Subsidizing Microcredit Interest: How Important Is It to the Poor?

This paper, which has been written by the Head of the ACSI Planning and Monitoring Department, explores how reaching out to clients in more remote areas will increase operational costs, particularly in light of the level of support need by the poorest clients. However, ACSI has continued to commit itself to a low interest rate, specifically 12.5%, even though the transaction costs of providing microcredit in remote and isolated areas are much higher than those of standard commercial loans. The author questions this policy and observes that subsidising the interest paid by clients usually has a counterproductive role by reducing the very access by the poor that it sets out to promote. In conclusion this paper suggests that while setting a realistic interest rate should not be a licence for higher costs and inefficiency, if an MFI is to offer its financial services to poor and marginalised people living in remote and peripheral rural areas (with non-existent, inadequate or defective infrastructure), who require very small loan sizes and hence high transaction costs, interest rate capping should not create a bottleneck.