Microfinance School > The Price of Money

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Serie: Microfinance School

  1. Banking the Unbanked


    Microfinance institutions are now present in almost every country in the world, and are providing access to financial services to millions of people. In this film we look at typical microfinance tech-nologies and methodologies in three very different countries, but with similar needs. Access to fi-nancial services such as savings, loans and insurance is an important tool to help poor people smooth out the negative effects of little and fluctuating income.

  2. Human Capital


    Access to money alone is often not enough to lift people out of poverty. In order to facilitate a social change you need be healthy and you need knowledge. In Human Capital we look at a holistic ap-proach to microfinance. Many microfinance institutions combine financial services with education and health programs with the aim of long-term social change. What are the benefits and what are the disadvantages of such an approach? How do you measure social change?

  3. Banking woman


    Microfinance institutions traditionally have targeted women. They have proven to be more reliable debtors and the loans tend to bring more benefit to the whole family. A dollar to a woman is a dol-lar to the whole family, so to speak. In this film we focus on microfinance projects and/or institu-tions targeting women especially. How are these projects different from microfinance that targets both genders? How can access to financial services be an effective tool towards a gender equal soci-ety, both economically and socially?

  4. Best Practise: Miles for smiles


    Katherine Kitongo identified a problem in Ugandan markets. The different stalls where often run by single mothers forced to bring their children to work with them. It is a double whammy; the children did not go to school and the mothers could not run their business as effective as they wanted to. Katherine's answer was Miles to Smiles, a daycare center for the children of the women in the mar-ket. And the fees for the daycare center? Katherine set up a loan and savings group for the mothers at the center.

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It is often observed that the interest rates charged by MFIs are high. Why is lending money to the poor such a costly affair? Can the poor afford the cost of loans? In this film we look at the factors that set the interest rate for micro-loans. Are high interest rates necessary in order to ensure sus-tainable financial services for the poor?

Concerns often arise as to why microfinance interest rates may be higher than the bank interest rates that wealthier people pay. The issue is cost: the administrative cost of making tiny loans is much higher in percentage terms than the cost of making a large loan. It takes a lot less staff time to make a single loan of $100,000 than 1,000 loans of $100 each. Besides loan size, other factors can make the smaller loans in microfinance more expensive to deliver. Further, the clients are often met where they live or have their business as the institution sends staff to the field rather having clients come to the offices. MFIs may operate in areas that are remote or have low population density, making lending more expensive. This is often why traditional banks tend to stay away from such areas. If an MFI wants to operate sustainably, it has to price its loans high enough to cover all its costs.

Interest rates are often compared across countries without adjusting. The comparison on such absolute terms is incorrect and in real terms a rate of 35 % can actually be a better deal than on of 4 %. This is depending on several components and among these, inflation rate.

Although microcredit interest rates can be legitimately high, inefficient operations can make them higher than necessary. As the microcredit market matures in a given country, administrative costs usually drop as managers learn from experience and in some cases because competition forces lower pricing and greater efficiency. Prices should be responsibly set and transparently communicated. However, the fact is that for a poor person this access to financial services can mean a huge difference. And; The most expensive loan is the one you never got.