The Profit Orientation of Microfinance Institutions and Effective Interest Rates

SummaryWith the rise in the number of for-profit microfinance institutions (MFIs), commentators are asking whether the sector benefits by MFIs having stronger profit orientations. We address this question by analyzing the relationship between interest rates and adopting the for-profit legal form, appointing private sector representation and traditional banking experience to advisory boards, and participating in more extensive for-profit networks. The results consistently indicate that a stronger for-profit orientation corresponds with higher interest rates for MFI clients. However, this does not contribute to greater profitability and therefore sustainability because the stronger profit orientation is also associated with higher MFI costs.