Interest Rates in Microfinance

daniel.vidal Uncategorized 10 Comments

Do you remember walking to class in college and that same guy would ask you if you needed a credit card?  I think his name was Timmy. For me at least, it came down to easy cash from Timmy or the blood bank.  Books (beer) weren’t getting any cheaper. After maxing out the first and then second card on books (beer), my father patiently explained if I continued to only pay off the minimum balance, I would be 50 before paying for my Econ 101 book (hangover).

Surprisingly when I went looking for Timmy, he didn’t care and didn’t even remember me. 

Some people today think all credit is the same, just like our “friend”, Timmy’s offer. But microcredit is different. While the credit card companies allow us to consume beyond your means, the microfinance institutions (MFIs) that Whole Planet Foundation (WPF) work with use credit as a tool to alleviate poverty. 

Some people wonder why those that have the least are charged any interest on microcredit at all. It was the Noble Peace Prize winner, Muhammad Yunus, that proved not only are the poor capable of repaying a loan, but can help create a sustainable system of opportunities that is able to reach millions more.

“Microcredit ignites the tiny economic engines of the rejected underclass of society. Once a large number of tiny engines start working, the stage can be set for bigger things.”

-Professor Muhammad Yunus, founder of Bangladesh’s Grameen Bank

To understand completely the reasons for interest rates in microcredit, we first need to understand the realities in the developing world and the most appropriate and efficient ways to deliver credit to the very poor. Important factors that impact interest rates are:

  • Risk: Many of these countries are viewed as high risk. Whether it is recent war, poor government, weak economies, or lack of infrastructure; these costs are passed onto their citizens. 
  • Inflation: In some cases these countries may have inflation rates that exceed 20%.
  • Delivery model of microcredit: The banks go to the poor, which requires an army of loan officers and transportation to reach isolated communities.
  • The Design of Effective Microcredit: Small, frequent repayments are essential to creating a system that works for the realities of the poor. This requires weekly or monthly visits to often times very remote parts of the country to collect payments from the poor.
  • Other services: Many WPF partners offer additional services like health, savings, insurance and education services. These are other opportunities that the poor would often not have access to otherwise.
  • Sustainability: It is critical that the interest rate be set to cover the above while still ensuring there is enough of a surplus to expand their services.

Interest rates are something that we closely monitor at WPF. We have 3 guys in the field – Costa Rica, Senegal, and Thailand – who work one-on-one with all of our MFI partners to ensure that their missions and services closely align with the needs of the poorest of the poor.

To understand why the poor are charged interest on microcredit, we must first have a better understanding of the cost that are involved and the desire, from both MFIs and borrowers, to expand this opportunity to others in their communities and around the world. Creating this sustainable system is important to alleviating poverty. Microcredit is not a hand out, but it provides a hand up to millions around the world, empowering them to lift themselves out of poverty.

For more information, check out the President’s Page at https://www.wholeplanetfoundation.org/root-causes-of-poverty/

Comments 10

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    i work at whole foods market and we just started our whole planet foundation drive and i was wondering if the people that get the loans get charged a interest rate and if so what the rate is

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    If interest is charge on micro loans then why would you be asking for donations from the US rather than giving a return on their investments since most third world countries interest rates are so high that monies borrowed from US investors can get a fair return that they will want to continue investing in the micro loans rather than US investors have their money in a US bank drawing low interest.

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      Hi Peter, the interest charged to the borrowers is paid pack to the microfinance institution and is used to cover their operating expenses. Whole Planet Foundation makes agreements with our microfinance partners that the funds we grant are used for loan capital, not institutional expenses. Charging interest allows our microfinance partners to fund their overhead – things like motorbikes for field credit officers to make the long trips to visit clients; or the building where loan groups meet to repay their loans. It is certainly an interesting idea to give US investors returns from microcredit investments and we may see that kind of microlending in the future. Thanks for sharing your thoughts.

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    Right… so after you get the money back with interest from these micro loans, what then happens to that money? Is it reinvested in more micro loans or?

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      Great questions, Sierra. The money is repaid to our microfinance partners, the institutions on the ground who implement the loans. We visit these partners annually and analyze their financials. When the funds are repaid with interest, those funds are then re-loaned to more people in the community, creating more prosperity around the globe.

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        Definitely Seems like this a legit based program disguised with nice pictures and ideas. If this were a true non profit the interest rates and resource allocation would be transparent to the public. So why is there so much encouragement to donate from a store where everything is already highly overpriced , when u are just using that money to loan to people who are in third world countries where interest are rates are extremely high.
        This seems a little suspicious to me .

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          Hi Curt,

          We require our microfinance partners to be transparent about their interest rates, portfolio at risk, and many other key performance indicators that our team tracks in order to determine which partners are the right partners. You can find our financials at the bottom of our website in the footer if you click “Financials.” Happy to answer any specific questions you may have about interest rates in any countries, if you’re interested.

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            What is the avg interest rate? What are the three highest? What are the three lowest? Why are interest rates not more clearly known to the public, why are they only mentioned on the Q and A? Please put this information on the about section under financials to avoid being seen as a highly suspicious organization.

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            First, it should be noted that WPF provides 0% local currency loans or grants to the MFI partner.

            Interest rates charged by the MFI to the clients vary widely across our partners, are dependent on country context and are different than traditional finance. Here is a great article that briefly explains the core differences:
            https://www.microworld.org/en/news-from-the-field/article/why-are-microcredit-interest-rates-higher-traditional-interest-rates

            We also have a number of projects that provide interest free loans or grants to the clients. These programs are targeting the very poorest, that often do not have any assets, and are the first rung in the financial inclusion ladder. This approach is known as the Ultra-Poor/Graduation model.

            Finally, in addition to cost, WPF monitors each partner’s “Responsible Finance”. We have designed indicators around accessibility, transparency and supportiveness and review these with each partner during annual field reviews.

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