Credit: ©ADA/ Olivier Minaire

Yesterday, ADA examined the subject of interest rates at the 42nd Midi de la Microfinance and Financial Inclusion, organised at Banque de Luxembourg.

In front of a full auditorium of 150 people, guest speakers from microfinance institutions (MFIs) and regulators from Africa and Latin America explained the complex equation of interest rates, client protection and the performance of "banks for the poor". Veronica Trujillo Tejada, Financial Sector Development Consultant at the World Bank - CGAP, moderated this session with Rosa Pasos, executive member of the National Microfinance Commission (Conami)- a regulator of microfinance created 5 years ago in Nicaragua- and Soulemane Djobo, project manager for Africa at ADA Luxembourg.

In order to establish good practice, in some countries regulation requires setting interest rates for microfinance institutions (MFIs) around the world. This is the case in West Africa, as explained by Soulemane Djobo, where since 2005, the rate is fixed first at 27% and then at 24%. Despite regulation, the sector still maintains strong competitiveness among MFIs, an important factor in lowering prices and giving access to more customers.

The factors that determine the fixed rate are very diverse: financing costs, provision, margin, as well as operational costs. These are the most expensive factor for the MFI. In fact, the management of the file of a customer living often in rural areas, away from the agency, as well as its tailor-made support, generate very high costs for the MFI. According to Soulemane​ Djobo, these staffing and administrative burdens can be reduced in the long run by new technologies that make the credit officer's job easier and more efficient by reaching more clients in less time. By reducing its expenditure, the rate requested by the MFI could therefore also fall.

Prof. Dirk Zetsche, ADA Chair in the Faculty of Law, Economics and Finance of the University of Luxembourg concluded the debate by mentioning the importance of taking an interest in the problem on a case-by-case basis, knowing that mentioned factors related to risk, transparency or justified or unjustified costs are adapted to the reality in each country. The 23 countries where the course has been set do not deliver optimal results for either the client or the MFI, therefore making it difficult to standardise both the regulation and the rate value.