When people hear on the news that microfinance institutions charge 25 percent, 30 percent or even 80 percent interest on loans, they often are outraged. How can these organizations get away with charging the poor these high rates, and why does no one regulate the industry? And most of all, why are the poor paying these exorbitant rates?
[This article has been reproduced with permission from Knowledge Network, the online thought leadership platform for Thunderbird School of Global Management https://thunderbird.asu.edu/knowledge-network/]
All countries get huge loans from World Bank and IMF. IMF and World Bank categorize countries based on how rich they are before deciding the interest rate for these loans. Developing countries are seen as high risk and are hence charged with high interest rates which transforms to what you and I pay to Banks in India when we take a loan. This is evident from the fact that in USA or Switzerland housing loans are at 3 to 4% and in countries like India its more than 10%. This is one of the many ways in which the West benefits from the hard work of the people in the east. The rest are sanctions/embargo and stuff. Developing countries have little presence in the decision making board of these huge monetary organizations, so in a way India is like a worker and they are the Boss. Our Govt doesn\'t really care anyways as its the citizen who will be paying it back. There are some American companies like Moodys and \'standard and poor\' who rate us as high risk and themselves as \'AAA\'. So every Indian Citizen end up paying 11% - 3% =8% to the rich countries. They know how to keep our Politicians silent (bribe the leader and the whole country works for you!). Any effort to offend World Bank would be dealt with Economic sanctions or even War (like what happens in Iraq, Syria) so its better to obey them. In short its the money game which West plays on us and we always loose making them rich.
on Jul 30, 2013So much of microfinance interest rates have to do with the cost of servicing the loans, that it's no surprise that competition wouldn't lower rates. Only a small percentage of rates is profit.
on May 8, 2011