> Posted by Anita Gardeva and Sergio Guzmán
Interest rates in Latin American need not stay as high as they are today. This is the basic argument that Anita Campion, Rashmi Kiran Ekka and Mark Wenner present in their recent publication “Interest Rates and Implications for Microfinance in Latin America and the Caribbean.” Their study surveys the interest rates of 29 MFIs from seven Latin American countries between 2005 and 2008. It argues that anyone interested in lower interest rates should be searching for ways to improve operating efficiency. The authors find that “improved operational efficiency – a key driver of lower rates – comes primarily from five sources: competition, reinvestment of profits, learning by doing, pressure from donors and investors on MFIs to be socially responsible, and the absence of interest rate caps.”
The paper identifies competition as the most important of the five conditions in bringing interest rates down. It explains that, “In interviews, MFI managers said that competition was often the largest factor in determining the interest rates they charged…” Competition also creates pressure to expand and reach clients who previously were not served and increase the quality of services.
Increasing affordability through competition coupled with price disclosure standards, knowledgeable stakeholders, client education, and market research can create more robust and responsible pricing in microfinance markets as we discussed in our recent paper “Responsible Pricing: The State of the Practice.” Responsible pricing is defined by the Smart Campaign as pricing, terms, and conditions that are set in a way that is both affordable to clients and sustainable for financial institutions and along with transparency it constitutes one of the Client Protection Principles.
We have always believed that healthy competition in markets can generate lower prices; this paper provides evidence that increased operational efficiency as a result of competition can lower prices for microfinance clients in Latin America.
For more information, sign up for updates from the Financial Inclusion 2020 campaign.
Flickr credit: krossbow