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How Can the Poor Afford Microfinance Image

Promoting Inclusive Markets and Financial Systems

How Can the Poor Afford Microfinance

How Can the Poor Afford Microfinance

Summary

The microfinance movement rests largely on one basic assertion: that poor households have high economic returns to capital. Even a small bit of extra cash, it is argued, can transform moneystarved, micro-scale businesses. The challenge for microlenders has been to figure out how to provide banking services in an efficient, long-term way.

The assumption of high returns to capital in poor communities justifies the expectation that, if it can be delivered, microfinance will bring critical social and economic impacts. The assumption also undergirds arguments that poor households can pay high interest rates—rates that are high enough to allow microlenders to sustain themselves without donor help. A recent survey of about 350 leading microfinance institutions finds most institutions charge interest rates and fees clustered between roughly between 20 to 40 percent per year, after taking inflation into account. Some are lower, and some are higher—and, in the rare case, above 100 percent per month, as with Mexico’s Banco Compartamos. An expectation of high returns to capital is thus at the heart of both the social and economic logic of microfinance.

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