WASHINGTON, July 16, 2013 /PRNewswire-USNewswire/ -- Microcredit interest rates, measured by the global median interest yield of microfinance institutions (MFIs), averaged 27 percent in 2011, says new research from CGAP, MIX and KfW. Global microcredit interest rates declined substantially between 2004 and 2007 and then leveled off.
The joint paper, Microcredit Interest Rates and Their Determinants, cautions that this global percentage veils a great deal of underlying diversity. For example, interest rates have dropped for banks and other regulated microlenders but have risen for NGOs and other unregulated entities focusing on low-end borrowers. Interest rates also vary more widely in Latin America and Africa than in other regions, and rates are significantly lower in South Asia than elsewhere.
The research finds that the operating costs of MFIs remain the largest determinant of microcredit interest rates. "Average operating expenses fell substantially through 2007 as microlenders became more efficient," adds William Ford, Market Intelligence Lead at MIX, "but this downward trend was interrupted in 2008 and 2001."
The percentage of borrowers' interest payments that went to microlenders' profits also dropped from about 20 percent in 2004 to 10 percent in 2011. During the same time, funding costs have climbed as microlenders fund more of their portfolio from commercial borrowing. "The fact that interest rates are driven mainly by funding and operational costs shows that at the aggregate level, there are no signs of systematic mission drift in the industry," said Matthias Adler, microfinance expert at KfW, sponsor of the study with funding from the German Federal Ministry of Economic Co-operation and Development.
An interactive data set offered by MIX supports this new paper and provides more than 800 data cuts that allow users to slice data for their needs and download the results. The online database, available on the website MIXMarket.org, is especially practical for users looking to customize data for a specific region or country.
"Microcredit inevitably comes with high administrative costs, which translates to interest rates that are often much higher than normal bank rates," notes Richard Rosenberg, co-author of the report and former CGAP advisor. "This research is an attempt to address what's 'reasonable' with facts rather than ideology."
The Consultative Group to Assist the Poor works toward a world in which everyone has access to the financial services they need to improve their lives. CGAP develops innovative solutions for financial inclusion through practical research and active engagement with financial service providers, policy makers and funders. Established in 1995 and housed at the World Bank, CGAP combines a pragmatic approach to market development with an evidence-based advocacy platform to advance poor people's access to finance. For more information, please visit www.cgap.org.
Established in 1948 as a public law institution, KfW's main activities are the promotion of SMEs, energy efficient housing and municipalities in Germany, export and project finance as well as the promotion of developing and transitional countries. With an outstanding portfolio ob 2.1 billion EUR, KfW is an important funder of microfinance in developing and transition countries. KfW provides a broad array of financial instruments. It has promoted a number of microfinance funds and is an active supporter of responsible finance practices. For more information, please visit www.kfw-entwicklungsbank.de. For press inquiries, please contact Sybille Bauernfeind (firstname.lastname@example.org).
MIX is the premier source for objective, qualified and relevant microfinance performance data and analysis. Committed to strengthening financial inclusion and the microfinance sector by promoting transparency, MIX provides performance information on microfinance institutions (MFIs), funders, networks and service providers dedicated to serving the financial sector needs for low-income clients. MIX fulfills its mission through a variety of platforms. For more information please visit www.themix.org.