Managing Tradeoffs

Achieving both profitability and strong social performance is the ultimate promise of microfinance. It is not impossible, but neither is it easy and few microlenders are there yet. Ten years ago it had been hoped that achieving both goals would simply be a matter of raising interest rates on loans. If borrowers were willing to pay, say, 50% interest per year for a loan, rather than 30%, the microlender’s profits would see an immediate boost, and, it was hoped, the well-being of clients would not be seriously hurt. Both parts of the claim are true up to a point, but increasing interest rates too high can bring financial and political difficulty and risk undermining social impacts.