Tuesday, November 09, 2010

Bangladesh caps microcredit interest rates

The government of Bangladesh is going to start imposing limits on the amount of interest that microcredit lenders can charge. The new rules are due to concerns that for-profit microcredit lenders are gouging the poor with excessively high interest rates. Microcredit companies counter that high rates are the only way they can stay viable to extend services to more of those in poverty.

From this AFP story that we found at MSN News, we read more details of the new rules.

The government's Microcredit Regulatory Authority (MRA) has approved new rules banning microfinance lenders from charging more than 27 percent interest on loans, MRA director Sazzad Hossain said.

"Many microlenders have earned a bad name for charging high interest rates. There are also isolated incidents in which lenders have used force to compel borrowers to repay loans," Hossain told AFP.

One out of every five of Bangladesh's 146 million citizens is a micro-credit borrower, relying on one of more than 1,200 micro-finance institutions whose interest rates vary from 20 percent to 51 percent, according to the MRA.

"We oppose the interest rate cap. It will be hard for micro-lenders to stay afloat charging just 27 percent interest," said Mosharraf Hossain, head of the Credit Development Forum, a microfinance industry association.

Hossain said local microfinance institutions have high costs as many borrow money from private banks at around 13 percent interest, then lend the money on, adding that there are extra costs when operating in remote, rural areas.


Don Stoll said...

Even while granting credibility to Mosharraf Hossain's suggestion that "to stay afloat" microlenders need to charge interest rates above thirty percent, one can favor the new rate cap in Bangladesh (and similar caps elsewhere). The motivation of sky-high rates by lending risks rather than lenders' greed will not save borrowers from the harm incurred by taking out such loans. And clearly, preventing this harm has to trump allowing the microlending sector to thrive.

Tom Brown said...

It's a shame that this is happening, though ultimately, competition might be good for the industry. If one bank is charging interest rates are too high, then another bank will come along and offer better interest rates. It's all in the execution, though. Grameen bank had a substantially lower default rate than even regular banks because people saw this as their last and only option. If they see other banks appearing, then they might be less scared of defaulting since they could simply go to another bank. .