Editor’s Note: Recently, Bryan Farris spoke with Mary Ellen Iskenderian, President and CEO of Women’s World Banking, one of thought influencers and industry leaders in microfinance with a focus on female entrepreneurs and customers in 27 countries. As WWB notes, the organization not only provides women access to financial services but “also control over their assets.” This post is the second of several topical discussions centered on the many financial, cultural and societal issues facing women in developing markets (earlier posts can be found on NextBillion.net here and here).

The microfinance sector has realized the need to move beyond microcredit, however new services are expensive to offer.  And yet, critics often cite high interest rates when claiming that microcredit exploits the poor.  In this discussion, Mary Ellen Iskenderian and I grapple with these issues and more.  How can the MFI sector reduce costs and expand offerings? How will MFIs encourage the poor to save for the long run? Can subsidized programs, like match savings and financial education programs, have an impact on behavior?

Rising Pyramid: There has been a lot of discussion lately about whether high interest rates in microfinance are ethical.  I’m more concerned with whether they are effective.  From the point of view of a CFO, any debt that a business takes on should be put to use in an activity that earns a return higher than the cost of debt.  The cost of microfinance debt is extremely high, which makes it very challenging for small businesses to earn a sufficient return to actually climb out of debt using the loan.  The business may be able to pay off the loan, but may not be retaining any earnings or accumulating capital.

There are several stories, like the one you described in your interview with Dowser, in which a woman takes out and repays several successive loans and is successful in growing a business.  Clearly the loans have been beneficial to some, but it seems to me that the high cost of debt will make it challenging for most businesses to deploy that capital in a way offers a return sufficiently high enough that the financial instrument is accretive to capital.

How do you solve the problem of high interest rates? Should we be looking for a way to provide subsidies to high rates?  Or, is it better to encourage transition to savings as a vehicle for asset accumulation? Read more »