Impact of External Factors on Lending Rate of Microfinance institutions: An Empirical Evidence

Abstract

In microfinance high lending rate has recently become an important topic in ethical debate because of its impact on poor borrowers and lenders. Microfinance institutions are moving towards commercialization in an effort to become sustainable and profit oriented. Lending rate is an essential element in covering up the cost of loans in microfinance so it needs to be set at a rate so that it is desirable and affordable for both the borrowers and lenders. There are certain underlying external factors contributing towards higher lending rate which are many others related to (business environment, financial developments and macroeconomic environment). This paper adds to the debate by providing empirical evidence on the impact of various external factors on lending rate in microfinance by controlling certain variables. A panel data set for a sample of 493 worldwide MFIs from the year 2008-12 has been generated from the MIX market website and the World Bank website. By employing random effect model our findings suggest that business environment, financial developments and macroeconomic environment have a role in driving lending rate in microfinance.”