What Influences Microfinance Lending Interest Rates in Sub-Saharan Africa?

The microfinance industry is progressing towards becoming a core of financial inclusion in sub-Saharan Africa (SSA). Despite the recent growth of microfinance in the SSA, the industry is seemingly characterised by high lending rates. Those high rates have become a hotly debated topic amongst microfinance stakeholders. It is against this background that this study estimates the factors that influence the persistently high microcredit interest rates in SSA by using a panel dataset compromising of 292 microfinance institutions drawn from 34 countries over the period 2003 to 2011. By exploiting several empirical approaches (i.e. BMA, FE and GMM estimators), our estimates reveal evidence of the following: first, the operating costs associated with providing small loans, unexploited economies of scale, and institutional deficiencies all contribute towards increasing the microcredit interest rate. Second, volatile macroeconomic fundamentals exert undesirable effects on the microcredit interest rates. Far more importantly, we draw policy recommendations from our empirical findings.