Does Efficiency Lead to Lower Prices? A New Perspective from Microfinance Interest Rates

Abstract

Pricing is a central strategic decision for all companies, and is particularly sensitive for social enterprises with both financial and social objectives. High interest rates in microfinance are a topic of intense debate. Using an original database of 291 MFIs, this paper provides empirical evidence of the impact the efficiency of an MFI has on its microcredit interest rate. We use the non‐parametric Data Envelopment Analysis (DEA) framework to calculate efficiency and differentiate financial and social efficiency. The results show that financial efficiency has a positive impact on interest rates, with more financially efficient MFIs having lower interest rates, while social efficiency has no impact on microcredit interest rates.

The determinants of interest rates in microfinance: Age, scale and organizational charter

“…This result is in line with the finding of Basharat et al. (). We reported in column (2) that the average interest rate for a mature MFI with more than 8 years of experience is 0.017 percentage points lower than the rate for new‐young institutions, other things being equal.…”

“…() and Basharat et al. (), these findings confirm that an increase in both the breadth and depth of outreach leads to a rise in interest charges.…”

“…(), Cotler (), and Basharat et al. (), all of the four components of interest have significant positive coefficients. The most important element in terms of size and level statistical significance of the estimated coefficients is the net profit margin variable (LPROFTR).…”

“…() and Cull, Demirgüç‐Kunt, and Morduch () that the inclusion of subsidized MFIs substantially lowered the average interest rates reported in previous studies. Further, Basharat, Hudon, and Nawaz () found that the role of firm characteristics in determining the lending interest rate in the microfinance industry may depend on whether the institution is financially efficient or not. Nonetheless, Cull et al.…”

“…(), Hermes, Lensink, and Meesters (), Nwachukwu (), and Basharat et al. (). Section outlines the empirical research model, hypotheses, and the basic features of our estimation method.…”