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The Impact and Outreach ofMicrofinance Institutions:The Effect of Interest Rates

bySebastian Schwiecker(sebastian.schwiecker {at} helpedia {dot} org)www.helpedia.orgRevised
November 2004
This paper was originally submitted in part fulfilment of the requirements for the degree
of Diplom-Volkswirt (German equivalent to Master in Economics) from the University
of Tbingen in October 2004.

1
ContentsContents........................................................................................................1Figures......
....................................................................................................3Acronyms....................................
.................................................................41. Introduction...............................................................
..............................52. The Development of Microfinance........................................................7
2.1. What is Microfinance?
....................................................................................................................7 2.2. The Origin of
Microfinance ............................................................................................................8 2.3.
Microfinance after the Second World
War.....................................................................................9 2.4. Microfinance
Today.......................................................................................................................11
3. The Impact of Microcredit...................................................................13

3.2. The Eradication of extreme Poverty and

Hunger.........................................................................13 3.3. Achievement of universal primary
Education ..............................................................................15 3.4. Promote gender Equality and
empower Women...........................................................................16 3.5. Reduce Child Mortality
and improve Maternal Health................................................................17 3.6. Combat
HIV/AIDS, Malaria and other diseases ..........................................................................18 3.7.
Ensure environmental
Sustainability............................................................................................20 3.8. Develop a
global Partnership for Development............................................................................21
4. Microcredit Outreach...........................................................................24
4.1. The Demand for
Microcredit.........................................................................................................24 4.2. The Supply
of Microcredit.............................................................................................................25 4.3.
Meeting the
Demand......................................................................................................................26 4.4.
Microfinance and the Capital Markets.........................................................................................29
5. Credit Rationing....................................................................................31
5.1.
The imperfect Information Paradigm...........................................................................................31
5.2. Adaptation to
the Microfinance Sector.........................................................................................33 5.3.
Overcoming Credit Rationing for the Microfinance Sector.........................................................35
6. Interest Rates.........................................................................................41
6.1. Setting the right Interest
Rate........................................................................................................416.2. Can MicroEntrepreneurs bear these Rates..................................................................................436.3. Should
the Interest Rate be subsidized anyway ............................................................................44
7. Empirical verification...........................................................................46
7.1. Setting up a Sample....................................................................................................................
...46
2
7.2. Examining the
Sample...................................................................................................................47
8. Conclusions............................................................................................52Appendix..................
..................................................................................54
Appendix 1: Average loan
balance.......................................................................................................54 Appendix 2: Portfolio
at Risk...............................................................................................................56 Appendix 3:
Transaction Costs
............................................................................................................58 Appendix 4: Portfolio Gro
wth..............................................................................................................60 Appendix 5:
Portfolio vs. Equity
..........................................................................................................60 Appendix 6: Internal Rate
of Return ...................................................................................................61 Appendix 7:
Subsidized Interest Rates and the Net Gains to

Society..................................................62 Appendix 8: Interest Rate vs. Loan Size vs. FSS vs.
PAR...................................................................63 Appendix 9: Inflation vs. GDP per
Capita...........................................................................................65
References..................................................................................................67Internet References.
..................................................................................71Ratings........................................................
................................................76Other Sources...............................................................................
.............78
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Ravi Jain
interesting site
08 / 20 / 2012

Rathiranee Yogendrarajah
This is useful tool for MFIs. Please send me the research papers related to micro finance
06 / 26 / 2012

Nizar Ben Slama

very interesting!!!
11 / 29 / 2010

ebusco34327
One of the challenges of microfinance is that many people don't trust the banks, they are afraid the banks might fold
up and as such don't want to put there money into it (for deposits/ huge savings). Also some insincere customers take
loans from the bank that is set to help them the poor but they refuse to pay back.
11 / 26 / 2008

chalespinosa
Presently there is a debate in Nicaragua, where the current President has stated that interest rates charged by the
MFI is too high. What is a fair interest rate.
07 / 29 / 2008

Basti
Actually you hear more and more about it and its also getting bigger and bigger. Just check out who won the last
noble peace prize last year (http://nobelprize.org/nobel_prizes/pe... or where Sequoia Capital (the VC behing Google,
Apple, Youtube...) hast recently invested (http://www.vccircle.com/blog/_archive...
06 / 03 / 2007

ninjapirate007
interesting asserstions
06 / 02 / 2007

bibliolept
RW, it's not more prevalent because the effectiveness varies depending on the implementation. However, there are
some methodologies utilized that seem to reduce the likelihood of that the loan will be defaulted upon. I'm a big
believer in this approach (when executed properly). It is spreading slowly but surely; we simply hear little about
because it's not as dramatic as building dams; the results are significant in the lives of the participants, though.
06 / 02 / 2007

