Why Microfinance Interest Rates Are So High and How Some Organizations Are Working To Change This
A well-structured microloan can help a woman finally start the small tailoring business she’s dreamed of, allow a farmer to invest in better tools or seeds that could change everything for his family, or empower a young artisan to purchase the materials needed to expand their craft and build something lasting. For many, these loans open the door to steady income, education for their children, and a future no longer defined by the heartbreak of daily survival.
It’s no secret that microfinance has the power to transform lives, but the crushing burden of high interest rates often tied to these loans can entrap the very communities they’re meant to lift up.
Access to capital shouldn’t come at the cost of long-term financial strain that keeps families awake at night. That’s why efforts to make microfinance more ethical, transparent, and community-focused feel so urgent and necessary. Read on as we explore why interest rates in microfinance tend to be so steep, and more importantly, what can be done to create fairer financial pathways for people across Senegal and beyond.
What Is Microfinance?
Microfinance refers to a range of financial services — including small loans, savings accounts, and insurance — designed for individuals who typically lack access to traditional banking systems. These services are often targeted at individuals living in poverty or working in the informal economy, where even modest financial support can have a significant impact. The most well-known form of microfinance is the microloan: small amounts of capital, sometimes just $50 or $100, lent to individuals to help them start or grow a small business.
The core idea behind microfinance is financial inclusion. This is the belief that everyone, regardless of income level, should have access to tools that build economic stability and opportunity. In many communities, microfinance has enabled men and women to become entrepreneurs and pave a path toward breaking the cycle of generational poverty.
But while the model has generated success stories around the world, it’s not without problems, especially when interest rates are high enough to undermine the very stability these loans are meant to foster.
That’s where organizations like Friends of Senegal and Maison de la Gare come in. Friends of Senegal is a U.S.-based, non-affiliated, independent nonprofit that partners with Maison de la Gare to support sustainable development and economic empowerment through microfinance loans. It is our mission to improve the lives of children and adults in the Saint-Louis, Senegal area.
Together, organizations like MDG and FOS are exploring more ethical and community-driven approaches to microfinance, helping ensure that financial aid empowers rather than exploits those in need. Through small-scale loan programs and business mentorship, they’re working to make microfinance a tool of liberation — not debt.
Interest-Based Microfinance Institutions in Senegal
In Senegal, most traditional banks do not lend money based on a borrower’s potential or future earnings. Instead, they require income and significant collateral — assets that most low-income individuals simply don’t have. For those without formal employment or property, accessing a loan often means relying on a third-party guarantor.
This system can lead to serious consequences: if the borrower cannot repay the loan, the guarantor becomes legally liable, which can strain relationships and put both parties at risk of financial or even personal harm. In essence, the people who most need access to capital are often the ones least able to obtain it safely and securely.
Recent data reveals just how limited financial access is across the country. Only 21% of Senegal’s population is connected to any formal financial institution, whether a bank or a digital finance platform. Meanwhile, 66% of people in Senegal don’t borrow at all, and 28% rely solely on informal lending sources.
Without credit histories or bank accounts, many aspiring entrepreneurs and workers seeking a path to economic mobility often turn to microfinance institutions. While these organizations aim to fill the gap, many charge interest rates as high as 30% — a burden that can trap borrowers in a cycle of repayment, where new loans are taken out just to repay old ones. In some cases, the pressure of mounting debt has become so severe that individuals are forced to relocate to entirely new towns or villages just to escape it.
Why Are Microfinance Interest Rates So High?
Microfinance institutions (MFIs) often charge high interest rates because lending small amounts of money is considered riskier and more resource-intensive than lending large amounts of money. Unlike traditional banks, MFIs invest heavily in monitoring and supporting their borrowers to ensure repayment — costs that are then passed on to clients through interest.
These overhead expenses include staff time, borrower training, and follow-up visits, which can add up quickly relative to the small size of the loans.
