Effective Cost of Borrowing from Microfinance Institutions

Ankur Tutlani

MPRA Paper from University Library of Munich, Germany

Abstract: It has been observed lately that the dependence on moneylenders for borrowing needs of poor borrowers remained stable despite the presence of MFIs, particularly in developing economies. This is surprising given the fact that MFIs charge relatively lower interest rate as compared to moneylenders. The paper explains this trend by arguing that the effective cost of borrowing from MFI is higher relative to the effective cost of borrowing from moneylender. It is due to the additional burden incurred in the form of transaction costs in case of MFI borrowing. Simulation results also support this phenomenon

Keywords: Microfinance; Group lending; Informal finance; Transaction cost; Effective cost (search for similar items in EconPapers)
JEL-codes: G21 O17 (search for similar items in EconPapers)
Date: 2016-02-12
New Economics Papers: this item is included in nep-ban, nep-iue and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:69502

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