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76The World Bank Group, (n.d.): Health, Nutrition, and Population and the
MillenniumDevelopment Goals, [www1.worldbank.org/hnp/MDG/MDG%20%20HNPbooklet.pdf], (availability date: September 30, 2004).Yunus, Muhammad (1998):
Championing the Right to Credit for Poor Women Aroundthe
World,[http://asp.grameen.com /dialogue/dialogue34/interview.html], (availabilitydate: September
30,
2004).UNAIDS (2004):[http://www.unaids.org/bangkok2004/GAR2004_pdf/UNAIDSGlobalRep
ort2004_en.pdf], (availability date: September 30, 2004).
Ratings
M-Cril (2000): SPANDANA,
[http//www.ratingfund.org/spanish/docs/SPANDANA_RatingReport.pdf],
(
availability date: October 7, 2004).M-Cril (2001a): BASIX, [http://www.basixindia.com/Mcril.asp],
(
availability date:October 7, 2004).M-Cril (2001b): BDB,
[http://www.ratingfund.org/spanish/docs/RF_BDB.pdf],
(
availability date: October 7, 2004).M-Cril (2001c): SNEHA,
[http://www.ratingfund.org/spanish/docs/RF_Sneha-u1.pdf],
(
availability date: October 7, 2004).M-Cril (2002a): KCLF, [http://www.ratingfund.org/docs/RFKCLF-risk%20report.doc],
(
availability date: October 7, 2004).M-Cril (2002b): NWTF,
[http://www.ratingfund.org/spanish/docs/RF_NWTF.pdf],
(
availability date: October 7, 2004).M-Cril (2002c): SEEDS,
[http://www.ratingfund.org/spanish/docs/RF_SEEDS_2002_Rating.pdf],
(

availability date: October 7, 2004).M-Cril (2002c): Share,

[http://www.ratingfund.org/spanish/docs/RF_SHARE.pdf],
(
availability date: October 7, 2004).M-Cril (2002d): TSKI,
[http://www.ratingfund.org/spanish/docs/RF_Tski_mcrilfinal(-)report.pdf],
(
availability date: October 7, 2004).M-Cril (2003a): ASA,
[http://www.ratingfund.org/docs/ASA%20update.pdf],
(
availability date: October 7, 2004).M-Cril (2003b): BURO, [http://www.m-cril.com/buro.pdf],
(
availability date: October7, 2004).MCril(2003c): EMT, [http://www.ratingfund.org/docs/EMT.pdf],
(
availability date:October 7, 2004).

77M-Cril (2003d): SKS,

[http://www.mixmarket.org/en/demand/demand.show.profile.asp?ett=25&showinfo=adjusted],
(
availability date: October 7, 2004).M-Cril (2003d): TPC,
[http://www.ratingfund.org/docs/TPC_Final.pdf],
(
availabilitydate: October 7, 2004).M-Cril (2004b): UPAP,
[http://www.ratingfund.org/docs/UPAP_2004.pdf],
(
availabilitydate: October 7, 2004).Microfinanza (2002a): ACME,
[http://www.ratingfund.org/spanish/docs/ACME_final.pdf],
(
availability date: October 7, 2004).M i c r o f i n a n z a ( 2 0 0 2 b ) :
B T F F , [ h t t p : / / w w w . r a t i n g f u n d . o r g / s p a n i s h / d o c s / B T F F _RatingReport.pdf

], (
availability date: October 7, 2004).Microfinanza (2002c): BESA,
[http://www.ratingfund.org/spanish/docs/BESA_RatingReport.pdf],
(
availability date: October 7, 2004).Microfinanza (2002d): CAME,
[http://www.ratingfund.org/docs/EvaluacionCAME(-)Final.doc],
(
availability date: October 7, 2004).Microfinanza, (2002e): RFF,
[http://www.ratingfund.org/docs/RFF%20final.pdf],
(
availability date: October 7,
2004).Microfinanza (2002f):PSHM, [http://www.ratingfund.org/spanish/docs/PSHM_Report.pdf],
(
availability date: October 7, 2004).Microfinanza (2003):
CAJCA,[http://www.ratingfund.org/docs/Calificacion_Jardin_Azuayo_rating.pdf],
(
availability date: October 7, 2004).Microserve (2003): ENDA,
[http://www.mixmarket.org/en/demand/demand.show.profile.asp?ett=865&showinfo=adjusted#],
(
availability date: October 7, 2004).Planet Rating (2002a): FONDEP,
[http://www.mfrating.org/Ratings/completed_ratings.html], (availability date: October 7,
2004).Planet Rating (2002b): PRIZMA,
[http://www.mixmarket.org/en/demand/demand.show.profile.asp?ett=111&showinfo=adjusted#],
(availability date: October 7, 2004).Planet Rating (2002c): SWS,
[http://www.ratingfund.org/spanish/docs/SWC_report.pdf](availability date: October 7,
2004).Planet Rating (2002d): ZAKOURA,
[http://www.ratingfund.org/spanish/docs /RF_Zakoura.pdf], (availability date: October 7,
2004).Planet Rating (2003a): AMSSF,
[http://www.ratingfund.org/docs/PlanetRating_AMSSF_010803.pdf], (availability date: October
7, 2004).Planet Rating (2003b): FOCCAS,
[http://www.ratingfund.org/docs/PlanetRatingFOCCAS120803.pdf] (availability date: October 7,
2004).

