Publication: Microcredit Interest Rates and Their Determinants, 2004-2011
Loading...
Files in English
587 downloads
116 downloads
277 downloads
31 downloads
Other Files
306 downloads
Published
2013-06
ISSN
Date
2014-01-29
Editor(s)
Abstract
From the beginning of modern microcredit, its most controversial dimension has been the interest rates charged by micro lenders, often referred to as microfinance institutions (MFIs). These rates are higher, often much higher, than normal bank rates, mainly because it inevitably costs more to lend and collect a given amount through thousands of tiny loans than to lend and collect the same amount in a few large loans. Higher administrative costs have to be covered by higher interest rates. Many people worry that poor borrowers are being exploited by excessive interest rates, given that those borrowers have little bargaining power, and that an ever-larger proportion of microcredit is moving into for-profit organizations where higher interest rates could, as the story goes, mean higher returns for the shareholders. Section one looks at the level and trend of micro lenders' interest rates worldwide, and breaks them out among different types of institutions (peer groups). Section two examines the cost of funds that micro lenders borrow to fund their loan portfolio. Section three reports on loan losses, including, worrisome recent developments in two large markets. Section four presents trends in operating expenses, and touches on the closely related issue of loan size. Section five looks at micro lenders' profits, the most controversial component of microcredit interest rates. A reader without time to read the whole paper may wish to skip to section six, which provides a graphic overview of the movement of interest rates and their components over the period and a summary of the main findings. The annex describes our database and methodology, including the reasons for dropping four large microlenders6 from the analysis.
Link to Data Set
Citation
“Rosenberg, Richard; Gaul, Scott; Ford, William; Tomilova, Olga. 2013. Microcredit Interest Rates and Their Determinants, 2004-2011. Access to Finance Forum;no. 7. © World Bank. http://hdl.handle.net/10986/16655 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Microfinance Meets the Market(World Bank, Washington, DC, 2008-05)Microfinance institutions have proved the possibility of providing reliable banking services to poor customers. Their second aim is to do so in a commercially-viable way. This paper analyzes the tensions and opportunities of microfinance as it embraces the market, drawing on a data set that includes 346 of the world's leading microfinance institutions and covers nearly 18 million active borrowers. The data show remarkable successes in maintaining high rates of loan repayment, but the data also suggest that profit-maximizing investors would have limited interest in most of the institutions that are focusing on the poorest customers and women. Those institutions, as a group, charge their customers the highest fees in the sample but also face particularly high transaction costs, in part due to small transaction sizes. Innovations to overcome the well-known problems of asymmetric information in financial markets were a triumph, but further innovation is needed to overcome the challenges of high costs.Publication El Salvador Financial Sector Assessment Program Update(Washington, DC, 2010-11)The global financial crisis and ensuing credit crunch has revived the discussion on the role of public sector in the financial system around the world and in El Salvador, authorities have announced plans to step up their activities. A clearly defined strategy for the public banks, focused on complementing private sector activity, is necessary as their activities expand to improve access to finance and diversify the sources of funding. Any process of growth needs to accompany by improvement in risk management processes, governance arrangements and enhanced supervision. Going forward, the two public retail banks should increase their specialization in different market segments. The development bank role can be enhanced while maintaining its second tier status. To make the guarantee funds effective, in addition to scale their size, several operational features need to be improved.Publication Banking in Brazil : Structure, Performance, Drivers, and Policy Implications(2009-01-01)The