MFI interest rates can range from 18 to 60 percent, depending on the conditions in each MFI’s service area. Without micro-finance programs, the most common alternative for very poor people is the local “money lenders,” who regularly charge between 120 and 300 percent! (Grameen Foundation)

Over the past two decades, institutions that make micro-loans to low-income borrowers in developing and transition economies have focused increasingly on making their operations financially sustainable by charging interest rates that are high enough to cover all their costs. They argue that this policy will best insure the permanence and expansion of the services they provide. Sustainable (i.e., profitable) micro-finance providers can continue to serve their clients without needing ongoing infusions of subsidies, and can fund exponential growth of services for new clients by tapping commercial sources such as deposits from the public. (CGAP)

The problem is that the administrative costs are inevitably higher for tiny micro-lending than for normal bank lending. Lending out a million dollars in 100,000 loans of $100 each will obviously require a lot more in staff salaries than making a single loan for the total amount. As a result, interest rates in sustainable micro-finance institutions (MFIs) are substantially higher than the rates charged on normal bank loans. (CGAP)