Evaluating the Impact of Microfinance Interest Rates on Sustainable Equipment Acquisition among Small Businesses

Small businesses that want to modernise their equipment often face a simple problem: clean, energy-efficient machinery costs more upfront than the conventional alternative, and the microloans they rely on to bridge that gap are themselves expensive. This paper looks at whether the price of microcredit – not just its availability – pushes small firms toward dirtier, cheaper equipment. Drawing on a small pilot sample of 25 micro and small enterprises (MSEs) that financed an equipment purchase through microfinance institutions (MFIs), we estimate a binary logistic model of the choice between clean and conventional equipment. The effective interest rate is negatively associated with choosing clean equipment, and a green interest-rate subsidy is associated with a markedly higher chance of adoption. A proposed non-linear “threshold” effect around 18–22% APR is suggested by the direction of the results but is not statistically confirmed at this sample size. Because the sample is small and exploratory, these findings should be read as a first look rather than a settled result – useful mainly for motivating a larger follow-up study and for the broader argument that blended finance and rate buy-downs deserve a place in green MSE lending.