objective of this paper is to analyze the industry structure of banking services in Brazil in order to shed light on financial performance and its drivers at a disaggregated level. The study illustrates how differences across market segments - which tend to be averaged out in aggregate analysis - need to be taken into account when analyzing performance and designing public policy for the banking sector. In particular, retail banking is found to be less sensitive to price competition and to exhibit considerably higher returns than corporate banking. The authors identify and discuss the factors underlying revenues, costs, and risks in each market segment, and conclude with policy implications.Publication Financial Sector Assessment Program - Poland : Credit Union Sector Regulatory and Supervisory Framework in Transition(Washington, DC, 2014-01)A World Bank-International Monetary Fund (IMF) mission visited Warsaw February 19 - March 5, 2013, to undertake an update of the Financial Sector Assessment Program (FSAP) conducted in 2006. The team was led by Luc Everaert (IMF) and Brett Coleman (World Bank) and included Karl Driessen, Nancy Rawlings, Yinqiu Lu, Jorge Chan-Lau, Rishi Ramchand (all IMF), Katia D'Hulster, Heinz Rudolph, Andrey Milyutin, John Pollner, Ignacio Tirado (all World Bank), as well as external experts David Walker (Canadian Deposit Insurance Corporation), Monnie Biety (independent consultant), and Fernando Montes-Negret (former World Bank and IMF). This note is prepared by Monnie Biety. The primary focus of this note is on the legal, regulatory, and supervisory framework of Poland's credit unions (SKOKs) at a time when the authorities are transitioning them to a stronger, more stable footing. The note reviews the law, regulations, and supervision regime in force at the time of the FSAP mission and suggests ways to help strengthen the SKOKs in a phased manner that gives viable SKOKs the necessary time and support to meet the new requirements. While the draft law was not reviewed during the FSAP as it was anticipated that there were to be many changes to the draft, key aspects of the draft law were analyzed using information and reports gathered that discussed the contents of the law. The note concludes with a discussion of these elements of the draft law. Numeric data used in this report were provided by National Association of Savings and Credit Unions (NASCU) during the FSAP mission, with some corrections provided by KNF post mission.Publication Financing Mechanisms for Addressing Remediation of Site Contamination(World Bank, Washington, DC, 2014-10)Industrial and commercial facilities provide great economic benefit to communities throughout the world. Unfortunately, many industries use or have used practices and materials which have proven toxic to the environment and to those who live and work near contaminated sites. The definition and degree of contamination varies at national and regional levels of government, but leaders throughout the world now recognize the hazard that contaminated industrial and service sites present to the wellbeing of their communities and seek innovative ways to finance the remediation of these challenging sites. Industrial contamination can have a severe, direct impact on adjacent communities. The cleanup and redevelopment of a so-called brownfield can improve a community s economy, provide an opportunity for habitat restoration, and create public space. Cleanup and redevelopment of brownfields can be an effective economic development strategy, with benefits seen in two timeframes. First, there is an immediate and one-time capital expenditure for cleanup activities, infrastructure, and construction. The initial investment generates tax revenues, temporary family-wage jobs, and indirect economic benefits within the community. Secondly, there is a long-term economic impact from remediation projects in the form of higher property values, long-term tax revenues, and the attraction of external capital to the community by tenants of the revitalized property. The economic benefit of contaminated site redevelopment is perhaps most clearly illustrated by permanent job creation from the restored properties. The deleterious effects of industrial contamination across all facets of a community typically provide a strong incentive for leaders to seek financing mechanisms that make site remediation possible.
