Small Money Big Impact

CHAPTER 7Loan Pricing

I firmly believe that giving people loans is to offer them an opportunity to get out of poverty by leveraging their own efforts.

Queen Máxima of the Netherlands¹

The absolute costs for a loan of $100 are virtually the same as for a loan of $1000. However, with higher volumes of credit, these costs are much less significant than with microloans.

MFIs are economically sustainable and socially involved, provided they can cover their costs in the long run and fulfill their social mission at the same time. As the fixed costs (operating and capital costs) constitute more than 80 per cent of the overall costs of a microloan, loan pricing in the developmental regions that are accessed by MFIs has become rather inflexible. The higher operating costs compared to traditional loans in industrialized countries are compensated by means of income from interest.

Borrowers are willing to accept these less favorable conditions but in turn gain long‐term access to capital. Their impressive profit margins from their business undertakings allow them to swiftly redeem their debts.

Increasing digitalization, and the use of new technology in developing countries, results in a bundling of efficiency in both lenders and borrowers, lowering the pool of costs.

7.1 INTEREST RATE COMPONENTS

The comparatively high interest rates are one of the most controversial and debated factors ...