Debatable Topics in Microcredit: Interest Rates

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The most debatable topic in microcredit has always been interest rates, especially that prices paid by low-income clients tend to be higher than conventional banks’ rates, and interest rates for some MFIs have exceeded annual rate of 100 percent on effective basis. In Egypt, microcredit rates are increasingly being criticized and viewed as unreasonably high, while it is immoral to set high prices on the poor. At least once a year, an article must be found in an Egyptian newspaper urging for the need to create “a bank for the poor”. Driven by religious perspective and long history of subsidized policies, the longing for a bank for the poor in Egypt have always been spinning around the idea of providing credit to low-income households “without interest rates or collaterals”. Interests shall be perceived as the price for an ordinary and important service, and the unpleasant news that everyone already know, is that there have never been or will exist a sustainable priceless lending, yet the debate in Egypt continuous. In their brilliant book “Portfolios of The Poor”, Collins et al. (2006) explain that; “interest rates may often be better understood as fees for a service than a rate for the use of money for a specific period”. Well, demands in Egypt for priceless loans distract our attention from what should be really done, “attention should be focused on how to reduce costs per client”, (Roy and Øystein, 2010). Thus, the question of what determines microcredit interest rates in Egypt became increasingly important. The study tries to analyze effective interest rates charged by microcredit providers in Egypt, key factors that determine these rates, and prospects to provide reasonably-priced credit for low-income Egyptians. Why the Poo... ... middle of paper ... ... outstanding portfolio. The five years average loan portfolio of a first tier NGO-MFI is more than EGP15 million and the Average Number of Active Borrowers is above 7,000 clients. Data for first tier NGO-MFIs covers the period from 2007 to 2011, while as the SFD’s funding requirements is the submission of only three years financial statements, data for the second tier NGO-MFIs covers only the period from 2009 to 2011. The selection of second tier NGO-MFIs included in the study was based on data availability and quality of the financial statements. As few NGO-MFIs in Egypt regularly report data to the MIX market, the additional data were composed from financial statements reported to the SFD. In addition, the study used NGO-MFIs’ monitoring and evaluation reports related to SFDs’ funded projects to assume NGO-MFIs “average loan size” and “number of active borrowers”.

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