Users also downloaded
Showing related downloaded files
Publication The Sub Prime Crisis : Implications for Emerging Markets(World Bank, Washington, DC, 2008-09)This paper discusses some of the key characteristics of the U.S. subprime mortgage boom and bust, contrasts them with characteristics of emerging mortgage markets, and makes recommendations for emerging market policy makers. The crisis has raised questions in the minds of many as to the wisdom of extending mortgage lending to low and moderate income households. It is important to note, however, that prior to the growth of subprime lending in the 1990s, U.S. mortgage markets already reached low and moderate-income households without taking large risks or suffering large losses. In contrast, in most emerging markets, mortgage finance is a luxury good, restricted to upper income households. As policy makers in emerging market seek to move lenders down market, they should adopt policies that include a variety of financing methods and should allow for rental or purchase as a function of the financial capacity of the household. Securitization remains a useful tool when developed in the context of well-aligned incentives and oversight. It is possible to extend mortgage lending down market without repeating the mistakes of the subprime boom and bust.Publication Empowerment in Practice : From Analysis to Implementation(Washington, DC: World Bank, 2006)This book represents an effort to present an easily accessible framework to readers, especially those for whom empowerment remains a puzzling development concern, conceptually and in application. The book is divided into two parts. Part 1 explains how the empowerment framework can be used for understanding, measuring, monitoring, and operationalizing empowerment policy and practice. Part 2 presents summaries of each of the five country studies, using them to discuss how the empowerment framework can be applied in very different country and sector contexts and what lessons can be learned from these test cases. While this book can offer only a limited empirical basis for the positive association between empowerment and development outcomes, it does add to the body of work supporting the existence of such a relationship. Perhaps more importantly, it also provides a framework for future research to test the association and to prioritize practical interventions seeking to empower individuals and groups.Publication Global Economic Prospects, January 2025(Washington, DC: World Bank, 2025-01-16)Global growth is expected to hold steady at 2.7 percent in 2025-26. However, the global economy appears to be settling at a low growth rate that will be insufficient to foster sustained economic development—with the possibility of further headwinds from heightened policy uncertainty and adverse trade policy shifts, geopolitical tensions, persistent inflation, and climate-related natural disasters. Against this backdrop, emerging market and developing economies are set to enter the second quarter of the twenty-first century with per capita incomes on a trajectory that implies substantially slower catch-up toward advanced-economy living standards than they previously experienced. Without course corrections, most low-income countries are unlikely to graduate to middle-income status by the middle of the century. Policy action at both global and national levels is needed to foster a more favorable external environment, enhance macroeconomic stability, reduce structural constraints, address the effects of climate change, and thus accelerate long-term growth and development.Publication Income Mobility, Income Risk, and Welfare(Published by Oxford University Press on behalf of the World Bank, 2019-06)This paper presents a framework for the quantitative analysis of individual income dynamics, mobility, and welfare, with ex ante identical individuals facing a stochastic income process and market incompleteness, implying that they are unable to insure against persistent shocks to income. We show how the parameters of the income process can be estimated using repeated cross-sectional data with a short panel dimension and use a simple consumption-saving model for quantitative analysis of mobility and welfare. Our empirical application, using data on individual incomes from Mexico, provides striking results. Most of the measured income mobility is driven by measurement error or transitory income shocks and is therefore (almost) welfare neutral. Only a small part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which, nevertheless, have economically significant effects on social welfare. Strikingly, roughly half of the mobility that cannot be attributed to measurement error or transitory income shocks is driven by welfare-reducing persistent income shocks. Decomposing mobility into its fundamental components is thus crucial from the standpoint of welfare evaluation.Publication Natural Disasters, Poverty and Inequality(Taylor and Francis, 2021-10-28)Conventional risk assessments underestimate the human and macroeconomic costs of disasters, leading to inefficient risk management strategies. This happens because conventional assessments focus on asset losses, neglecting important relationships between vulnerability and development. When affected by a hazard, poor households take longer to recover from disasters and are more likely to face long-term consequences. Forced to manage trade-offs between essential consumption and reconstruction, these households are more likely to face persistent health or education costs. This chapter proposes a review of existing research into the natural disaster-poverty-inequality nexus and the various metrics that can be used to measure disaster impacts, such as recovery times, economic (income or consumption) losses, poverty incidence, inequality, and welfare or well-being losses. Each of these metrics provides a different perspective on disaster costs and suggest different spatial and sectoral priorities for action. Focusing on the concepts of well-being losses and socioeconomic resilience, this chapter shows how more comprehensive accounting of disaster impacts can better inform disaster risk management and climate change adaptation strategies and support their integration into development and poverty-reduction policies.