The majority of MFIs aim to charge an interest rate that will allow them to achieve all of their financial and social goals. The interest rate should be high enough to cover institutional costs, allowing for financial sustainability. At the same time, it must be low enough to compete in the finance market and also allow them to achieve their social mission of creating access to credit for low-income populations. There is little information, however, to help MFIs determine the most suitable interest rate.

IPA is collaborating with Movimiento Manuela Ramos, a Peruvian female empowerment organization, to evaluate the effects of both different interest rates and incentives on institutional sustainability. How do these factors affect the type of clients that choose to participate in the community banks? Do lower interest rates attract new borrowers, who have never received loans before, or merely entice clients to switch from alternative lenders?

The study randomizes over 400 communal banks in the regions of San Martin, Amazonas, and Puno. The randomization divides the banks into five different groups: one group receives no incentive and the remaining four groups receive a unique combination of high/low interest rate and positive/negative incentive. To measure impact, IPA collects institutional data on loan size, repayment rate and number of new clients. We also survey all potential Manuela Ramos clients to determine characteristics of people who have chosen to take out loans at different interest rates and whether they have previously borrowed through other lenders.