In Defense of “High” MFI Interest Rates: Part II

14 February 2011 at 07:32 15 comments

By Nila Uthayakumar, KF 14, Uganda

On the one-year anniversary of Eva Wu’s blog post entitled In Defense of “High” MFI Interest Rates, I was inspired to write a post on this exact topic. The date of this post is a coincidence, as I was actually inspired by the concerns of a group of friends I met with last week. They inundated me with questions: Why is it that microfinance institutions (MFIs) all over the world charge interest rates between 30 to 60% or even higher in many cases? Are they all predatory organizations, profiting from the hard earned money of the world’s working poor? How are these astronomical interest rates even remotely justifiable?

As they asked me these questions, I found that I was repeating myself in answering them. It is expensive to run an MFI. There are bad roads and very high transportation costs, it is time consuming to make visits to borrowers, borrowers often do not have collateral and loans are given to solidarity groups whose members guarantee each other’s loans, and borrower default is also a problem. These are but a handful of the issues that make microlending very different from traditional banking. Still, as I explained, I was not convinced myself. I wanted to see some numbers.

I am currently supporting a Kiva field partner based in Kampala, Uganda called MCDT. MCDT charges its borrowers 2.5% monthly interest or 30% interest per year, plus other fees. With the fees added to the interest rate, the portfolio yield (interest income earned plus fees divided by the total loan portfolio) is 64.5% per year. Does that figure shock some of you? It was difficult for even me to wrap my head around why my MFI needs to charge that much to its borrowers to stay in business, and I am in Kampala working in the middle of it all. A quick check of MCDT’s budget clarified that question for me. Here is the breakdown:

Currency is given in Ugandan Shillings on the left and US Dollars on the right. The exchange rate used is 2,358.49 USh to the US dollar.


Income Earned in 2010 406,975,610.00 USh $172,558
(from Interest and Fees)
Expenses in 2010
Salary and Staff Benefits 159,446,175.00 USh $67,605
Telephone 6,904,453.00 USh $2,927
Stationary 14,446,840.00 USh $6,125
Office Expenses 6,541,500.00 USh $2,774
Professional Fees 3,136,000.00 USh $1,330
Staff Travel and Transport 37,117,800.00 USh $15,738
Staff Travel Abroad 5,554,940.00 USh $2,355
Bank Charges* 1,652,594.00 USh $701
Utilities 10,153,443.00 USh $4,305
Maintenance and Repairs 1,709,300.00 USh $725
Computer Expenses 3,642,300.00 USh $1,544
Staff Welfare and Recreation** 16,922,870.00 USh $7,175
Board Expenses 4,022,800.00 USh $1,706
Committee Expenses 4,969,750.00 USh $2,107
Office Rent 15,006,000.00 USh $6,363
Staff Medical Fund 3,429,400.00 USh $1,454
Staff Training 1,566,900.00 USh $664
Interest Expenses*** 25,393,723.00 USh $10,767
Insurance Expenses 7,440,881.00 USh $3,155
Audit Fees 6,500,000.00 USh $2,756
Legal Expenses 130,000.00 USh $55
Subscription 546,500.00 USh $232
Consultancy 9,200,000.00 USh $3,901
Annual General Meeting 7,300,600.00 USh $3,095
Monitoring and Evaluation 3,010,000.00 USh $1,276
Foreign Currency Exchange loss 13,179,965.00 USh $5,588
Amortization 2,226,000.00 USh $944
Provision for Bad Debts 8,052,045.00 USh $3,414
Members’ Training Expense**** 3,553,900.00 USh $1,507
TOTAL EXPENSES 382,756,679.00 USh $162,289
Income Earned in 2010 406,975,610.00 USh $172,558
Total Expenses 382,756,679.00 USh $162,289
Profit 24,218,931.00 USh $10,269



* MCDT banks with commercial banks. They have savings and checking accounts, and also make wire transfers, etc.

**This includes employee severance packages, a basic lunch for the staff, gifts of appreciation for employees during the Christmas season, and similar staff morale expenses.

***Although Kiva’s loans are interest free, MCDT works with other sources of funding that do charge them interest (i.e. Stromme Foundation)

****MCDT is a Savings and Credit Cooperative (SACCO), which means each of its borrowers are considered members and own shares in the company. The members are trained in business strategies and are given support as long as they are MCDT borrowers.

So, after all of MCDT’s expenses are covered, they are left with about $10,000 in profit, which they use to expand their business and make more loans to people who do not have access to affordable credit. There were a total of 15 employees at MCDT in 2010, which makes the average salary $4,507.

I’ll let the numbers speak for themselves and let you draw your own conclusions.

Special thanks to MCDT for access to the figures. How’s that for transparency.

Nila has just arrived in Kampala, Uganda after having spent six months in Zanzibar, Tanzania last year. She considers East Africa home now, and looks forward to working with several Kiva partner microfinance institutions throughout the next few months in Uganda and Kenya.

Entry filed under: Africa, blogsherpa, KF14 (Kiva Fellows 14th Class), Micro Credit Development Trust SACCO (MCDT), Uganda. Tags: , , , , , .

First Borrower Visit (Take 350+) Hey, Soul Sisters!


