Interest rates

Chuck Waterfield, MFTransparency: "Transparency leads to accountability and accountability leads to more tempered behaviors. You think more carefully about your prices, you think more carefully about your compensation levels, if those are public information. Public transparency leads to more prudent, cautious, but still business-like behavior, and that is responsible business, that way everyone can have a beautiful annual report. But which ones are getting rich off poor and which ones are intentionally setting their return levels at a more moderate level, transparency gives us that answer." [NpM film, 2011]   


 

Interest consists of cost of capital, loan loss provision, operating costs and profit. The operating costs for a small loan are more or less the same as for a large loan. Operating costs therefore make up a relatively higher part of the total costs in a small loan. Clients of microfinance institutions (MFIs) take out small loans and save small amounts at short intervals, so their interest rates are relatively more influenced by operating costs.

However, this does not mean that all interest rates of MFIs are justifiable and the microfinance industry has put emphasis on improving efficiency in order to bring down these rates. The cost of capital (funding of an MFI) and loan loss provisions (provision if a client does not repay its loan) are generally not related to loan size. Profit is necessary for an MFI to grow; when an MFI becomes financially sustainable, it will be able to serve more clients.

The members of NpM have agreed not to work with MFIs that solely aim for high profits; the MFI's aim should be to work towards a balanced financial and social return. If prices are unknown however, management can simply choose to set the profit level. Transparency in microfinance is important because in a transparent market, consumers are able to make borrowing decisions based on accurate and comparable pricing information. To contribute to fair and transparent rates of MFIs, MicroFinance Transparency (MFTransparency) has been established in 2008. MFTransparency has investigated the effective interest rate of products offered by MFIs in more than twenty countries.