Completely agree with this article. After doing some research on microfinance myself I was at first alarmed by the heights these interest rates can reach, primarily because they are so different to what I am used to seeing in the developed world. However after looking into this topic I came across a similar conclusion as to what you did.

The small size of loans and the location to which clients are based are very much contributing factors to higher interest rates. In fact I’ve come across an article that has been very influential to my work; I would think that you would be interested in this if you have not seen it already.
The article evaluates the determinants for such high interest rates and boils it down to operating expense. Therefore it somewhat supports your above arguments as it states that higher MFI interest rates result from high operating expenses rather than money-hungry profit motives that many would think. Thus MFIs such as BancoSol have decreased their loan rates because they have come more efficient; competition as you have mentioned, drives this efficiency.

Your third that may justify potentially higher interest rates is new to me. Throughout all of the pieces of literature that I have read, I have yet to come across this concept as a line of argument. Restating your assessment, you claim that higher paid loan officers are observed with higher interest rates. I find this quite interesting because economic logic tells me that the opposite would be true. I would have thought that a lower paid officer would increase corruption. With lower salaries, loan officers are likely to cheat the sheets, pocket some money for themselves or practice inefficient and somewhat unethical collection methods like that observed in the Andhra Pradesh case of SKS microfinance (2010). This would lead to a higher default rate and thus higher interest rates in consequence. However I do agree that with higher paid staff, operating expense increases and thus so do interest rates. But I can’t help but wonder if this is only in the short term and in fact higher paid staff decreases corruption and thus increases ‘sustainability and permanence’ in the long term.
By and large, I do agree that competition and regulation must progress in order for us to see future decreases in the interest rate. And I also agree with you Sam. In a world where many are excluded from financial services, if higher interest rates are the only way to provide them with the opportunity to borrow, then so be it!

Micro finance organisations … and even at the extreme end, shylocks exist simply for one reason.Lack of money and lack of opportunity at birth does not consign the poor to perpetual poverty. We are all self made, but only the sucessful dare admit it. The few underpriviledged who have realised this walk up to stores and get LPOs , Confirmed orders and letters of commitment from institutions seekeing to be supplied with commonly available goods. They then walk up to banks to get credit for working capital only to be told they do not qualify because they dont have credit history OR they do not have good references OR they do not have Tangible security. To that underpriviledged man the question is WHAT IS THE OPPORTUNITY COST of missing the business opportunity even as we scholars debate about SUITABLE interest rate?

No microfinance organisation wishes to charge high interest rate just for profits . Any intelligent mind would discern that interest rates are inversely proportional to high volumes. So the only way to reduce interest rates microfinance organisations charge is to avail cheap wholesale CREDIT to the microfinance lenders and avail the Technical Asststance funds to enable them rrefine/develop/support the end beneficiaries