responsAbility Research Insight: Microfinance: Rising efficiency, falling interest rates

responsAbility Research Insight:
Microfinance: Rising efficiency, falling interest rates 

Zurich, 11 March 2014 – The Research department of the Swiss asset manager responsAbility Investments has conducted a microfinance study to identify the factors determining interest rates for micro-borrowers. It has found that a combination of healthy competition, effective regulation, an appropriate market infrastructure and innovation help to drive efficiency gains at microfinance institutions (MFIs), resulting in lower operating costs and interest rates.

Microfinance meets with a positive response in markets where traditional financial institutions have failed to serve poorer sections of the population. Hundreds of millions of low-income households are able to gain access to financial services as a result of microfinance. The level of interest rates that applies to microloans is generally higher than interest rates on larger loan volumes and is also significantly higher than the interest rates usually charged in Europe – repeatedly prompting discussions about the benefits of microfinance for borrowers. 

The latest study published by responsAbility Research examines the question of how different factors determine the level of interest rates charged. The study is based on the core premise that microfinance is a cost intensive business. Small loan volumes and a lack of collateral lead to high operating costs for MFIs. They account for around 60% of costs and consequently of the interest rates charged to borrowers.

The conclusion reached by the study is that it is only by achieving higher levels of operating efficiency that MFIs will be able to charge lower interest rates on a sustained basis. The study points out that this goes hand in hand with the increasing maturity of the sector in general, which is driven by regulation and the market infrastructure, competition, economies of scale and innovation. This theory is supported by the fact that over the last five years, the MFIs that were analysed were able to reduce their operating costs by an average of 23%, with interest rates also falling over the same period. This means that both lenders and borrowers benefit from the development of the financial sector.

responsAbility is the world’s leading independent asset manager in the area of microfinance and had invested a volume of USD 1.6 billion in 318 MFIs in 67 countries as of the end of 2013. 
responsAbility Research regularly publishes studies about microfinance as well as responsAbility’s other investment themes, including agriculture, energy, healthcare and education.

Contact

responsAbility Investments AG 
Ulli Janett, Media Relations
+41 44 403 06 33
ulli.janett [at] responsAbility.com

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