China Microfinance Interest Rates: A Case Study

This study explores the question that whether microfinance in China can have a commercially sustainable development or not. It starts with the stress of interest rates issue as the key to the sustainable development of China's microfinance institutions. It first reviews what others have done on this ambit in a broad scope of economic literature. Much attention is paid to restudy two theoretical models about microfinance interest rates: financial gain-loss balance method and Rosenberg Model. Based on these two theories, it studies three representative cases of microfinance institutions in China. Under certain assumptions, this study produces two groups of estimation of Chinese microfinance shadow interest rates in accordance with two assumed operation goals. For the institution's goal of financially balanced operation, the required interest rates are 5.5%, 30.88% and 20.34% respectively; for its goal of commercially sustainable development with independence of donors and subsidies, it requires a rate of 26.1%, 49.35% and 41.27% respectively. This result can generally represent the overall required interest rate levels of Chinese microfinance institutions to fulfill those two assumed operation goals. Then it estimates that the adopted interest rates in real cases of microfinance are in the range of 15% - 27%. It easily can be seen that there are interest rate gaps between the shadow interest rates and real adopted interest rates, positive for some cases and negative for some institutions or programs. From long run, it draws that when competition prevails and the market becomes matured, the interest rates of microfinance in China will converge to the one of most efficiency. So, at last the paper concludes that not only can China's some microfinance institutions get financially balanced, it can also realize commercially sustainable development.