Publication Update: Analyzing Microcredit Interest Rates A Review of the Methodology Proposed by Mohamed Yunus, MIX Data Brief No. 4
The following figures are updated versions of those published in “Analyzing Microcredit Interest Rates, A Review of the Methodology Proposed by Mohamed Yunus”, MIX Data Brief, No. 4.
All updated figures below are almost identical to the ones originally published, suggesting that the main results from the previous paper are still valid:
Professor Yunus' methodology for the evaluation microcredit interest rates was originally presented in his 2007 book Creating a World Without Poverty. In particular, this methodology defines three zones:
- Green Zone: (Interest Rate – Cost of Funds) ≤ 10 percentage points. According to Yunus, these are the “poverty-focused” microcredit programs (p. 69).
- Yellow Zone: (Interest Rate – Cost of Funds) ≤ 15 percentage points.
- Red Zone: (Interest Rate – Cost of Funds) > 15 percentage points. Yunus labels institutions operating in this zone as “profit-maximizing” MFIs, adding that these programs are “commercial enterprises whose main objective appears to be earning large profits for shareholders or other investors”. Yunus even referred to this as the zone of the “moneylenders” and “loan sharks”.
Last year a review of this particular methodology using data for 2008 found that:
- Three out of four microfinance institutions worldwide fall into the ‘red zone’.
- The categorization can almost entirely be explained by operating expenses, rather than profits, since operating expenses represent 62 percent of all the expenses that need to be covered by the average yield and 80 percent of expenses covered by the premium, as defined in the methodology.
- Looking across the broad universe of MFIs, there is no evidence that institutions in any ‘zone’ are taking supernormal profits. Removing all profits from all MFIs would not substantively change the distribution of MFIs into green, yellow and red zones.
- Most MFIs that have low average loans sizes (suggesting they reach poorer clients) are being mislabeled as in the ‘red zone’.
- Not-for-profit NGO MFIs are more likely to be in the red zone than for-profit MFIs (like banks) and credit unions.
Below are the updated figures that match almost identically the results from last yea'rs paper. For a discussion of the results, please refer to the original paper.
Figure 1: Percentage of MFIs by Zone in 2009
Figure 2: Premium and Yield Components, only for Profitable MFIs, 2009
Figure 3: Percentage of MFIs by Zone and Legal Status in 2009
Figure 4: Percentage of MFIs by Zone in 2009: Actual Values and Simulations