The determinants of interest rates in microfinance: Age, scale and organizational charter

This study compares the responsiveness of microcredit interest rates with age, scale of lending, and organizational charter. It uses an unbalanced panel of 300 microfinance institutions (MFIs) from 107 developing countries from 2005 to 2015. Three key trends emerge from the results of a 2SLS regression. First, the adoption of formal microbanking practices raises interest rates compared with other forms of microlending. Second, large‐scale lending lowers interest rates only for those MFIs that already hold legal banking status. Third, age of operation in excess of 8 years exerts a negative impact on interest rates, regardless of scale and charter type of MFI. Collectively, our results indicate that policies that incentivize mature MFIs to share their knowledge will be more effective in helping the nascent institutions to overcome their cost disadvantages compared with reforms to transform them into licensed banks. For MFIs that already hold permits to operate as banks, initiatives to increase loan sizes are key strategic pricing decisions, irrespective of the institution's age. This study is original in its differentiation of the impact on interest rates of regulations that promote formal banking principles, credit market extension vis‐à‐vis knowledge sharing between mature and nascent MFIs.