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Towards a Theory of Fair Interest Rates on Microcredit

Marek Hudon and Joakim Sandberg

No 11-019, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: One of the most salient ethical debates concerning microcredit pertains to the unexpectedly high rates of interest charged on microloans. Microcredit is supposed to be to the advantage of borrowers in some of the poorest regions of the world, but at the same time commercial institutions need to cover their comparably high costs. This article seeks to find a theoretical basis for a more balanced way of setting prices on microcredit; i.e. a theory of fairness in interest rates. By drawing on both contemporary debates in the industry as well as more general philosophical ideas, the article discusses four main theoretical approaches. In the end the authors favour a combination of consequentialism and liberal egalitarianism which seems able to adequately balance the needs of the institutions with the needs of the clients. However it is also acknowledged that further research in the area is needed.

Keywords: justice; microfinance; interest rate; usury (search for similar items in EconPapers)
JEL-codes: L31 M54 O16 Q14 (search for similar items in EconPapers)
Pages: 32 p.
Date: 2011-06
New Economics Papers: this item is included in nep-hme, nep-hpe, nep-mfd and nep-pke
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