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The Impact and Outreach ofMicrofinance Institutions:The Effect of Interest Rates
bySebastian Schwiecker(sebastian.schwiecker {at} helpedia {dot} org)www.helpedia.orgRevised November 2004
This paper was originally submitted in part fulfilment of the requirements for the degree of Diplom-Volkswirt (German equivalent to Master in Economics) from the University of Tübingen in October 2004.
 
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ContentsContents........................................................................................................1Figures..........................................................................................................3Acronyms.....................................................................................................41. Introduction.............................................................................................52. The Development of Microfinance........................................................7
 2.1. What is Microfinance? ....................................................................................................................7  2.2. The Origin of Microfinance ............................................................................................................8 2.3. Microfinance after the Second World War.....................................................................................9 2.4. Microfinance Today.......................................................................................................................11
3. The Impact of Microcredit...................................................................13
 3.2. The Eradication of extreme Poverty and Hunger.........................................................................13 3.3. Achievement of universal primary Education ..............................................................................15 3.4. Promote gender Equality and empower Women...........................................................................16  3.5. Reduce Child Mortality and improve Maternal Health................................................................17  3.6. Combat HIV/AIDS, Malaria and other diseases ..........................................................................18 3.7. Ensure environmental Sustainability............................................................................................20 3.8. Develop a global Partnership for Development............................................................................21
4. Microcredit Outreach...........................................................................24
 4.1. The Demand for Microcredit.........................................................................................................24 4.2. The Supply of Microcredit.............................................................................................................25 4.3. Meeting the Demand......................................................................................................................26  4.4. Microfinance and the Capital Markets.........................................................................................29
5. Credit Rationing....................................................................................31
 5.1. The imperfect Information Paradigm...........................................................................................31 5.2. Adaptation to the Microfinance Sector.........................................................................................33 5.3. Overcoming Credit Rationing for the Microfinance Sector.........................................................35
6. Interest Rates.........................................................................................41
6.1. Setting the right Interest Rate........................................................................................................416.2. Can Micro-Entrepreneurs bear these Rates..................................................................................436.3. Should the Interest Rate be subsidized anyway ............................................................................44
7. Empirical verification...........................................................................46
7.1. Setting up a Sample.......................................................................................................................46 
 
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7.2. Examining the Sample...................................................................................................................47 
8. Conclusions............................................................................................52Appendix....................................................................................................54
 Appendix 1: Average loan balance.......................................................................................................54 Appendix 2: Portfolio at Risk...............................................................................................................56  Appendix 3: Transaction Costs ............................................................................................................58 Appendix 4: Portfolio Growth..............................................................................................................60 Appendix 5: Portfolio vs. Equity ..........................................................................................................60 Appendix 6: Internal Rate of Return ...................................................................................................61 Appendix 7: Subsidized Interest Rates and the Net Gains to Society..................................................62 Appendix 8: Interest Rate vs. Loan Size vs. FSS vs. PAR...................................................................63 Appendix 9: Inflation vs. GDP per Capita...........................................................................................65
References..................................................................................................67Internet References...................................................................................71Ratings........................................................................................................76Other Sources............................................................................................78

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Nizar Ben Slamaleft a comment

very interesting!!!

ebusco34327left a comment

One of the challenges of microfinance is that many people don't trust the banks, they are afraid the banks might fold up and as such don't want to put there money into it (for deposits/ huge savings). Also some insincere customers take loans from the bank that is set to help them the poor but they refuse to pay back.

chalespinosaleft a comment

Presently there is a debate in Nicaragua, where the current President has stated that interest rates charged by the MFI is too high. What is a fair interest rate.

Bastileft a comment

Actually you hear more and more about it and its also getting bigger and bigger. Just check out who won the last noble peace prize last year (http://nobelprize.org/nobel_prizes/pe... or where Sequoia Capital (the VC behing Google, Apple, Youtube...) hast recently invested (http://www.vccircle.com/blog/_archive...

ninjapirate007left a comment

interesting asserstions