Regulating Micro Lenders

A piece in this week’s Economist begs caution on regulation of for-profit microlenders. The article mainly concerns the sprouting number of microfinance institutions (MFIS) in Bangladesh and India, but Peru also warrants mention. Many MFIS’ in India, like the ones in Mexico, charge seemingly high interest rates on their small loans. The Economist generally defends the practice:

Despite charging what may seem high interest rates, MFIS typically have wafer-thin margins because of the high costs of making and collecting payments on millions of tiny loans.

However, as noted in previous posts on the Mexico blog, interest rates can get way out of line. Te Creemos, one particular MFIS in Mexico, charges an annualized interest rate of 125 percent. Still, railing against out of whack interest rates on small loans probably should not warrant a blanket interest rate cap. Peru, by contrast to Bangladesh and India, is praised by The Economist for management of MFIS operations within its borders. This owes to a sophisticated blend of rules that are enforced on capital buffers. But I image that a wholesale embrace of Peru’s regulatory structure is probably unrealistic in the near term. One solution put forth by the wonky British publication: allow MFIS to take deposits. In India at least this would curb the need for outside financing.