Why do MFIs charge such high interest rates to poor people?
Providing financial services to poor people is quite expensive, especially in relation to the size of the transactions involved. This is one of the most important reasons why banks don’t make small loans. A Rs. 4,000.00 loan, for example, requires the same personnel and resources as a Rs. 100,000 one thus increasing per unit transaction costs. Loan officers must visit the client’s home or place of work, evaluate creditworthiness on the basis of interviews with the client’s family and references, and in many cases, follow through with visits to reinforce the repayment culture. This makes the institution to charge a high rate of interest to cover its cost of loan administration. The microfinance institution could subsidize the loans to make the credit more “affordable” to the poor. Many do. However, the institution then depends on permanent subsidy. Subsidy-dependent programs are always fighting to maintain their levels of activity against budget cuts, and seldom grow significantly. They
