The typical microfinance clients have low incomes and can’t gain access to formal financial institutions.

More often than not, these institutions simply don’t exist, especially in rural areas. For example, there are only 400 bank branches in Ethiopia for more than 80 million inhabitants.

When these institutions do exist, they impose conditions that in fact exclude the great majority of the population.

Microfinance clients use their loan to create or develop an income-generating activity, even if modest.

The activities of these micro-entrepreneurs are related to agriculture, food processing or small retail business in rural areas. In cities, microfinance clients include shopkeepers, craftsmen and street vendors. They generally work in the informal sector.

More on the profiles of entrepreneurs supported by our MFI partners… 

By applying interest rates covering their overall operating costs, many MFIs have succeeded in developing and perpetuating their activities, all the while increasing the number of their beneficiaries.

The three types of costs that determine interest rates

• the financing cost: due to the economic and financial situation of developing countries, the financing cost in local currency is often much higher than the borrowing cost in the more advanced economies;
• the cost of risk related to non-repayment by some borrowers;
• the operating costs: these costs are generally high, given the low amount and short duration of the microcredit, the need to analyse each project in detail, and the logistical and the administrative costs associated with the granting of the loans and other services within village communities.
  The operational costs are likely to decrease along with the institution’s growth, as it achieves economies of scale.

Median interest rates

The cost structure of MFIs and the context in which they operate explains why they practice an interest rate higher than that applied by commercial banks in developed countries.

The worldwide median interest rate applied by MFIs is approximately 28% per year (source: median portfolio yield, MixMarket). However, it varies considerably from one country to another.

The activities financed by a micro-loan, usually in the commercial and handycraft sector, can absorb such interest rate in the marging of the business.

Towards rates that are more transparent and less high

In order to promote the well-being of poor micro-entrepreneurs and the integrity of microfinance as a tool to fight poverty, all the stakeholders of microfinance must strive for better transparency in prices and work hard on reducing the costs of microcredit.

More on price transparency (MFTransparency website)…

More on whether microloan interest rates are excessive (Microfinance Gateway)…

Definition of social performance

In microfinance, social performance is defined as “The effective translation of an institution's social mission into practice in line with accepted social values such as serving larger numbers of poor and excluded people; improving the quality and appropriateness of financial services; creating benefits for clients; and improving social responsibility of an MFI.”

Essential indicators for taking into account the social dimension on an everyday basis

Most MFIs consider their social mission to be as important as their financial objective.

By measuring social performance thanks to recognised indicators created with this aim, the institution puts the social dimension at the heart of its everyday management and its strategy.

More on social performance –CERISE website…