Do Microlenders Have Excessively High Interest Rates?
Financial Services Advisor
April 22, 2010
Yani R. Contreras- Miami
Thomas F. "Tom" Morante- Miami
Banking and Finance Partner Thomas Morante and Yani Contreras, Foreign Legal Counsel, offer their opinions on microlending in a Financial Services Advisor article titled, "Do Microlenders Have Excessively High Interest Rates?"
Microlending in recent years has been hailed as an effective strategy for poverty reduction. But some microlenders have come under scrutiny for charging high interest rates. An April 13 article in The New York Times said the average interest rate charged by Mexican microlenders is approximately 70 percent, with rates surpassing 100 percent in some cases. Why are microlenders' interest rates so high, particularly in Mexico? How much profit is too much when it comes at the expense of the poor? Are microlenders adequately policing themselves or must governments toughen regulation so that poor borrowers are not exploited?
In this article, Mr. Morante and Ms. Contreras explain that several factors gave rise to new risks related to the microfinance industry's activities. These factors included reduction in capital, the rising cost of funding, the contraction of demand for financial services and the decrease in borrowers' ability to pay. This is the environment that microfinance institutions faced in 2008 and 2009 and may have contributed to higher interest rates. In Mexico, microlenders' higher interest rates were a function of increased costs of collection on unpaid loans in connection with a larger portfolio at risk, higher salaries and the fact that the average amount of credit in Mexico is significantly lower than in other countries of the region.
READ: Do Microlenders Have Excessively High Interest Rates?
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