Capping microfinance interest rates will hurt the poor. There are better ways to regulate the industry
MICROFINANCE is an example of something that is sadly all too rare: an anti-poverty tool that usually at least breaks even. If you make small, uncollateralised business loans to groups of poor women, they almost always repay them on time. It has grown rapidly in many countries, not least Bangladesh and India. With nearly 30m clients each, these are now the world’s biggest markets for microfinance. Yet the industry has come under attack for being too commercial.
In Bangladesh the government has capped the annual interest rate that microfinance institutions (MFIs) can charge at 27%. In India a new breed of for-profit microlenders has shaken up an otherwise NGO-dominated sector—and annoyed the authorities.
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