Why Do MFIs Charge High Interest Rates?
To maintain and increase its services over time, an MFI must charge interest rates high enough to cover the cost of its loans. Otherwise, the MFI will lose money. Its activities will shrink instead of growing unless it is continually infused with fresh money from private donors or governments. The problem is that donor and government money is not reliable, and there is not enough to meet the demand. Commercial investment fundings available, but MFIs must be sustainable, i.e., profitable enough to continue, in order to attract this investment. There are three kinds of costs the MFI has to cover when it makes microloans. The first two, the cost of the money that it lends and the cost of loan defaults, are proportional to the amount lent. For instance, if the cost paid by the MFI for the money it lends is 10%, and it experiences defaults of 1% of the amount lent, then these two costs will total $11 for a loan of Rs.100, and Rs.55 for a loan of Rs.500. An interest rate of 11% of the loan a
