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Effective Cost of Borrowing from Microfinance Institutions

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  • Tutlani, Ankur

Abstract

It has been observed lately that the dependence on moneylenders for borrowing needs of poor borrowers remained stable despite the presence of MFIs, particularly in developing economies. This is surprising given the fact that MFIs charge relatively lower interest rate as compared to moneylenders. The paper explains this trend by arguing that the effective cost of borrowing from MFI is higher relative to the effective cost of borrowing from moneylender. It is due to the additional burden incurred in the form of transaction costs in case of MFI borrowing. Simulation results also support this phenomenon

Suggested Citation

  • Tutlani, Ankur, 2016. "Effective Cost of Borrowing from Microfinance Institutions," MPRA Paper 69502, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:69502
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    References listed on IDEAS

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    More about this item

    Keywords

    Microfinance; Group lending; Informal finance; Transaction cost; Effective cost;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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