WASHINGTON, Feb. 26 /PRNewswire-USNewswire/ -- Concerns that microcredit interest rates are unjustifiably high don't find much support in the available data, according to a new research report by CGAP, the global microfinance resource center.

Microfinance institutions (MFIs) need to charge higher rates than normal banks do because their tiny loans entail higher administrative expenses, and because they cannot borrow their funding as cheaply as banks can.

"Some MFIs seem to be charging interest rates that appear hard to justify even when considering these factors," says Elizabeth Littlefield, CGAP's CEO. "However, we found that such cases were only a small minority and that, in general, interest rates seem to be in line with the costs to MFIs. Encouragingly, interest rates on microcredit are declining rapidly, along with administrative costs and MFI profits as well."

"The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates," co-authored by Richard Rosenberg, Adrian Gonzalez, and Sushma Narain, found that the median interest rate on microloans was about 26 percent in 2006, the most recent year for which data were available. Microcredit usually costs less than credit cards or consumer loans in countries where data could be found, and virtually always costs far less than "informal" loans.

Microcredit rates have been dropping fast-by about 2.3 percentage points each year since 2003, much more steeply than the decline in bank loan rates. Rates fell very fast in East Asia/Pacific and the Middle East/North Africa (annual declines of 3.7-3.9 percent), and moderately in Africa, Europe/Central Asia, and Latin America (0.9-1.5 percent). Rates in South Asia did not move much.

Administrative costs, the largest contributor to microcredit interest rates, are inevitably higher for tiny microloans than for normal bank loans. For instance, lending $100,000 in 1,000 loans of $100 each requires greater spending on staff salaries, among other costs, than making a single loan of $100,000. But institutional learning and competition have been cutting these costs by about one percentage point annually.

Generally, MFI profits do not appear excessive: the median return on owners' equity was about 12 percent in 2006, compared to about 18 percent for banks in the same countries. The most profitable 10 percent of the worldwide microcredit portfolio produced returns on equity above 34 percent in 2006, a level that could raise concern about appropriateness for some. But much of this profit is earned by not-for-profit entities, which retain and reuse these earnings to expand their services to clients. And profits have been dropping by about 0.6 percentage points a year since 2003.

"The bottom line is that we found no evidence to suggest any widespread pattern of borrower exploitation," says Richard Rosenberg, the report's lead author. "Interest rates like the 85 percent that Compartamos was charging in Mexico raise understandable concerns, but less than 1 percent of microborrowers worldwide are paying rates that high. Administrative costs will always be higher for tiny microloans than for big bank loans. What's encouraging is that those administrative costs are declining, along with lenders' profits, and the savings are being passed along to borrowers. We expect this trend to continue over the medium term."

About CGAP
CGAP (The Consultative Group to Assist the Poor) is the world's leading resource for the advancement of microfinance. CGAP provides the financial industry, governments and investors with objective information, expert opinion, and innovative solutions to effectively expand access to finance for poor people around the world. More information: www.cgap.org

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