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Effective Cost of Borrowing from Microfinance Institutions

Author

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  • Ankur TUTLANI

    (Jawaharlal Nehru University, India.)

Abstract

It has been observed lately that the dependence on moneylenders for borrowing needs of poor borrowers remained stable despite the presence of MFIs, particularly in developing economies. This is surprising given the fact that MFIs charge relatively lower interest rate as compared to moneylenders. The paper explains this trend by arguing that the effective cost of borrowing from MFI is higher relative to the effective cost of borrowing from moneylender. It is due to the additional burden incurred in the form of transaction costs in case of MFI borrowing. Simulation results also support this phenomenon.

Suggested Citation

  • Ankur TUTLANI, 2016. "Effective Cost of Borrowing from Microfinance Institutions," Journal of Economics Bibliography, KSP Journals, vol. 3(1), pages 134-147, March.
    • Handle: RePEc:ksp:journ6:v:3:y:2016:i:1:p:134-147
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    References listed on IDEAS

    as
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    4. Pal, Debdatta & Laha, A. K., 2013. "Sectoral Choice of Credit in Rural India," IIMA Working Papers WP2013-03-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
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    More about this item

    Keywords

    Microfinance; Group lending; Informal finance; Transaction cost; Effective cost.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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