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Toward a theory of fair interest rates on microcredit: balancing the needs of clients and institutions

Marek Hudon and Joakim Sandberg

Chapter 5 in Handbook of Microfinance, Financial Inclusion and Development, 2023, pp 83-98 from Edward Elgar Publishing

Abstract: One of the most salient debates concerning microcredit pertains to the unexpectedly high rates of interest charged on microloans - rates which frequently are deemed usurious by outside parties. Microcredit is supposed to be to the advantage of poor borrowers, but at the same time microfinance institutions face comparably high costs. This chapter seeks to give theoretical input into the debate on fairness in microcredit interest rates. By drawing on both contemporary discussions in the industry as well as abstract philosophical perspectives on fairness, we classify and theorise four conceptions about fairness in interest rates and pinpoint their limitations. We finally argue for a combination of consequentialist and rights-based concerns which seeks to balance the needs of clients and institutions. We also draw out some practical implications of this view for both microfinance institutions and governments.

Keywords: Development Studies; Economics and Finance (search for similar items in EconPapers)
Date: 2023
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