  • 1. Nathan’s Office « Kiva Stories from the Field  |  26 May 2011 at 05:38

    […] In Defense of “High” MFI Interest Rates: Part II […]

  • […] In Defense of “High” MFI Interest Rates: Part II […]

  • […] can be hard to visit borrowers and that when we’re not trekking for miles we’re doing elaborate calculations or dealing with databases and reporting. In truth, it’s all a front for an extended holiday […]

  • 4. Jagatha Kumar  |  26 February 2011 at 14:59

    Excellent piece of work! Keep it up!

  • […] In Defense of “High” MFI Interest Rates: Part II Country: Uganda / Fellow: Nila Uthayakumar (KF14) Nila demonstrates just how expensive it is to run a microfinance organization by sharing her partner MFI’s budget. […]

  • 6. JD Bergeron  |  18 February 2011 at 17:31

    Excellent post, Nila! Thank you for your research and thank MCDT for sharing this information.

  • 7. Collin Verdi  |  15 February 2011 at 04:24

    You make a compelling case as to why MFIs must charge such a high interest rate to stay afloat but you article begs the question: if they have to charge these poor people a 64% interest rate, is it really worth it? Whether the money goes into the pockets of well-intentioned individuals or ruthless bankers doesn’t really make a difference to the borrower. 64% is 64%. Look at it objectively and it becomes clear that despite the best interests of those who engage in microfinance, It is propagating third world debt. Muhammad Yunus, the pioneer of microfinance, stated that MFIs that charge over 15% should be forced to pay a fee. I understand that it is not a business that people get into for profit and the costs of operating are really high but is that warm fuzzy feeling really worth putting an entrepreneur of the third world even more in debt? Charging such high interest rates eliminates the purpose of microfinance. If an MFI can’t operate efficiently then it should not be in operation at all.

    • 8. ndotoyakidege  |  15 February 2011 at 08:11

      Hi Collin, thanks for your comment. I absolutely agree that if an MFI cannot operate efficiently, it should not be in business. In a place like Kampala, Uganda there are so many MFIs that if a particular MFI is not operating efficiently and offering competitive interest rates, it will go out of business.

      The best answer I can give you regarding your question of whether offering credit at a rate of 64% is worth it, are the responses of MCDT’s borrowers. I have talked to around 80 borrowers, and they have all told me that they have chosen to borrow from MCDT because the interest rate is low and affordable. The borrowers have loan terms of 4, 6, or 9 months, and the vast majority pay off the principle and interest on time.

      There is most definitely a strong demand for microcredit, and if MCDT were not lending, someone else would be, and very likely at a much higher interest rate than even 64%. For example, there is a Kiva Fellow in Mexico who recently met a woman who was paying the equivalent of a 300% annual percentage rate (APR) before taking a loan with a Kiva partner MFI.

      Lastly, the Grameen Bank charges about 20% interest. From what I have seen here in Kampala, unless an MFI was heavily relying on donor funds to cover its own costs, it could not offer an interest rate that was 15% or below.


  • 9. Alexis Ditkowsky  |  15 February 2011 at 03:16

    Really loved seeing this spreadsheet. Thanks, Nila, and thanks to your MFI.

    • 10. ndotoyakidege  |  15 February 2011 at 08:34

      Thanks Alexis! It was enlightening for me as well. The answers are not simple, but at least a detailed cost breakdown offers a more nuanced perspective when talking about MFI interest rates.

  • 11. World Spinner  |  14 February 2011 at 17:23

    In Defense of “High” MFI Interest Rates: Part. II « Kiva Stories ……

    Here at World Spinner we are debating the same thing……

  • 12. Antoine S. Terjanian  |  14 February 2011 at 15:42

    This is a very good post Nila. You and the MFI get A for transparency. And A for honesty in quoting 64.5% (per year) as the true annual interest rate being charged by this MFI.
    I have asked this same question from Eva Wu (since you are quoting her): Assuming the Ugandan borrower is a farmer and purchases a cow with the loaned money can you show us how s/he can pay back capital and interest at this exorbitant rate.

    • 13. ndotoyakidege  |  15 February 2011 at 08:31

      Hi Antoine, thanks a lot for your comment. I was also pleased that MCDT so openly disclosed their financial information to me. Regarding the 64.5% portfolio yield figure, Kiva’s website actually displays that information (the “real interest rate”) on each partner MFI’s profile. Look in the box on the right side titled “About the Field Partner.”

      Regarding whether a borrower can pay back the principle and interest on a loan that has a rate of 64.5%, the best answer I can give you right now is what I have heard from MCDT’s borrowers. I have talked to around 80 borrowers, and they have all told me that they have chosen to borrow from MCDT because the interest rate is low and affordable. The borrowers have loan terms of 4, 6, or 9 months, and the vast majority pay off the principle and interest on time.

      For example, if someone borrows 500,000 USh or $212, a repayment schedule might have her paying between 10,800 to 17,100 Ush or $4.58 to $7.25 each week for 36 weeks, which is a total of nine months. At that point the borrower would have paid off the principle and the full amount of interest.


  • 14. uthaya kumar  |  14 February 2011 at 13:57

    It is very good. Now I have a better understanding of the MFIs and their high costs of lending.

    • 15. Ange  |  15 February 2011 at 06:18

      I think this post makes a great point that running a business is expensive. If you think running a small MFI is expensive, I wonder what the break down of income-expenditures are for the MFI beneficiary businesses. My guess is that the nearly poor rural farmer’s small business doesn’t spend 7,000 USD on staff welfare and recreation or make anywhere near 10,000 USD in annual profit. But…maybe growing small businesses with affordable credit isn’t the point afterall…the point is growing the MFI…?

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