This dissertation consists of two chapters. The first chapter is dealing with microfinance's interest rates. Microfinance institutions' (MFIs) high interest rates have been at the center of controversy from the beginning of microfinance. One plausible and widely accepted theory, which explains MFIs' high interest rate puzzle, is that there exist fixed costs involved in making loans, say per borrower (or per loan) fixed transaction costs. However, in spite of its topicality, this fixed costs theory still remains untested empirically. Based on the theoretical operating costs function and a large data set on 526 MFIs from 75 countries, this study is the first attempt to test the fixed costs theory directly, by answering the following questions: how much of operating costs are incurred by per borrower fixed transaction costs? And how much do MFIs need to charge in order to cover their operating costs? We find that the per borrower fixed costs account or about 45% of total operating costs for a representative median MFI, which lends $1,000 on average to 12,000 borrowers, and drive the MFI to charge at least 6 to 10 percentage points more as interest solely to cover its operating costs. Furthermore, the smaller average loan size is the more per borrower fixed costs matter to MFIs interest rates, i.e., MFIs' making small loans of $400 have to charge about 40% percentage points higher interest rates than MFIs' making large loans of $2,500. The second chapter is about the religion effects on microfinance. In spite of recent emergence of religion as a crucial factor in development economics, only limited studies have been done on the effect of religion on microfinance. This study aims to provide answers to the following two questions; whether a certain religious denomination is better or worse in MFIs' operation, and whether religious intensity also has an impact on MFIs'performances. We find that MFIs operating in Muslim-dominant countries have significantly lower operating costs than MFIs in Christian-dominant countries, and consequently, have higher operational self-sufficiency. Besides, we also find that religious intensity, which is measured by % of actively religious population, has positive effects on growth rate of MFIs' average loan size.
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