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

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Savings groups are a widely used strategy for women's economic resilience – over 80 per cent of members worldwide are women, and in the case described here, 72.5 per cent. In these savings groups it is common to see the interest rate on savings reported as '20–30 per cent annually'. Using panel data from 204 groups in Malawi, I show that the correct figure is likely to be at least twice as much. For these groups, the annual return is 62 per cent. The difference comes from sector-wide application of 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 cannot be compared with the interest rate on loans. I argue for the use of a standardized comparable metric and suggest easy ways to implement it. Development of new tools and standards 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.
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Document Type: Research Article

Publication date: 2012-12-01

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