What determines microcredit interest rates?

Abstract

High microcredit interest rates cause fierce debates among practitioners, scholars and even the general public. To objectify these discussions, this article investigates determinants of microcredit interest rates by using a worldwide data set of 712 microfinance institutions (MFIs). We examine how cost factors, gender, regulation, lending methodology and organizational type affect microcredit interest rates. Controlling for other microfinance- and country-specific factors, we identify the operating expenses as the main factor influencing microcredit interest rates. Furthermore, our findings show that MFIs tend to subsidize interest rates charged with income from investments not related to their lending activities.

Keywords:

• microfinance institutions
• lending rate
• operating expenses
• group lending
• gender

JEL Classification:

• G15
• G18
• G21

Acknowledgements

We are grateful to an anonymous referee, Marek Hudon, Robert Lensink, Roy Mersland, Marc Steffen Rapp, Sven Resnjanskij and Ariane Szafarz for helpful comments and suggestions. We thank the participants of the Second and Third European Research Conference on Microfinance and of the 19th Annual Meeting of the German Finance Association (DGF). Furthermore, we thank the German Research Foundation (DFG), which provided financial support for the project ‘Ökonomische Analyse der Refinanzierung von Mikrokreditvergabe’(AR 530/1-1).

Notes

1 See, http://www.mixmarket.org, for further information.

2 The number of MFIs in each year is shown in Table 3.

3 If information on the lending methodology is not determinable for the year 2009, but for 2008 or 2010 we employ these data.