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02.18.2011

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MicroWorld

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How can abusive interest rates be controlled?

Alongside regulations and the free play of competition, transparency has proven to be one of the most efficient ways of preventing abusive interest rates. But in the end, it is the conjunction of these three factors that makes it possible to guarantee reasonable lending rates for borrowers.

Controlling interest rates through the law: mitigated results

The idea of government-controlled maximum interest rates can seem appealing. In fact, several countries are doing this via the laws on usury rates or on MFI funding by banks… But what is the end result of this? Most experts (1) point to the counterproductive effects: fixed maximum rates could turn microcredit institutions away from the poorest communities, whose loans are more expensive. in favour of more profitable clients. Elsewhere, methods may be found for getting around the law, for example by billing other items such as extra administrative fees.

Through competition?

Competition would appear to be an efficient way of keeping interest rates down in the sector. “The real motivating force for keeping interest rates down is competition. In Bolivia, between 1992 and 2003 (interest rates) were divided by three in this way”, confirms Jérémy Hadjenberg, co-author of the Guide de la Microfinance. An assertion we should not take too seriously since it has been observed, in certain markets, related or not to microfinance, that agreements have been made between competitors to keep prices high (see, for example, the case of text messages in France)

Transparency: An imperative

Transparency enables borrowers (and also regulating bodies) to access the information needed to compare different microcredit offers. It is therefore the best way of identifying the lowest rates and the most abusive. To be effective, it must be developed with the help of several means of leverage:

First of all, through State regulation: for example in Peru, MFIs are obliged by law to publish their interest rates, which are even displayed on the web site of the SBS, the public supervision authority.

The second means of leverage is self regulation by the sector, as practiced by MF Transparency, which groups together over 550 microcredit institutions all over the world under one maxim: price transparency. A number of regional initiatives make it possible to complete the system and communicate the correct practices to members of the microfinance sector.

Finally…

The ethics of microfinance remain the source of its efficiency, whether social or financial. Various tools make it possible to limit abuse, but it is only the willingness the sector shows to fulfil its role towards the poorest communities that will sustain lenders’ confidence whilst ensuring its long term viability.

1 «Voyage au cœur d’une révolution, la microfinance contre la pauvreté », collective work presented by Jacques Attali, published by JC Lattès 2007, p. 166.

This article is part of the special report: