Word of the Week – APR:
An acronym for Annual Percentage Rate; a form of stating an interest rate in which the interest rate is annualized and all fees are incorporated.
Quotation of rates in APR terms facilitates price comparison. It is important that clients are able to compare prices and select the loan with the greatest value for their money; however, diverse manners of portraying the price of a loan make it difficult for microfinance clients to compare interest rates. APRs are always declining balance rates. Additionally, an APR does not include compounding interest unlike the effective interest rate (EIR). See also nominal APR.
Spotlight Fact: Despite the recent debate on whether microfinance institutions are making unfair profits from the poor by charging exuberant interest rates, a recent MIX publication that analyzed over 1,000 MFIs, shows evidence that operating expenses are far more influential on microfinance interest rates than profits, and that removing profits altogether would not change interest rates for clients substantially.
“The most important result from this analysis is that operating expense is the largest factor contributing to the level of both [interest rate] premiums and interest rate (yields) levels of microfinance institutions…For both yield and premium, the relative contribution of profits is less than one-eighth of the relative contribution of operating expenses.”
- “Responsible Pricing: The State of the Practice” (July, 2010) –A recent paper by the Smart Campaign examines the full range of approaches to responsible pricing of loans, including interest rate caps, promoting competition, comparative transparency, and return on equity limitations.
- “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Muhammad Yunus,” MIX Data Brief, No. 4—A publication by Microfinance Information Exchange (MIX) that analyzes the interest rates of global MFIs in order to better understand the factors affecting the prices of microfinance loans.
Graph from: Adrian Gonzalez, “Analyzing Microcredit Interest Rates: A Review of the Methodology Proposed by Mohammed Yunus” MIX Data Brief, No. 4