Just as I finished asking When is lending just?, a CGAP report on microfinance institution (MFI) interest rates landed in my electronic inbox. I just read it, and highly recommend it for its careful and creative turn to the evidence amidst an inflamed debate:
A few MFIs have charged their borrowers interest rates that may be considerably higher than what would make sense from this perspective. Indeed, it would be astonishing if this were not the case, given the diversity of the industry and the scarcity of competitive markets.The real question is whether unreasonable MFI lending rates are more than occasional exceptions. We do not find evidence suggesting any widespread pattern of borrower exploitation by abusive MFI interest rates. We do find strong empirical support for the proposition that operating costs are much higher for tiny microloans than for normal bank loans, so sustainable interest rates for microloans have to be significantly higher than normal bank interest rates. We are encouraged by the rapid decline in interest rates, operating costs, and profits in recent years, and we would expect this trend to continue in the medium-term future.
The report is "The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates?", by Richard Rosenberg, Adrian Gonzalez, and Sushma Narain.Thoughts:
- If Rosenberg, Gonzalez, and Narain had written this a few months later, they could have benefited from the insight in Portfolios of the Poor that informal moneylenders often end up charging much less than their quoted rates of, say, 30%/month. People often pay back late without paying extra interest, so the effective rate is lower. As a benchmark for MFIs, moneylenders are not quite what they seem.
- I think the time trends---falling interest rates---are particularly interesting because they speak to factors other than rates that determine when lending is fair. As I suggested in When is lending just?, whether a loan is exploitative depends on such factors as whether the local credit market is competitive. A monopolist charging 50%/year is more worrisome than an MFI charging the same in the face of stiff competition. That rates are falling suggests that microcredit markets are becoming competitive in more places.
