the time and money s/he must put out to get the loan. In fact, these transactions costs are frequently higher than the interest costs, which takes away the advantage to the borrower of the interest rate subsidy. However, while increased access to credit for the poor on a long term and sustainable basis can bring significant benefits, MFIs must continue to work to improve efficiency levels, and to increase scale. This will bring down the cost of providing loans, and the benefits transferred to the poor in terms improving loan products, better access to loans, and lower borrowing costs.
Why do MFIs charge such high interest rates to poor people FAQ - To learn more about this author, visit Microfinance Gateway's Website.
Like this article? Share it with your friends
Providing financial services to poor people is quite expensive, especially in relation to the size of the transactions involved. This is one of the most important reasons why banks don't make small loans. A $100 dollar loan, for example, requires the same personnel and resources as a $2,000 one thus increasing per unit transaction costs. Loan officers must visit the client's home or place of work, evaluate creditworthiness on the basis of interviews with the client's family and references, and in many cases, follow through with visits to reinforce the repayment culture. It can easily cost US$25 to make a microloan. While that might not seem unreasonable in absolute terms, it might represent 25% of the value of the loan amount, and force the institution to charge a “high” rate of interest to cover its cost of loan administration.
The microfinance institution could subsidize the loans to make the credit more "affordable" to the poor. Many do. However, the institution then depends on permanent subsidy. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts, and seldom grow significantly. They simply aren't sustainable, especially if other microcredit operations have shown that they can provide credit and grow on the basis of “high” rates of interest—and along the way serve far greater numbers of clients.
Evidence shows that clients willingly pay the higher interest rates necessary to assure long term access to credit. They recognize that their alternatives—even higher interest rates in the informal finance sector (moneylenders, etc.) or simply no access to credit—are much less attractive for them. Interest rates in the informal sector can be as high as 20 percent per day among some urban market vendors. Many of the economic activities in which the poor engage are relatively low return on labor, and access to liquidity and capital can enable the poor to obtain higher returns, or to take advantage of economic opportunities. The return received on such investments may well be many times greater than the interest rate charged.
Moreover, the interest rate is only a small part of their overall transaction cost of credit, and if microfinance institutions offer credit on a more accessible basis, substantial costs in terms of time, travel, paperwork, etc. can be reduced, thus benefiting the poor. A long series of studies has shown that many programs that charge subsidized interest rates end up using rationing mechanisms to distribute credit in response to excess demand. These mechanisms cause the borrower to have to “jump through hoops”, increasing the time and money s/he must put out to get the loan. In fact, these transactions costs are frequently higher than the interest costs, which takes away the advantage to the borrower of the interest rate subsidy. However, while increased access to credit for the poor on a long term and sustainable basis can bring significant benefits, MFIs must continue to work to improve efficiency levels, and to increase scale. This will bring down the cost of providing loans, and the benefits transferred to the poor in terms improving loan products, better access to loans, and lower borrowing costs.
Why do MFIs charge such high interest rates to poor people FAQ - To learn more about this author, visit Microfinance Gateway's Website.
Like this article? Share it with your friends
 | |
 |
No article feedback found. |
| |
Leave Your Feedback |
 | |
| |||
|
For an online Car Loan Calculator and finance for a cheap car loan. Get approved on car loans or car finance in Australia with cheap bank car loans and finding a car finance broker. Commercial car loans including business car finance and car lease. Car Loan Calculator has information on finance companies and getting the right cheap car loan from banks at best car loan rates and a online car loan calculator for all finance in Australia. Get the best car finance with our help at Car Loan Calculator and Finance Ezi. - Visit Richard Jefferies's Website |
|||
Leanne Hoagland-SmithAre your sales where you want them to be? Will you be one of the few who achieves sales or business success or one of the many who have failed to change? Are you tired of being told you are like everyone else? Then you may find my first book on sales of interest. Be the Red Jacket in the Sea of Gray Suits, The Keys to Unlocking Sales available at Amazon or at http://www.processspecialist.com/red-jacket.htm. This book is a reflection of my no-nonsense approach to improving sales to overall business results. If you are truly committed to making sustainable changes, then I can help you secure a positive return on your investment because I focus on executable solutions not telling you the problems you already know you have. From training to corporate (group) coaching to executive one on one coaching, my approach is to assess, create awareness, build a goal driven action plan and then execute. The bottom line question is "Not do you or your employees know it, but do you or they want to do it?" Please call for a free strategy session at 219.759.5601. - Visit Leanne Hoagland-Smith's Website |
|||