How Friends of Senegal Turns Microfinance on Its Head With Interest-Free Loans
While many microfinance institutions rely on high interest rates to cover their costs, Friends of Senegal and Maison de la Gare take a completely different approach — one rooted in trust, education, and community support. Together, they’ve created an interest-free microloan program that not only gives borrowers financial breathing room but also sets them up for long-term success.
Through a unique combination of zero-interest loans, tailored repayment plans based on each borrower’s projected business income, and hands-on business education, this partnership empowers individuals — many of whom have never had access to formal banking — to launch and grow small businesses that support their families and strengthen their communities.
Since its inception during the COVID-19 pandemic, the program has issued hundreds of loans to aspiring entrepreneurs and continues to grow rapidly, helping people in Saint-Louis and beyond open shops, expand trades, and hire neighbors, friends, and family members. The results speak for themselves: more than 95% of loans have been repaid in full and on time, with repayment rates improving each quarter, even as the FOS/MDG lending program remains focused on serving the poorest and most vulnerable members of the community.
Through FOS and MDG’s microfinance loan program, instead of interest, borrowers pay a modest one-time administrative fee. The fee is 10 percent for first-time borrowers and 5 percent for any subsequent loans to the same individual or group. One hundred percent of the administrative fees collected goes directly back into the fund to support future borrowers. While the microfinance program includes paid staff from Maison de la Gare, the initiative is supported and guided by FOS, which is entirely volunteer-run and committed to community-led change.
Adults from Saint-Louis and surrounding villages receive training in business fundamentals for up to two months before being considered for a loan. Some borrowers complete the process more quickly, depending on their readiness. With the support of staff and FOS volunteers, loan candidates develop practical business plans, working through key details such as sourcing supplies, setting prices, managing inventory, and planning for sustainable growth.
Borrower proposals are then reviewed by a local loan committee. Once approved, they receive their loan. Many return for a second or third loan to build on their success. At its core, this program is not just about money. It is about dignity, opportunity, and the belief that real change begins when people are trusted to build their own future.
Changing Lives in Senegal: Stories of Impact Through Interest-Free Microfinance
Adija Anna Diagne’s Story
“My name is Adija Anna Diagne. I am a seamstress and dyer by trade. I live in the Darou neighborhood of Saint-Louis, and my sewing workshop is located on the main street.
I am the mother of three small children. When I was expecting my last child, my husband disappeared, leaving me alone with my children and my pregnancy at a time when I needed support the most. Then my daughter was born with Down syndrome, and she also has a heart condition. From then on, everything became very complicated. I had to quit my job so I could take my daughter to Dakar regularly for treatment. I had no income and was exhausted. While I was fighting for my daughter’s health, my mother, with her limited
means, I took care of my two other children. As a mother, it’s difficult and sometimes heartbreaking to raise children in poverty, wanting to give them what they need, but unable to do much for them.
But despite the hardships, I never gave up hope. Thanks to the invaluable help of Maison de la Gare and Friends of Senegal, I was able to obtain a microloan and find a new lease on life. I slowly restarted my sewing business. I even had the chance to participate in an exhibition organized by women entrepreneurs, where I proudly presented men’s and women’s clothes that I made myself.
But my dream is to buy more sewing machines and hire tailors to help me meet demand. I also want to resume my business of dyeing sheets, tablecloths, and other items. I want to become independent and provide for my children. I am determined.”
Aissatou Mbaye’s Story
“I started out selling small bags of powdered soap, going door to door. Some customers paid cash, others on credit. I also tried selling vegetables, but without success. However, I never gave up.
Thanks to my husband, I discovered Friends of Senegal and Maison de la Gare. With their financial help, I was able to take over the shop where my grandmother used to sell a few items. Little by little, I started to expand my range: crockery, traditional brooms, incense burners… Today, I manage my own accounting and ensure my business continues to grow.
