Don't Cap Microfinance Lending Rates | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary

Don't Cap Microfinance Lending Rates | Swaminathan S. Anklesaria Aiyar | Cato Institute: Commentary: "Charging poor people 30% interest sounds terrible. ... Is this unwarranted loot? Not at all, say the poor. They clamour for more such loans, and repayment rates exceed 99%, suggesting the interest rates are affordable."

"Compartamos in Mexico lends at up to 100%, yet borrowers repay. How so? An annual rate of interest is meaningless for businesses with a daily churn. A vegetable vendor borrows Rs 300 to buy vegetables wholesale, selling these for Rs 450. Even if he pays 100% per year interest on his loan of Rs 300, it amounts to just 90 paise/day, a negligible portion of his profits.

Many poor Indians use MFI loans to pay off moneylenders. An MFI loan at 30% to pay off a moneylender's loan at 100% is a blessing."

"But new MFIs lose money for years before breaking even at 36% interest. Weekly meetings with clients are expensive but inescapable: this enforces group solidarity and loan discipline. As loans rise from Rs 5,000 to Rs 15,000, operating costs fall and interest rates can be cut. When MFIs make large business loans with monthly rather than weekly repayments, then too interest rates can be cut. In semi-urban areas a single agent can handle 1,000 clients a week, but in remote areas no agent can handle over 200 clients, and that's costly."