In search of an insurance policy

There is a misperception that the "high" interest rates of microfinance gouge the recipients. To the contrary, borrowers benefit significantly despite "high" interest rates.

Why? Returns on investment for microenterprises are extremely high. Studies—including those by my own organization—have estimated returns from microenterprises fall in the range of 50% to 100%. When a borrower is earning such high returns, paying interest rates in the range of 26% (what SKS charges), or even higher, is perfectly acceptable to a borrower.

Such high returns exist in microenterprises because microentrepreneurs in the developing world run businesses (1) that primarily use family labor, which is more productive than hiring outsiders, (2) that have low infrastructure costs (e.g., village groceries are often home-front stores), (3) that are in the informal sector so there are no taxes and legal costs, and (4) where financial capital is a small percentage of the overall inputs, which are primarily labor. read more