This job allows me to help my children: I can provide for them, ensure their education, and their well-being. It’s my greatest source of pride. But my dream doesn’t stop there. I want to open a large shop, a real space where all the women in the neighborhood can easily stock up on supplies. A shop that will make their lives easier and offer them essential products at affordable prices. Thank you to everyone who believes in us, who reaches out to us, and who gives us hope for a better future.”
Changing Lives in Senegal: Stories of Impact Through Interest-Free Microfinance
#1: Poverty Alleviation
Interest-free microfinance provides a powerful, sustainable pathway out of poverty by giving individuals the means to generate income without the burden of high repayment costs. For many low-income families, even a small loan — used to start a food stall, purchase farming equipment, or invest in tailoring supplies — can create a ripple effect of stability and opportunity.
Without the added weight of interest, borrowers can reinvest profits into their businesses or household needs instead of watching their earnings disappear into compounding interest. This model helps families meet their basic needs, send children to school, and break cycles of dependency, offering not just short-term relief but long-term financial independence.
#2: Empowerment of Developing Communities
Interest-free microfinance doesn’t just uplift individuals, it strengthens entire communities. By equipping people with the tools and training to start their own businesses, this model fosters local entrepreneurship and encourages a culture of collaboration and mutual support.
As small businesses grow, they create jobs, circulate money locally, and reduce reliance on outside aid. In places where formal employment opportunities are scarce, interest-free loans offer a chance for communities to build their own economies from the ground up. The result is not just financial progress, but a renewed sense of agency, pride, and possibility among people who are often excluded from traditional systems of economic opportunity.
#3: Providing Resources for Those Who Often Go Without
Interest-free microfinance helps deliver vital resources not only to the borrowers themselves but also to the people they serve. Many loan recipients use their funding to create goods and services that meet essential needs, often in areas where access to such resources is limited.
By enabling entrepreneurs to establish and grow their businesses, these loans help fill gaps in local markets and improve the quality of life for people who might otherwise struggle to find reliable products and services. In this way, interest-free microfinance creates a positive cycle where communities become more self-sufficient and resilient, with benefits that extend far beyond the individual borrower.
#4: Giving Those With No Credit History or Steady Income Access to Funds
One of the biggest barriers to economic opportunity is the lack of a formal credit history or steady income, which are common challenges for many living in developing communities. Traditional banks often deny loans to these individuals, leaving them with few options to invest in their futures.
#5: Facilitates Economic Growth
Interest-free microfinance acts as a catalyst for broader economic growth by enabling small-scale entrepreneurs to launch and expand their businesses without the heavy burden of interest payments. As these businesses thrive, they create jobs, increase local production, and stimulate demand for goods and services within the community.
This growth circulates money locally, strengthens supply chains, and encourages further investment, all of which contribute to a more vibrant and self-sustaining economy. By focusing on sustainable, interest-free lending, programs like those run by Friends of Senegal and Maison de la Gare help build resilient economic ecosystems that can withstand challenges and create lasting prosperity for communities across Senegal.
How You Can Get Involved With Friends of Senegal and Maison de la Gare
If you’re inspired by the impact of interest-free microfinance and want to be part of this transformative work, there are meaningful ways to get involved with Friends of Senegal and Maison de la Gare. Volunteers play a vital role, whether it’s teaching business skills, mentoring borrowers, or helping manage loan programs on the ground. Your time and expertise can directly empower individuals and communities to build brighter futures.
If you’re inspired by what we are doing but prefer to work with children, please contact us. We offer programs in health care, teaching French, English, and mathematics, sports, meal planning and cooking, housing and supervision of young children, excursions, arts, and more.
If you’re unable to volunteer, donations are equally important in sustaining these non-profit efforts. Every contribution helps fund loans, education programs, and essential community services.
Together, through volunteering or giving, you can help turn the tide on poverty and make lasting change possible in Senegal. Contact us to learn how to join this mission and support a community-driven movement toward financial dignity and independence.
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