Understanding and Dealing with High Interest Rates on Microcredit: A Note to Policy Makers in the Asia and Pacific Region

Abstract

Charging prices high enough to cover costs is essential for any business to survive in the marketplace. This is true for institutions providing microfinance services as it is for any other enterprise. Thus, it is not surprising that many successful microfinance institutions charge high interest rates to cover their high costs. However, despite the success of those institutions in expanding the supply of credit during the last 2 decades to an increasing number of poor and low-income households, some countries in the region seem to be moving to impose ceilings on microcredit interest rates. This paper discusses why such moves are likely to hurt the poor. And the paper points toward a number of positive measures that policy makers could consider to bring down the high microcredit interest rates without hurting the industry and its clients.