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Interest rate ceilings and microfinance : the story so far (English)

The high interest rates charged by many microfinance institutions (MFIs) have attracted the attention of policy makers throughout the world. Several concerns have been raised: Why do institutions that set out to help the poor charge such high rates? How can governments support this practice from a political perspective? Should poor people have to pay for inefficiencies that result in high MFI costs? How can customers be best protected from predatory lenders, where they exist? This occasional paper aims to shed some light on the relationship between interest rate ceilings and microfinance. It presents the current state of knowledge, drawing on a review of the literature, anecdotal evidence provided by experts, and a Consultative Group to Assist Poor (CGAP) survey of interest rate ceilings around the world. The paper outlines the rationale for high micro-credit interest rates and the historical performance of subsidized lending schemes. It then examines the impact of interest rate ceilings on microfinance clients. The paper goes on to offer a typology of interest rate ceilings in developing and transitional countries, together with a description of the challenges inherent in implementing such ceilings. The paper concludes with policy recommendations on fostering lower micro-credit interest rates through competition and consumer protection, without imposing interest rate ceilings.

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Citation

Helms,Brigit S. Reille,Xavier

Interest rate ceilings and microfinance : the story so far (English). CGAP Occasional paper ; no. 9 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/572411468139208387/Interest-rate-ceilings-and-microfinance-the-story-so-far