Title: Lowering the interest burden for microfinance

Authors: Insu Song; Carrie Lui; John Vong

Addresses: James Cook University, 600 Upper Thomson Road, 574421, Singapore ' James Cook University, Cairns Campus, 14-88 McGregor Rd., Smithfield QLD, Australia ' Financial IT Academy, Singapore Management University, 80 Stamford Road, 178902, Singapore

Abstract: MFIs have a high interest rate burden due to the small amount per transaction of microcredit and inevitably high operating cost per transaction. To ensure financial viability and to expand the depth and breadth of their operations, MFIs have to adopt cost recovery interest rates on microcredit, hence, MFIs have to charge interest rate high enough, usually substantially higher than the bank loan risk free interest rate. The major factors determining the interest rate on microcredit are the cost of funds, operating costs, loan loss cost and capital for business expansion. To illustrate the impacts of the above factors on interest rate, we present a summary of the current cost structures of microfinance institutes (MFIs) in three Southeast Asia countries, Cambodia, Vietnam and Indonesia. Then, we review existing studies and propose new uses of mobile technologies and financial market innovations for lowering the interest burden.

Keywords: microfinance institutions; mobile technologies; insurance; interest burden; interest rates; microcredit; cost structure; Cambodia; Vietnam; Indonesia; financial markets; market innovation.

DOI: 10.1504/IJPMB.2014.060409

International Journal of Process Management and Benchmarking, 2014 Vol.4 No.2, pp.213 - 229

Available online: 13 Apr 2014 *

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