Why are the interest rates so high?

Microfinance interest rates vary greatly by region and market and average 35% globally. This might seem crazy; however, there are a lot of unseen risks and costs of sustaining an MFI.

Because the loans are typically for small amounts, MFIs need to charge interest to cover administrative costs. If you think about it, giving a $1,000 loan requires the same amount of employee attention as a $25 loan. Giving a large number of small loans is time intensive with smaller returns and administrative costs are around 10-25% of the total loans given.

MFIs take on risk by giving collateral-free loans. Well-established MFIs still lose about 1-2% of their loans. Without physical assets to secure the loan, there is no guarantee and the interest rates help to compensate for that risk.

Inflation and currency exchange rate fluctuation also plays into this problem. For example, in Nepal, the rupee has slowly been losing value against the dollar while annual inflation rates can reach double-digits. Each subsequent month the borrowers pay a portion of their loans, its value decreases against the currency in which may MFIs receive funding. In order for an MFI to grow, the need for additional operational margins (around 5-15%) to compensate for the losses incurred by inflation and currency exchange fluctuation.