Staging DivaDebra Gould, aka The Staging Diva®, is President of Six Elements Inc., an internationally recognized home staging company. Inspired by many requests from aspiring home stagers wanting to start similar businesses, Gould created the Staging Diva Home Staging Business Training Program. Gould has trained over 1000 Staging Diva Graduates worldwide to start staging businesses. Buying decorating and selling six of her own homes in four years lead to an interest in real estate staging which she turned into a career with the launch of sixelements.com in 2002. Since then she has staged hundreds of homes in addition to teaching home staging training. Gould is the author of several home staging resources including a series of popular ebooks made up of a Design Guide, Color Guide and Portfolio Guide. For more information about Debra Gould visit stagingdiva.com. - Visit Staging Diva's Website |
|||
Anne BarrAnne Barr has over 26 years experience in sales and marketing, six years as a franchisee. She has assisted over 367 business owners and purchasers to achieve their goals in career change, transition and exit strategy. She holds the designation of Certified Franchise Executive from the International Franchise Association, Certified Business Intermediary from the International Business Brokers Association and Board Certified Broker from the Texas Association of Business Brokers. Anne is active in professional organizations, networking groups and volunteers for non-profit entities. As owner/operator of four successful businesses, Anne has proven people skills and enjoys helping clients find the right "fit" in business ownership. Visit www.FranchiseOpportunitySpecialist.com for more information about me and my company. - Visit Anne Barr's Website |
|||
Jeff FosterWebBizIdeas.com is a Minneapolis website design company founded to help people start an internet business by providing them with website, business, and internet resources that help foster the growth of successful online businesses and develop innovative Internet business ideas. We specialize in internet consulting & internet marketing. - Visit Jeff Foster's Website |
|||
John BrennanJohn Brennan Ed.D. Dr. Brennan is President of Interpersonal Development, LLC, a training and development firm. Interpersonal Development has provided sales training and coaching to more than 3,000 sales reps from over 100 companies. A native of Australia, Dr. Brennan received his doctorate from the University of Rochester. His dissertation researched the effectiveness of Behavioral Modeling Technology in training people in interpersonal skills. While he has spent most of his career designing or delivering training, he was also a Vice-President of Sales of a training and development franchise with operations in 25 markets. Dr. Brennan has designed and delivered sales training in North America, Asia, Europe, Australia and the Middle East. He has been a guest speaker at numerous national and regional professional conferences. When Microsoft wanted Best Practices articles on sales for their web site, they called Dr. Brennan. The results are at http://office.microsoft.com/en-us/FX011387391033.aspx His firm’s clients have included Volvo, The Prudential, Merrill Lynch, Eastman Kodak, Gannett, Equifax Europe, the Economist Group and countless small businesses. - Visit John Brennan's Website |
|||
Stephanie RobeyStephanie Robey is President and CoFounder of Pivot Positive, LLC - an Internet marketing business focused on helping people start work at home ventures. Previously, she was employed at The Search Agency with over 20 years experience in graphic design and 10 years experience in online marketing. She was responsible for launching the Conversion Path Optimization (CPO) unit where she and her team have conducted hundreds of optimization tests for online companies across multiple verticals. She is a successful entrepreneur having started and sold 2 companies and remains on the board of directors of the third, PhotoSpin.com Stephanie began her career in the direct marketing realm creating and producing direct mail for many of the major cable television companies and directly attributes her understanding of Internet marketing to those early offline experiences. Stephanie is a graduate of San Diego State University with a BFA in Graphic Arts and also holds an Executive MBA from the Graziadio School of Business and Management at Pepperdine University. Read Steph's Blog Meet Steph and Dave Sign up for our Free 7-Day BootCamp: Self Employed & Rich - Visit Stephanie Robey's Website |
|||
|
To learn more about the Evan Elite Author Program please contact us. | |||
 | |
|  |
Subscribe to Microfinance's articles
 | |
|
|  |
 | |
|
| |
 | |||||||
|
 | ||
|
||
 |
||
 |
||
|
| ||
 |
| Have you written articles that would be of value to entrepreneurs? Become an expert on our site by publishing them! Expose yourself to a wide audience, drive more traffic to your website and get more sales! Click Here for details. |
|
|
 |
| Modeling the Masters: Learn the true secrets behind Walt Disney's business success factors & grow your company! Video produced by Phanta Media |
|
|
 |
"Learn straight from Evan how you can Make a Full Time Income (And More) from a Website"
Click Here To Learn More |
|
|
|
|
Get advice & tips from famous business owners, new articles by entrepreneur experts, my latest website updates, & special sneak peaks at what's to come!
|
|
|
 Million $ Interview Meditation Guide Networking To Get Results Eneterprise Readiness Start eTutoring Business |
|
 | ||
 |
Top 50 Productivity Blogs
Top Blogs To Watch In 2008 | |
 |
More PR Resources
Press Release Builder | |
| ||
 | ||||
| ||||
|
| ||||
| ||||
|
|
|
|
|
||||||||||||
|
Email us your ideas on how to make our website more valuable! Thank you Sharon from Toronto Salsa Lessons / Classes for your suggestions to make the newsletter look like the website and profile younger entrepreneurs like Jennifer Lopez and Sean Combs!
|
|
|
