Why do MFIs charge high interest rates?

Question frequently asked is why the micro - credit interest rates are higher than the bank interest rates being repaid by the wealthier people. The answer lays in expenditures.

Administrative expenditures for approving small scale loans are higher in percent than the costs of approving large scale loans. An employee consumes lesser time for processing the loan in the amount of EUR 100,000 in comparison to processing hundred loans amounting to EUR 1,000.

In addition to the loan amount, there are also other factors contributing to more expensive approval of micro - loans. Loan decisions for clients lacking guarantees or salaries may not be grounded on automated system for the assessment of loan request. Therefore, it requires significant interventions of credit assistants in assessing the risk of each loan individually.

MFI also operate in remote and less populated areas for the purpose of making the loans more available for this population, overburdening the loan processing costs. That is also the reasons why the traditional banks do not have tendency of operating in these areas. For the purpose of achieving successful operation, the MFI has to calculate all factors related to the loan approval for the purpose of covering all expenses and continuing sustainable operation.