MICROCAPITAL BRIEF: Microfinance Information Exchange (MIX) and CGAP (Consultative Group to Assist the Poor) Criticize Muhammad Yunus’ Method of Judging Microfinance Institutions’ (MFIs’) Interest Rates

Microfinance Information Exchange (MIX) Lead Researcher, Mr Adrian Gonzalez, has published a report on MIX titled, “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus.” The report gathers data from 1,008 microfinance institutions (MFIs) that reported to MIX in 2008, and analyzes the data in the context of Dr Yunus’ proposed methodology. Dr Yunus argues that MFIs fall into three zones based on their interest margin (financial revenue from loans less financial expenses):

• Microlenders in the “green zone” have an interest margin of less than 10 percent. These are considered the “poverty-focused” microcredit programs.
• An interest margin of 10 to 15 percent puts microlenders in the “yellow zone,” which signifies that interest rates should be lowered.
• Anything above 15 percent falls in the “red zone.” Yunus labels these programs as “commercial enterprises whose main objective appears to be earning large profits for shareholders or other investors.”

The report concludes, “the categorization can almost entirely be explained by operating expenses, rather than profits,” and “the proposed methodology is an imperfect tool for understanding the operations of an institution and identifying solutions for bringing affordable credit to the poor.”

Mr Richard Rosenberg, Senior Advisor to CGAP’s Research and Market Intelligence Team, argues that Dr Yunus’ “simple formulas can’t help much when it comes to appraising things like mission drift or fairness of interest rates” and that it takes a more complex analysis to effectively judge MFIs.

By Stefanie Rubin, Research Associate

About Microfinance Information Exchange (MIX):

Established in 2002, Microfinance Information Exchange (MIX) is a nonprofit organization with headquarters in Washington, DC, and regional offices in Peru, Senegal, India and Indonesia. MIX provides detailed financial and social performance information from microfinance institutions (MFIs), as well as business information from market facilitators and donor organizations and investors in microfinance. MIX was founded by CGAP (Consultative Group to Assist the Poor) and is sponsored by Citi Foundation, Deutsche Bank Americas Foundation, International Fund for Agricultural Development (IFAD), and the Bill & Melinda Gates Foundation.

Source Article: MIX Publications: “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus,” http://www.themix.org/publications/analyzing-microcredit-interest-rates-review-methodology-proposed-mohammed-yunus

Microfinance Universe: Microfinance Information Exchange (MIX): https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microfinance+Information+Exchange+%28MIX%29

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