Poverty Penalty and Microfinance

Examining the reasons behind high interest rates charged by MFIs from poor borrowers
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This paper aims to verify whether a financial poverty penalty exists, where the poor pay more than the non-poor to access goods and services. It also examines the credibility of reasons provided by the MFIs for high interest rates. The paper examines the Colombian case by empirically analyzing the Effective Interest Rate (EIR) of several financial products offered by different financial institutions, including MFIs and commercial banks. Findings include:

  • Financial poverty penalty does exist as microcredit interest rates are higher than other financial product rates, though they are far from moneylender rates;
  • MFIs usually justify the high interest rates on grounds of the high risk, high financial expenses, high administrative costs and fixed cost involved in microcredit as well as the need for profits due to lack of donations;
  • Causes of high interest rates are more closely related to a lack of efficiency, and sometimes, to an eager desire for profits;
  • Joint presence of a lack of concurrence, a lack of financial literacy, and the null negotiating power of microcredit clients intensifies poverty penalty.

About this Publication

By Serrano-Cinca, C., Guti‚rrez-Nieto, B., Fern ndez, B.C. & Fuertes-Call‚n, Y.