Small groups, large profits: Calculating interest rates in community-managed microfinance

Ole Dahl Rasmussen

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review


Savings groups are a widely used strategy for women’s economic resilience – over 80% of members worldwide are women, and in the case described here, 72.5%. In these savings groups it is common to see the interest rate on savings reported as "20-30% annually". Using panel data from 204 groups in Malawi, I show that the right figure is likely to be at least twice this figure. For these groups, the annual return is 62%. The difference comes from sector-wide application of a non-standard interest rate calculations and unrealistic assumptions about the savings profile in the groups. As a result, it is impossible to compare returns in savings groups with returns elsewhere. Moreover, the interest on savings is incomparable to the interest rate on loans. I argue for the use of a standardized comparable metric and suggest easy ways to implement it. Developments of new tools and standard along these lines are fortunately under way from key players in the sector and should be welcomed by donors, politicians and practitioners to improve transparency and monitoring.
TidsskriftEnterprise Development & Microfinance
Udgave nummer4
Sider (fra-til)298-318
StatusUdgivet - 2012