The paper begins by charting and examining the shift in the interest rate policy of microfinance institutions and the merits of doing so. It also suggests implications this has for the future of microfinance institutions and the financial systems of the countries in which they operate. The paper then considers interest rates from the perspective of the borrower and aims to show how reasonable financial costs do not hinder the ability of microentrepreneurs to increase their incomes and profits. It also shows that financial costs may be one of the least expensive portions of a microentrepreneur's total borrowing costs.

The discussion then turns to the perspective of microenterprise credit programmes. It examines the role of interest rates for achieving self-sufficiency, and examines some of the external constraints often placed on an institution's interest rate policy. The concluding section highlights opportunities that sound interest rate policies create for microenterprise programmes, their clients and the financial systems of developing countries. Throughout, the paper draws on experiences of institutions in Chile, Colombia and the Dominican Republic.

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