There is much made of the “extraordinarily high” interest rates often found in microfinance in emerging markets. Phrases like ‘profiting from the poor’ and ‘extortion’ get frequently thrown around by those who do not understand the economics and challenges of delivering financial services in these markets. But comparing interest rates in the US to Africa is like comparing the prices of oranges in Mexico to those found in Antarctica. The conditions are very different, and the cost of delivering services in many of these markets is, or at least has been, very high.
In an inspiring example of creating rapid progress in lowering interest rates, UNIT Trust of Tanzania (UTT) has managed to offer interest rates which are three times lower than the rest of the market. How did they do it? Primarily through the use of “advanced technology on acquiring and repaying loans — especially mobile money transfer platforms.” As a result, their interest rate is only 18 per cent compared to other micro-institutions that charge up to 48 per cent.
Providing microfinance is expensive. Technology makes it a lot cheaper. Organizations like UTT who can leverage technology intelligently can rapidly innovate in their market, lower the cost of banking services while growing their own margins and market penetration. Which ultimately means more people will get better and more affordable access to banking services. A win-win.