The US-based nonprofit data provider Microfinance Information Exchange (MIX) recently published an updated review of the methodology for categorizing microcredit interest rates proposed by Nobel laureate Dr Muhammad Yunus in his book “Creating a World Without Poverty”. The review, which uses 2009 data from approximately 1,020 microfinance institutions (MFIs) covering approximately 88 million borrowers, updates the findings of the previous review presented by MIX that uses 2008 data.

The methodology proposed by Dr Yunus defines three zones based on the margin between the interest rates charged by MFIs and their cost of funds: green zone, when the difference is less than or equal to 10 percentage points; yellow zone, when the difference is greater than 10 percentage points and less than or equal to 15 percentage points; and red zone, when the difference exceeds 15 percentage points [1].

The review lays out an argument against the interest rate cap of 10 – 15 percentage points over cost of funds that has been suggested by Dr Yunus to prevent MFIs from extracting inappropriate levels of profits from poor borrowers. The findings of the 2009 review corroborate the findings of the 2008 review, which indicate that operating expenses as opposed to profits drive the zone categorization. Three out four MFIs studied fall into the ‘red zone’; most MFIs that have lower average loan sizes (suggesting that they reach poorer clients) are categorized in the ‘red zone’; and institutions in the ‘red zone’ are more likely to be nonprofit NGOs than for-profit MFIs or credit unions.

In conclusion, the review aims to make the point that rather than excessive profits being a major problem, increased efficiency in operations is required to bring down microcredit interest rates. The review also states that, while MFIs should focus on reducing the cost of borrowing for poor people, emphasis on factors such as quality of service, appropriate product terms, speed of delivery and options for future borrowing are also important factors in poor people’s decisions on where and if to borrow.

By Medha Ravi, 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, 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 and Resources:

[1] Microfinance Information Exchange (MIX) Bulletin, “Sacrificing Microcredit for Unrealistic Goals”, http://www.themix.org/publications/microbanking-bulletin/2011/01/sacrificing-microcredit-unrealistic-goals

MicroCapital.org story, April 12, 2010, “MICROCAPITAL BRIEF: Microfinance Information Exchange (MIX) and CGAP (Consultative Group to Assist the Poor) Criticize Mohammed Yunus’ Method of Judging Microfinance Institutions’ (MFIs’) Interest Rates”, http://www.microcapital.org/microcapital-brief-microfinance-information-exchange-mix-and-cgap-consultative-group-to-assist-the-poor-criticize-mohammed-yunus%E2%80%99-method-of-judging-microfinance-institutions%E2%80%99-mfi/

MicroCapital.org story, January 10, 2011, “MICROCAPITAL BRIEF: Founder of Grameen Bank and Nobel Peace Prize Winner Dr Muhammad Yunus Speaks Out Against the Commercialization of Microfinance Institutions (MFIs)”, http://www.microcapital.org/microcapital-brief-founder-of-grameen-bank-and-nobel-peace-prize-winner-dr-muhammad-yunus-speaks-out-against-the-commercialization-of-microfinance-institutions-mfis/

MicroCapital.org story, December 2, 2010, “MICROCAPITAL BRIEF: Microfinance Information Exchange (MIX) Assesses Potential Impact of Recent Microfinance Regulation in India’s Andhra Pradesh State”, http://www.microcapital.org/microcapital-brief-microfinance-information-exchange-mix-assesses-potential-impact-of-recent-microfinance-regulation-in-india%E2%80%99s-andhra-pradesh-state/

MicroCapital’s Microfinance Universe Profile: Microfinance Information Exchange (MIX), http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microfinance+Information+Exchange+(MIX)

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