Poor service: Tiny loans are getting more expensive

Friday, January 31, 2014

INTEREST on the minuscule loans made by microfinance outfits has always been high, but over the past few years it has become even higher. A recent paper, using data on over 1,500 microfinance institutions (MFIs) from around the world, shows that for the smallest loans, typically less than $150, the average rate climbed steadily from 30% in 2004 to 35% in 2011.*

Even as small loans have become more expensive, they have also become more common. Global microfinance grew by 30% annually from 2004 to 2011, according to figures from MIX Market, a data provider. Strong growth heightened competition and made lenders more confident, says William Ford of MIX. Banks and mid-market MFIs started to poach the poorest clients away from low-end MFIs when they realised that lending to them was viable. The average loan size in the portfolios of most MFIs dropped after 2006, suggesting that they were indeed lending to a wider range of clients. Meanwhile, to replace lost customers, low-end MFIs began to serve borrowers even they had previously spurned as too great a credit risk.

Source: The Economist (link opens in a new window)

financial inclusion, microfinance, poverty alleviation