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Lowering the interest burden for microfinance

Author

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  • Insu Song
  • Carrie Lui
  • John Vong

Abstract

MFIs have a high interest rate burden due to the small amount per transaction of microcredit and inevitably high operating cost per transaction. To ensure financial viability and to expand the depth and breadth of their operations, MFIs have to adopt cost recovery interest rates on microcredit, hence, MFIs have to charge interest rate high enough, usually substantially higher than the bank loan risk free interest rate. The major factors determining the interest rate on microcredit are the cost of funds, operating costs, loan loss cost and capital for business expansion. To illustrate the impacts of the above factors on interest rate, we present a summary of the current cost structures of microfinance institutes (MFIs) in three Southeast Asia countries, Cambodia, Vietnam and Indonesia. Then, we review existing studies and propose new uses of mobile technologies and financial market innovations for lowering the interest burden.

Suggested Citation

  • Insu Song & Carrie Lui & John Vong, 2014. "Lowering the interest burden for microfinance," International Journal of Process Management and Benchmarking, Inderscience Enterprises Ltd, vol. 4(2), pages 213-229.
    • Handle: RePEc:ids:ijpmbe:v:4:y:2014:i:2:p:213-229
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    Cited by:

    1. Aruna Balammal & R. Madhumathi & M.P. Ganesh, 2016. "Pentagon Performance Model of Indian MFIs," Paradigm, , vol. 20(1), pages 1-13, June.

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