Is lowering the interest rate cap in Africa really beneficial to the development of microfinance?

Since the inception of microfinance, the interest rates charged to clients of microfinance institutions have often been reconsidered cause of their high level in some parts of the world.

Therefore, UEMOA has recently reduced the maximum interest rate that microfinance institutions (MFIs) can apply in order to protect consumers. However, this measure does not seem to be without consequences for the future of microfinance in West Africa: it could reduce access to credit.

UEMOA (West African Economic and Monetary Union) is an African organization whose mission is the achievement of economic integration of the Member States, through the strengthening of economic competitiveness.
8 states are part of it: Benin, Burkina Faso, Ivory Coast, Guinea -Bissau, Mali, Niger, Senegal, Togo.

Indeed, decreasing rates from 27 % to 24%, could cause difficulties for financial services providers such as MFIs to cover their operating costs and therefore they could be forced to reduce their coverage of the poorest populations, especially in rural areas.

As stated Khaled Ben Jilani of AfricInvest: "Limiting the interest rate automatically excludes the portion of the population the most in need."

As the opinion of some actors in the sector, several MFIs could eventually disappear because they would face too many costs. Borrowers could turn again to so-called traditional actors that usually apply much higher interest rates.
While many microfinance institutions are still struggling to develop in this region of the world, the authorities also plan to return to the current tax exemption for cooperatives MFIs, which could hinder the development of this sector to a sustainable model.

In a recent study, CGAP showed that the management of interest rates is even less justified that they have already fallen by 39 % to about 25 % between 2005 and 2011 in sub-Saharan Africa.

Would liberalizing the system to bring down costs be the solution as Julie Hearne, Specialist IFC suggests, or should we rather go to a multi-layered regulation?

In Kenya, for example, interest rates have not been limited and the government chose to turn to an inspired system of Uganda, with a multi-layered regulation adapted to different types of financial institutions.

Thus, the solution could also reside in a change of a model based more on new technologies to lower costs and thus reach a larger population?

Source: Jeune Afrique

Tags : microfinance, microfinance institutions, MFIs, microcredit, CGAP, UEMOA, West Africa, regulation, interest rate, credit, MicroWorld