Essay on Debatable Topics in Microcredit Interest Rates

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 â€Å"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†¦show more content†¦2011). Supporters of commercial microcredit claim that microcredit clients’ major priority is the accessibility to finance rather than its costs, Porteous (2006), claims that the main priority for mi crocredit clients is the structure of the loan rather than its price, what really matters is the loan size, type of the loan and disbursement timing and procedures. This claim is usually supported by steady demand on microcredit regardless of the charged rates, and mainstreaming about high rate of return for micro-enterprises. Gobezie, (2004) and Cull, et al (2007) estimate high rate of return to invested capital for those with low capital and who are facing capital constraints. Accordingly, poor households would still have a sufficient income even with high effective interest rates. Goldstein, Udry, (1999) and Bidwell, (2009), found similar results for small scale farmers. While on the contrary, many studies observed clear evidence for the sensitivity of the demand for microcredit to interest rate greater than wealthier borrowers (Dehejia et al. 2005, Annim, 2011 and Karlan, Zinman 2008). Hashemi, Rosenberg, (2006) explained that microcredit high rates are rational, associated with high risks, lack of guarantees and challenges of continually providing non-financial services. While according to Morduch, (2000), high rates are caused by high inelastic demand for credit among populations where financial services are limited. On the basis of cost per