How does Oikocredit determine the interest rates it charges its partners?

We consider several factors:

• market rates for comparable transactions (if any) by local banks and other lenders
• our own cost of capital
• borrower and country risks
• development relevance of the application submitted by the borrower
• our own operational cost in providing and monitoring the loan.

We use an internal interest rate calculation model to determine what the interest rate should be. In general, within a certain country, the model works out that the interest rate charged to a borrower varies with the size of the loan (bigger loans have proportionately lower operational costs), the sector (loans to MFIs are more standard than SME loans which means that we have less operational costs in analyzing and monitoring MFIs) and the borrower risk. No matter the outcome of the model, the interest rate charged will be in line with a country's market rates.

In general, bigger loans to large MFIs with a track record (lower risk borrowers) especially in countries with a low country risk, would receive a rate of approximately the cost of capital plus 2 to 4% (EUR). Loans to smaller MFIs, with a brief track record and a high country risk would have interest rates of the cost of capital plus 5 to 7% (EUR). These rates can vary depending on the development of cost of capital (base rates) and other factors. Loans made in domestic currency often have a higher interest rate than those in dollars or euros, factoring in a higher chance of devaluation (partially influenced by higher inflation).