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Microfinance And Rate Of Interest

Microfinance and Rate of Interest

Microfinance is considered as key Instrument to fight against poverty and slogan of Microfinance practitioners is “serving poorest of the poor”.

There are two arguments to the rate of return:
1. Dimensioning Marginal Rate of Return (DMR) to capital.
2. Poor’s are already paying higher rate of interest to many lenders.

Financial sustainability / profitability:
1. Subsidy: Khushhali Bank receives 20% and Grameen Bank 30% of markup.
2. High rate of interest: Yugoslavian banks receive 70% and Latin American banks 50% of markup.

 Till 1980’s the trend was to provide subsidized credit.
 At that time rate of interest less then rate of inflation.
 And effective rate of interest is less the 0%
 After 1980’s the trend has changed.
 Now banks charge high rate of interest to cover the cost of lending.

 There is an argument that poors problem is of access but not of rate of return.
 And it is said that any change in Rate of return “R” will not affect borrowing.
 To test this argument they initiated a program.

Safe Save Program Bangladesh (Dhaka)
11 million people i.e. 1/3 of population are living in slums in Dhaka and have own active economy of working poors.
 The Program was lunched in 1996, they were extending loans and providing saving services.
 Two sites were selected 1. Tikkapura and Kalyan pur 2. Geneva.
 Data was collected from 1999 to 2001.
 At one place there was no change in rate of interest and at the other place in mid way the rate of interest was changed.
 And it had a clear cut impact on the borrowers, and the borrowers started declining from the point where rate of interest was elevated.
 Which shows that poors are sensitive to the rate interest.
 So welfare aspects must be preferred.
 As subsidized programs will increase outreach, but increasing outreach reduces sustainability.

Outreach and Sustainability

Financial Services are of two types:...