Microcredit Interest Rates High Interest Research Proposal

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Reducing operational costs is thus a key element in making microcredit less usurious. Extending larger loans to a group of individuals, so the cost of the loan is dispersed to a community, rather than used to burden a single individual is another potential solution.

The charges of usury are also rooted in the highly variable rates of interest around the world of microfinance, which can create the perception of injustice. Furthermore, some loan rates are shocking, especially for loans extended by supposedly charitable institutions and programs: "in 2007, for example, a controversy erupted around Compartamos, a Mexican MFI that was earning a 55% return on shareholders' equity by charging its borrowers interest rates around 85%" (Are microcredit interest rates excessive, 2009, CGAP). On average, the median interest rate for profitable microfinance institutions (MFI)s was about 26% in 2006. While this is around the interest rate of some credit cards in the developed world, for individuals in poor rural areas it is still prohibitively high (and it is prohibitively high for many individuals in the developed world as well).

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Microcredit is not the solution for all areas of the world. The population must have a reasonably stable situation, and cannot be nomadic due to political instability. Individuals must have relatively close contact with the lending institution. And finally, for microcredit to be truly effective, NGOs must work with lending institutions to train borrowers to conduct their business and personal affairs in an effective fashion, to ensure that the loan enables them to realize their goals of starting a new business or personal independence......

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