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Towards a Theory of Fair Interest Rates on Microcredit

Author

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  • Marek Hudon
  • Joakim Sandberg

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.

Suggested Citation

  • Marek Hudon & Joakim Sandberg, 2011. "Towards a Theory of Fair Interest Rates on Microcredit," Working Papers CEB 11-019, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/88905
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    More about this item

    Keywords

    justice; microfinance; interest rate; usury;

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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