Macroeconomic Factors Influencing Interest Rates of Microfinance Institutions In Latin America

Examining the influence of macroeconomic factors on the microfinance market

This paper investigates whether key macroeconomic factors influence interest rate policy of MFIs, and also whether the financial crisis of 2008 has had a significant impact on this policy. It reviews two main approaches to setting interest rates in MFIs. One approach takes the view that interest rates should be set at a high level due to the excessive risk that MFIs undertake. The second approach is to convince the public of the possibility of reducing these rates through cost savings, increased efficiency, and sharing best practice, etc. Key findings include:

  • Final impact of macroeconomic factors on interest rate policy of MFIs is significantly influenced by the choice for a proxy for interest rate;
  • Unemployment rate and bank interest rates were found not to be significant determinants of the size of profit margin;
  • Yield on gross portfolio appears to be highly significantly dependent on all macroeconomic factors considered in the regression model.

The paper concludes by stating that the hypothesis that the financial crisis had not had an impact on microfinance interest rates was rejected when profit margins are considered, but it was not rejected in the case of yield on gross portfolio.

About this Publication

By Janda, K. , Zetek, P.