Are microfinance institutions (MFIs) exploiting poor borrowers by charging the excessive interest rates? Some people think so, especially after the publicity around Andhra Pradesh in India. Despite recent events, there has always been a widespread agreement that most MFIs should operate sustainably, keeping costs as low as possible, and charging interest rates high enough to cover these costs. However, even in these instances, rates hover much higher than your typical commercial bank.
One of the leading factors attributing to high MFI interest rates is administration expense. The cost to process numerous tiny loans requires a lot more legwork that cannot sustainably offset by economies of scale. Also, MFIs often operate in remote or low population density areas, were simple contact with the borrower can turn into long journey. The video below depicts this through my trek out to Kanaan Village in West Timor, Indonesia. Enjoy!