I\’m not normally a fan of Ha Joon Chang, but this is good:
The microfinance industry has always boasted that its operations remain profitable without government subsidies or contributions from individual donors, except perhaps in the initial teething phase. […] However, it turns out that, without subsidies from governments or international donors, microfinance institutions have to charge, and have been charging, near usurious rates. It has been revealed that the Grameen Bank could initially charge reasonable interest rates only because of the (hushed-up) subsiides it was getting from the Bangladeshi government and international donors. If they are not subsidized, microfinance institutions have to charge interest rates of typically 40-50 per cent for their loans […] the vast bulk of microcredit is not used to fuel entrepeneurship by the poor, the alleged goal of the exercise, but to finance consumption.
The point being that providing small short term loans to people is a very expensive undertaking.
Remember this when people start to splutter about payday loans and doorstep lenders here in the UK.
Oh, and the reason that the UK interest rates are so much higher? Because the amounts being loaned are so much smaller in relation to those fixed costs of labour needed to make the loan. Lending $100 to someone where monthly wages are $50 (or whatever) is much cheaper in terms of the costs of that labour than lending £100 to someone where monthly wages are £2,000 (or whatever).
What is true of small short term loans in one part of the world is true of them in other parts: they\’re expensive to make.