78Planet Rating (2003c): PADME,

[http://www.mfrating.org/docs/PlaNetRatingPADME070302_English.pdf], (availability
date: October 7, 2004).Planet Rating (2003d): PAPME,
[http://www.mfrating.org/docs/PAPME_PlanetRating080903.pdf], (availability date: October 7,
2004).Planet Rating (2003e): VITAL FINANCE,
[http://www.mfrating.org/docs/Vital%20Finance_Sept%202003.pdf], (availability date: October 7,
2004).Planet Rating (2004a): ABA, [http://www.ratingfund.org/docs/ABA_April%202004.pdf],
(availability date: October 7, 2004).Planet Rating (2004b):
ACEP, [http://www.mfrating.org/docs/ACEPSngal_2004.pdf],(availability date: October 7,
2004).Planet Rating (2004c): AGROINVEST,
[http://www.ratingfund.org/docs/AgroInvest_June%202004.pdf], (availability date: October 7,

2004).Planet Rating (2004d): ASBA, [http://www.ratingfund.org/docs/ASBA_April%202004.pdf],

(availability date: October 7, 2004).Planet Rating (2004e): DBACD,
[http://www.ratingfund.org/docs/DBACD_April%202004.pdf], (availability date: October 7,
2004).Planet Rating (2004f): FINADEV,
[http://www.mfrating.org/docs/Finadev_2004.pdf],(availability date: October 7, 2004).Planet
Rating (2004g): MI-BOSPO, [http://www.ratingfund.org/docs/MIBOSPO_160404.pdf],
(availability date: October 7, 2004).Planet Rating (2004h): SBACD,
[http://www.ratingfund.org/docs/SBACD_PlanetRating300604.pdf], (availability date: October
7, 2004).
Other Sources
Interview Shaw Newaz: Deputy General Manager of the Grameen Bank, October 30
th
2003.Hodson, Charles (2001): Your Business Your World, Jim Boulden, CNN (ed.), Dhaka2001.

Microfinance
Master Thesis of 2004. Still gives you a fairly good overview about what's microfinance is about (and
some "German English").
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Sections

Acronyms
1. Introduction
2. The Development of Microfinance
2.1. What is Microfinance?
2.2.The Origin of Microfinance
2.3. Microfinance after the Second World War
2.4. Microfinance Today
3. The Impact of Microcredit
3.2. The Eradication of extreme Poverty and Hunger
3.3. Achievement of universal primaryEducation
3.4. Promote gender Equality and empower Women
3.5. Reduce Child Mortality and improve Maternal Health
3.6. Combat HIV/AIDS, Malaria and other diseases
3.7. Ensure environmental Sustainability
3.8. Develop a global Partnership for Development
4. MicrocreditOutreach
4.1. The Demand for Microcredit
4.2. The Supply of Microcredit
4.3. Meeting the Demand
4.4. Microfinance and the Capital Markets
5. Credit Rationing
5.1. The imperfect Information Paradigm
Figure 1: Expected Bank Return and the Interest Rate
5.2. Adaptation to the Microfinance Sector
Figure 2: The extended Model
5.3. Overcoming Credit Rationing for the Microfinance Sector
Figure 3: Marginal Productivity of Capital
Figure 4: The extended Model
6. Interest Rates
6.1. Setting the right Interest Rate

6.2. Can Micro-Entrepreneurs bear these Rates

6.3. Should the Interest Rate be subsidized anyway
7. Empiricalverification
7.1. Setting up a Sample
7.2. Examining the Sample
Figure 5: Loan Size vs. Interest Rate241
Figure 6: Interest Rate vs. PAR244
Figure 7.: Interest Rate vs. FSS247
8. Conclusions
Appendix
Appendix 1: Average loan balance
Appendix 2: Portfolio at Risk
Appendix 3: Transaction Costs
Appendix 4: Portfolio Growth
Appendix 5: Portfolio vs. Equity
Appendix 6: Internal Rate of Return
Appendix 7: Subsidized Interest Rates and the Net Gains to Society
Appendix 8: Interest Rate vs. Loan Size vs. FSS vs. PAR
Appendix 9: Inflation vs. GDP per Capita
References
Internet References
Ratings
Other Sources

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Upload Date: 06/02/2007
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