MFIs generally charge annual interest rates of around 30%, although there are many occasions when MFIs regularly charge higher. There are a number of reasons why the interest rates charged by MFIs are often higher than the rates charged by commercial banks:
- Firstly, the administrative costs of making many small loans are much higher than making fewer larger loans. For example, it takes less time for staff to make one loan of £1,000 than ten loans of £100 each.
- Secondly, loan officers must work longer and harder to assess the feasibility of each loan application and thereby reduce risk because borrowers cannot generally offer traditional collateral nor do they have regular salaried income.
- Thirdly, MFIs often operate in geographically remote areas with low population densities and this means that they incur greater operational costs.
In recent years MFIs have focused increasingly on making their operations financially sustainable by charging interest rates that are high enough to cover all their costs. This approach can ensure that they can continue to operate and indeed expand to serve more people. If they do not make their operations sustainable then they must continually be reliant upon subsidies from donors, which may or may not be forthcoming, or they may have to close down altogether since they cannot cover their costs in which case many poor people would certainly be worse off. It is worth pointing out that as MFIs mature over time and become more efficient, transactions costs usually decrease and this can mean lower interest rates. Furthermore, it is also worth emphasising that the interest rates charged by MFIs are still far below what poor people can expect to pay to local moneylenders, who often charge annual interest rates of several hundred percent.
The MFIs that we work with tend to charge interest rates that are comparable to the rates charged by other microfinance providers working in that particular country. We would not consider working with MFIs that charge interest rates that might be considered as 'excessive'.