Why interest rates of microfinance so high?

Over the years since the time when Muhammad Yunus won the Nobel Peace Prize, has become almost a household of microcredit term. The gift and even to invest in the micro-finance organizations has become a tradition that is popular at the end of the year in many philanthropic families in mind. But when people become more familiar with the sector of microfinance, the inevitable question: why so high interest rates?

In fact, rates of interest seems fairly high compared to commercial microfinance loans in the United States-course. On average, approximately 30% of the interest rate seems high micro-financing, although only in relation to credit cards. But before closing their accounts and place Micro kiva and cancel its annual contribution to the action moves us further in this topic of interest.

Some will say that political and an increased risk to foreign currency loans, is such that increases in costs to borrowers of micro-enterprises. Although these factors may play a role, there are many parties involved in the puzzle of microfinance interest rates. To make the clearer picture on what is happening, must take into account all the elements that make up these charges.

The mixture:

With the help of statistics on the market in the mixture, containing an Association of microfinance industry financial information-look at the values of the elements that make up the Micro Finance interest rates.

According to mixture has reported an average daily balance of a loan for a large part of 1,000 organizations in 2008 was about $600. Average nominal "gross portfolio return" was 30.7%. Performance of a portfolio is a good approximation of rates means applied by microfinance for their borrowers. Now, 30% seems high, but the amount of the benefits a reality? Want to you know, we need to look at their own expense.

Cost of financing:

For the same group of microfinance is the raw mix of financial statements 5.2% of the total assets and the portfolio of loans, 78.5% of total assets. We use these two figures were combined for the overall estimate of 6.7% share of 30.7% came from contributions from the interest.

What does this mean? The institutions of micro finance should always get money from somewhere. In many cases, borrow money from banks and microfinance (WFSA) investment vehicles: agencies that specialize in microfinance investment. Some microfinance have their own funds to applicants who has to offer. In all cases, you must pay the costs of call routing, loans and interest. The average cost of these funds, as we said in our previous estimates of about 6.7%.

These institutions in developing countries, with significant political risks in the game market is at first glance, 6.7% low interest rates. But there are many people and organizations that fund social investors of these institutions. Governmental organizations such as social investors, public authorities and non-profit organizations are not prepared to accept lower return on your money for a social mission that meets your investment. As a result, social investors reduce costs to borrow money for microfinance.

In addition to the economic costs of the financial institutions to create a provision of money in loans for all losses. Reserve for loans to help financial institutions to absorb future loan losses. Use a mixture of available statistics and our adjustments, we find that the cost of the allowance for loan losses is 1.4% of microfinance interest rates.

When microfinance organizations raise funds, they must be present, and therefore the law can cost money. According to the mixture, administrative costs, such as Office, transport, etc., information systems, it is approximately 6.4% of the assets in a microfinance institution: 8.1 percentage points in general our country from above.

Micro financial institutions also have costs for staff, wages, benefits, etc... The mixture was a personal expense 8.0% of total assets, which means percentile 10.1 points.