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Special report

01.28.2011

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microworld

Rates and transparency in microfinance

The aim of microfinance is to break away from the traditional banking method by giving individuals the means to finance themselves. This involves the application of interest rates on their borrowings. As loan amounts are low, and repayments are made frequently (often weekly), repayment amounts are affordable for the customers, especially in view of the high productivity and profitability of their income generating business(s). Interest rates of MFIs appear high because many MFIs provide smaller loans than traditional banks and are disbursed with a rigorous methodology, thus increasing their operating costs.

Interest rates must cover: the cost of funds for the MFI, the costs associated with the risk of default, administrative costs and costs associated with the processing of loans (accessing the clients, processing of applications for loans, providing support, collecting repayments etc).

It is estimated that operating costs represent on average 25% of the portfolio of an MFI, while in India, for example, commercial banks incur operating costs of only 5% to 7% on their outstanding loans.

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