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Responsible, “fair” interest rate in microfinance
2010 European Microfinance Week
Prof. Marek Hudon
Solvay Brussels School-EM (ULB)
Centre for European Research in Microfinance (CERMi)
Novembre 2010
CERMi and EMP
• CERMi
– Research centre devoted to microfinance
management (eg. governance, ethics, innovation etc.)
– Created three years ago in Brussels and Mons
– 9 PhD students in microfinance
– Network of 30+ research associates
• EMP (European Microfinance Programme)
–
–
–
–
4 European Universities + 5 partner NGOs
Started in 2005
+- 40 students selected among 150 applications
20+ nationalities
Recent news!
Agenda
• Brief (recent) “historical” perspective
• Terms and concepts
• Responsible pricing: What does fairness entail?
New concern?
”Remember Jubilee 2000, canceling Third World
debt, imagine if these social activists focus on
the fact that many of our very good microfinance
institutions are charging 100% and making
returns higher than banks “,
E. Littlefield (past CEO, CGAP) at 2006
Microcredit Summit in Halifax
After Compartamos Clash (IR: 86% + VAT)
CGAP Portfolio (Dec, 2008) “Critics worry that
microfinance institutions (MFIs) may be charging
exploitative rates because of the weak bargaining
power of their poor clients, who can't get loans
elsewhere”.
Why now?
Impact (Banerjee et
al., 2009)
Overindebtedness
Criticism %
financial
sector
“Microcredit interest rates”? Wide range!
Agenda
• Brief (recent) “historical” perspective
• Terms and concepts
• Responsible pricing: What does fairness entail?
Why is there a debate? What is a credit?
Bargaining - Agreement of both, no constrain
- Win-win
- Market-based
- No reference to bargaining powers
Moral
- Socio-economic circumstances
- Poverty of clients
- Moral responsibility to intervene
- Priority lending or (goal)right to credit
What is a credit? Implications
Bargaining
Agreement of both, no constrain
Win-win
Market-based
* Transparency
* Compliance
No reference to bargaining powers
Moral
Socio-economic circumstances
Poverty of clients
Moral responsibility to intervene
Priority lending or (goal)right to
credit
* Injustice
* Fairness
Agenda
• Brief (recent) “historical” perspective
• Terms and concepts
• Responsible pricing: What does fairness entail?
Fair, responsible: What is the question?
Transaction
Costs (e.g. smaller
Systemic Issues
cake to divide)
 Which benchmark?
Morality of financial
System
Trade-off between SPM
(ALS) and FSS (e.g.
Bédécarrats et al., 2009;
Lensink et al., forthcoming)
Individual Issues
Manager put pressure
on loan officer
Corporate Issues
Morality of corporate culture
Concepts from Velasquez (2006)
Three conceptions of fairness
“Cost of fund + 10
to 15%”
(Yunus, 2009)
Ceiling
Sometimes
Religious
Unequal
powers
But counterproductive?
“Allows the institution to
operate as a going
“Clients themselves
concern, but at the same
obviously judge that the
loans are good for them (…)” time is as low cost to the
customer as possible”
(Rosenberg, 2007)
(Rhyne, 2004)
Demandbased
Mix
Repayment
rate
MFI
constrains
Second loan
OSS, FSS or
market return?
But unfair
initial
situation?
What if
nothing left?
Fair interest rate or fair price/ deal?
Compl
exity
Externa
lities
Other fees
Transport
Mandatory
savings
Opportunity
costs of
meetings
 Annual
Effective
Rate
 Risk of
mission drift
if focus on
IR?
Conclusion
• Interest rate is a complex issue (e.g. fairness
compared to?) but also an important one
• Putting the whole sector at risk!
• Fair trade definition? “Stable price, above market
price + sufficient to finance other projects”
• Clients need cheap service (all included, not only
yield/ IR) but also flexibility & reliability
• More problems and discussions to come (with
various outsiders)