MicroBanking Bulletin

In a comment to our post on cost and profitability in microfinance, John DeWit from SEF – ZAF raised the point that some MFIs may “charge high rates but...not make high returns because of large loan write-offs.”

This presents a perfect opportunity to look at the interaction between risk, return and costs for MFIs in greater detail. The figure below shows at a glance that returns decrease when risk rises, but before looking at the data in more detail, we should look at how we measure "risk."

In the past week, both David Roodman and MFTransparency have posted on the relationship between yields and APRs for microfinance institutions. We are happy to see the dialogue deepen on what we really know about what MFIs charge their clients. Both posts shed good insight onto what APR and yield are and are not.

Recent commentary on microfinance has focused on the idea that there is a big problem with excess commercialization driven by greedy for-profit microcredit lenders. Perceptions of uncontrolled growth and excessive interest charged to vulnerable low income clients have - together with select episodes of suspected excesses - become the unquestioned narrative about microlenders. But what’s the reality? Are microfinance institutions exploiting poor clients to make big profits? Are for-profit MFIs charging higher interest rates on loans to extract high profits?