What is the true cost of microfinance?


Alex Counts is President and CEO of Grameen Foundation.

Wednesday’s front-page article in the New York Times by Neil MacFarquhar raised some important issues facing the microfinance industry, but, unfortunately presented a distorted picture.  I had the opportunity to challenge the author about his assertions on the Takeaway radio program.

Ibu Yusnaini

Ibu Yusnaini is a beneficiary of microfinance

His sweeping generalizations about interest rates, while focusing on just two countries, could lead the average reader to believe that rates above 80 percent are the norm.  This is far from the truth, as evidenced by a recent report by the Consultative Group to Assist the Poor that found that, on average, sustainable microlenders were charging 26 percent. (Grameen Bank, our model for microfinance efficiency, charges rates from 8% to 20%, and gives interest-free loans to the ultra-poor as a transitional strategy to get them ready for regular borrowing.)  The same report also noted that rates have been falling by 2.3 percent annually and that less than one percent of microfinance clients worldwide actually pay rates as high as those cited in the article. Moreover, in most of the 36 countries studied, microfinance interest rates were below the rates charged on consumer credit cards, which is an appropriate benchmark.

Most microfinance involves substantial direct contact with clients in remote locations and this can be costly.  However, we believe that interest rates will continue to fall, getting closer to the rates charged by the Grameen Bank and other efficient lenders, as more institutions are able to lower their operating costs. These costs are largely driven by local factors, and this is something the article didn’t adequately address.  For example, in taking aim at LAPO (full disclosure: Grameen Foundation has worked with LAPO  for nearly a decade), the article ignored the high costs of doing business in Nigeria and omitted the fact that it actually charges the one of the lowest interest rates among Nigerian MFIs (something that was acknowledged by the client that was interviewed).

Even so, no one is satisfied with these high rates and there are already efforts underway across the industry to help microfinance institutions (MFIs) lower their costs and deliver their services more efficiently.  Grameen Foundation has been working hard to realize efficiency gains at MFIs including LAPO, and we are pleased that they reduced their interest rate by one-sixth of its previous rate (which was well below the rates cited in the article).

The article also gives an unbalanced view of the compulsory savings programs that are utilized by some MFIs. Globally, compulsory savings are used by many MFIs as an incentive to help clients develop a savings habit and build assets.  In LAPO’s case, more than one-third of its members also voluntarily deposit additional savings, signifying that they value the ability to save with LAPO.  All LAPO clients earn interest on mandatory and voluntary savings accounts.

In addition, it confuses the role of microfinance banks, which are completely different from the regular commercial banks that would be more familiar to the average reader.  For the most part, these “banks” are actually former non-profit lenders who were required to change their status because of banking regulations in their countries.  This misleading distinction creates the inaccurate impression that regular commercial banks are coming to dominate the industry.

The article suggests that microfinance has not lived up to its claims of improving the lives of the poor, and falls short of the standard of “sav[ing] the world.”  In fact, no one has made that claim.  What is certain, and has been shown by a growing body of research,  is that it helps give poor families access to the financial services they need to improve their lives and better prepare for financial shocks that could otherwise send them deeper into poverty.

7 Responses to “What is the true cost of microfinance?”

  1. SS Says:

    I am so glad that you had the opportunity to set the record straight on this. Thank You

  2. Fehmeen Says:

    I think the article correctly highlighted that microfinance may head the wrong way if certain precautions are not taken immediately. More importantly, it pointed out that less than 10% of all MFIs are questionable, and that the rest are genuine efforts. A few bad apples ought not to tarnish the reputation of this sector.

  3. Prasanna Mishra Says:

    In some cases promoters of micro finance companies tend to maximise profit and charge higher interest. The ideal situation would be to encourage more Not For Profit Companies handling micro finance.

  4. M.RamaMohanRao Says:

    The interest rate burden on the poor definetly requires a close examination and regualtion . If MFI,s start running ther business in MNC”S style this would happen. The article cautions all good thinking people that enjoyment at the cost of the poor is unpardonable. There is also a need to define maximum lilmit for microfinance as it started entering in to medium and macro finance in some cases Let it not be a backdoor for accessing more money by not so poor.

  5. Sugiana, SP Says:

    i think this article is explain the cost of microfinance with many clear,but i have one ask. How much cost is ideal for agriculture lending?

  6. money Says:

    I’m so proud with Grameen. They have helped many people. This is really a bank which helps people.

  7. adrianalemus Says:

    was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of it and I have you bookmarked to check out new stuff you post.

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