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Fair interest rates when lending to the poor: Are fair prices derived from basic principles of justice?

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  • Marek Hudon

Abstract

This paper addresses the fairness of prices, with a focus on fair interest rates as they apply to microlending transactions for the poor. Under different assumptions on fairness in interest rate policies and the principles of justice as described in A Theory of Justice (Rawsl, 1976), the paper determines the extent of the ‘just’ range of a price. Using the original notion of fair reservation price and fair bargaining range, it is shown that some unfair considerations can make the fair bargaining range negative. Therefore, we propose an additional criterion for fairness: a fair distribution of the benefits within the fair bargaining range between borrowers and lenders. This new criterion is particularly useful and relevant, at minimum, for socially-minded ones active on the microfinance markets.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 06-015.RS.

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Length: 25 p.
Date of creation: 2006
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:06-015

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Keywords: justice; microfinance; interest rate; principles.;

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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  3. Kim Oosterlinck, 2003. "The bond market and the legitimacy of Vichy France," ULB Institutional Repository 2013/142693, ULB -- Universite Libre de Bruxelles.
  4. Marc Labie & Anaïs Périlleux, 2008. "Corporate governance in microfinance: credit unions," Working Papers CEB, ULB -- Universite Libre de Bruxelles 08-003.RS, ULB -- Universite Libre de Bruxelles.
  5. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
  6. Kershnar, Stephen, 2005. "Giving Capitalists Their Due," Economics and Philosophy, Cambridge University Press, vol. 21(01), pages 65-87, April.
  7. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank.
  8. O. F. Hamouda & B. B. Price, 1997. "The justice of the just price," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 4(2), pages 191-216.
  9. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
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