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Interest Rates and Implications for Microfinance in Latin America and the Caribbean

Author

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  • Ekka, Rashmi Kiran
  • Wenner, Mark D.
  • Campion, Anita

Abstract

Microfinance institutions (MFIs) have been successful in providing credit to millions of low-income borrowers in groups previously excluded from formal financial services, but they often charge interest rates that many claim are excessive. We examine microfinance interest rates and their determinants in order to understand how these rates might be lowered. Using high-quality financial data from 29 institutions in seven countries over a period of four years, and drawing on information from field visits with clients, we explore patterns of cost and efficiency in MFIs. We find that improved operational efficiency comes with increased competition and institutional age, or learning by doing. Encouragingly, our regression analysis shows patterns of profit-making MFIs charging lower interest rates. We also find that interest rate caps reduce the outreach of these institutions to the poor, women, and rural clients.

Suggested Citation

  • Ekka, Rashmi Kiran & Wenner, Mark D. & Campion, Anita, 2010. "Interest Rates and Implications for Microfinance in Latin America and the Caribbean," IDB Publications (Working Papers) 4298, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:4298
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    References listed on IDEAS

    as
    1. Suresh de Mel & David McKenzie & Christopher Woodruff, 2009. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(1), pages 423-423.
    2. Dean S. Karlan & Jonathan Zinman, 2008. "Credit Elasticities in Less-Developed Economies: Implications for Microfinance," American Economic Review, American Economic Association, vol. 98(3), pages 1040-1068, June.
    3. González-Vega, Claudio & Villafani-Ibarnegaray, Marcelo, 2007. "Las microfinanzas en la profundización del sistema financiero. El caso de Bolivia," El Trimestre Económico, Fondo de Cultura Económica, vol. 0(293), pages 5-65, enero-mar.
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    More about this item

    Keywords

    efficiency; microfinance; tasas de interés; eficiencia; microfinanzas; interest rates;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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