Effective Interest Rate of Mfis

Topics: Interest, Microfinance, Debt Pages: 18 (4992 words) Published: January 4, 2013
Under The Supervision Of:
Mohammad Akter Hossain
Associate Professor
Department Of Finance & Banking
University Of Chittagong
28 April 2012
Chittagong University

Letter of submission

Mr. Mohammad Akter Hossain
Associate Professor
Department of Finance & Banking
University of Chittagong.

Subject: Prayer for obliging the ‘TERM PAPER’.


With due respect, beg to focus your kind attention with the following fact that as requirement of the BBA Programme I had visited many clients of some MFIs to collect the information regarding their interest rates of microfinance activities. Also I have collected a huge amount of secondary data, including videos & documentaries to understand whether the effective interest of the MFIs in Bangladesh are rational enough to provide the financial services to the poor people of Bangladesh.

I hope that you will accept my TERM PAPER considering its distinctiveness.

Yours truly,
Tareq Mahmood
ID : 05303134
BBA (Hons) 4th Year 2010
Department of Finance & Banking
University of Chittagong, Bangladesh.

Tareq Mahmood


Right from the start of microcredit programme in late 1970s, there has been a strong criticism of high interest rates charged by MFIs. In recent years, the criticism that Microfinance Institution (MFIs) charge its poor borrowers unreasonably high interest rate has intensified. Some people point out the unfortunate combination of profit seeking MFIs, minimal competition and vulnerable borrowers has opened up dangerous potential for exploiting the poor. In the backdrop of these concerns and criticisms, this study reviews the interest practice of MFIs in Bangladesh, examines the issue of interest rate from the perspectives of MFIs and the borrowing members.

In this paper it was chief endeavor to find out the EIR of MFIs in Bangladesh. At last, enacting some criticisms, suggestions and recommendation in this connection concludes the analysis.


At first I would like to express my appreciation to my honorable teacher Mr. Mohammad Akter Hossain sir who had given me the topic “Effective Interest Rate Of MFIs & It’s Rationality In Bangladesh’’ as for my TERM PAPER. Also I express my thanks to Mr. Prof. Mohammad Saleh Jahur Sir for providing us the guidance to prepare the term paper. Besides I am also grateful to honorable teacher Mr. Mohiuddin sir, who has helped me by sharing some his research knowledge regarding the MFIs.

I could not but utter my gratitude to Mrs. Kawsar Zinnat Programme Officer, BRAC, Sathkania Branch, Mr.Ramen Das Field Officer, ASA, as they had helped me to prepare the TERM PAPER by providing their suggestions and information, as I required.

I am really thankful to all the clients who lend a hand me by providing the information I had sought from them.

My sincere thanks to all my friends of the same department specially Syed Alam and Jahangir Alam who gave me essential supports.

Table of Contents

Title Page
Part One : Introductory Section 06 - 08 Introduction07
Objective of the study 08
Scope & limitation of the study 08
Method of data collection 08

Part Two: Findings & Analysis 09 - 25
2.1 Interest rates of microcredit 10
2.2 EIR for the borrower 10
2.3 Calculating effective interest rates on microcredit loans 11 2.4 Calculating EIRs with irregular grace periods15
2.5 Interest rates of microcredit: MFI perspectives20
2.6 The Break-Even Rate in Bangladesh21
2.7 Efficiency of the MFIs in Bangladesh21
2.8 Interest Rates of Microcredit: Borrowers’ Perspectives22 2.9 Interest Rates Of Microcredit : A Critical Overview 24

Part Three: A Review : The Rationality of The EIR of MFIs In Bangladesh 3.1 Borrowers Perceptions about Interest Rate 27
3.2 Rate of...
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