ESTIMATING THE EFFECTIVE COST OF BORROWING TO MICROCREDIT CLIENTS

Abstract

This paper addresses two questions regarding microcredit in the Kumasi metropolis: What is the average interest rate on microcredit in the Kumasi metropolis? What is the effective interest rate paid by microcredit borrowers in the Kumasi metropolis? We use survey data from 33 microfinance institutions (MFIs) to answer these two questions. The results of the analysis show that the average interest rate on microcredit in the Kumasi metropolis is 4% per month generally applied using the straight-line method of loan amortization. However, due to compensating balance condition coupled with other charges mostly 3% of the principal, a microcredit borrower who contracts a loan at 4% interest rate per month ends up paying more than 4%.