Interest rates in microfinance: What is a fair interest rate when we lend to the poor?

This paper analyses how much is fair interest rate when lending to the poor. Empirical works of literature on microfinance interest rates are investigated to explain the basis of the exigent ethical debates. To further understand the fairness of an interest rate in microfinance, theoretical investigations were also conducted. The findings suggest that providing financial services to the bottom of the pyramid is costly, but feasible. A fair interest rate is affordable to the poor, and, at the same time, could enable microfinance institutions to be sustainable and allow them to provide a permanent financial service to low-income households. The findings also suggest that microfinance institutions are charging a high interest rate to cover operational costs rather than a profit orientation. The studies reviewed in this paper also show that a high interest rate has both a positive and a negative significant effect on microfinance institutions’ financial performance and social mission respectively. However, there is an interest rate threshold level that would balance the interests of all stakeholders in the microfinance industry. Indeed, looking for an optimal interest rate that makes microfinance institutions self-sufficient and sustainable, at the same time affordable to borrowers’ requires stakeholders’ collaboration.