Refuting a Common Microfinance Critique

What is the most common critique of microfinance? The high interest rates on microloans.

For those of us accustomed to interest rates on consumer credit in the United States, 20%-30% seems like a pretty steep interest rate. When you take into account the administrative costs and the currency risk involved, however, 20-30% begins to seem a bit more reasonable–especially if we are interested in long term self-sufficiency not just for the borrowers, but also for the MFIs.

Richard Rosenberg, a senior adviser to CGAP, just posted the findings of a recent study that concluded that the average interest rate on microcredit is 26% and that the “excessively high” rates are rare. Moreover, interest rates are dropping as administrative costs decrease (presumably as a result of productivity gains) and profits shrink (possibly as a result of competitive pressures ). Check out his findings here. It’s a great article should you ever need to refute the commonest of misconceptions about microfinance.

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The Consultative Group to Assist the Poor (CGAP) is an important source for information on microfinance. Housed at the World Bank, CGAP conducts research on microfinance to guide public policy and promote universal standards towards the alleviation of poverty.