CGAP Report Finds Interest Charges, Along With Costs and Profits, Are Declining



    
    Microcredit Interest Rates Generally Reasonable

    
    WASHINGTON, Feb. 26 /PRNewswire-USNewswire/ -- Concerns that microcredit
interest rates are unjustifiably high don't find much support in the available
data, according to a new research report by CGAP, the global microfinance
resource center.
    

    
    Microfinance institutions (MFIs) need to charge higher rates than normal
banks do because their tiny loans entail higher administrative expenses, and
because they cannot borrow their funding as cheaply as banks can.
    

    
    "Some MFIs seem to be charging interest rates that appear hard to justify
even when considering these factors," says Elizabeth Littlefield, CGAP's CEO.
"However, we found that such cases were only a small minority and that, in
general, interest rates seem to be in line with the costs to MFIs.
Encouragingly, interest rates on microcredit are declining rapidly, along with
administrative costs and MFI profits as well."
    

    
    "The New Moneylenders: Are the Poor Being Exploited by High Microcredit
Interest Rates," co-authored by Richard Rosenberg, Adrian Gonzalez, and Sushma
Narain, found that the median interest rate on microloans was about 26 percent
in 2006, the most recent year for which data were available.  Microcredit
usually costs less than credit cards or consumer loans in countries where data
could be found, and virtually always costs far less than "informal" loans.
    

    
    Microcredit rates have been dropping fast--by about 2.3 percentage points
each year since 2003, much more steeply than the decline in bank loan rates. 
Rates fell very fast in East Asia/Pacific and the Middle East/North Africa
(annual declines of 3.7-3.9 percent), and moderately in Africa, Europe/Central
Asia, and Latin America (0.9-1.5 percent). Rates in South Asia did not move
much.
    

    
    Administrative costs, the largest contributor to microcredit interest
rates, are inevitably higher for tiny microloans than for normal bank loans.
For instance, lending $100,000 in 1,000 loans of $100 each requires greater
spending on staff salaries, among other costs, than making a single loan of
$100,000. But institutional learning and competition have been cutting these
costs by about one percentage point annually.
    

    
    Generally, MFI profits do not appear excessive: the median return on
owners' equity was about 12 percent in 2006, compared to about 18 percent for
banks in the same countries.  The most profitable 10 percent of the worldwide
microcredit portfolio produced returns on equity above 34 percent in 2006, a
level that could raise concern about appropriateness for some. But much of
this profit is earned by not-for-profit entities, which retain and reuse these
earnings to expand their services to clients.  And profits have been dropping
by about 0.6 percentage points a year since 2003.
    

    
    "The bottom line is that we found no evidence to suggest any widespread
pattern of borrower exploitation," says Richard Rosenberg, the report's lead
author.  "Interest rates like the 85 percent that Compartamos was charging in
Mexico raise understandable concerns, but less than 1 percent of
microborrowers worldwide are paying rates that high.  Administrative costs
will always be higher for tiny microloans than for big bank loans. What's
encouraging is that those administrative costs are declining, along with
lenders' profits, and the savings are being passed along to borrowers. We
expect this trend to continue over the medium term."
    

    About CGAP
    
    CGAP (The Consultative Group to Assist the Poor) is the world's leading
resource for the advancement of microfinance. CGAP provides the financial
industry, governments and investors with objective information, expert
opinion, and innovative solutions to effectively expand access to finance for
poor people around the world. More information:  www.cgap.org
    


    




For further information:

For further information: Una Gallagher Pulizzi of CGAP, +1-202-473-8869,
upulizzi@worldbank.org Web Site: http://www.cgap.org

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