February 26, 2009
When is lending just?
By David Roodman Tags: ethics
Commenting on chapter 2, Debbie asks “what [interest] rate do you feel is too high?” This relates to my user fee post. But the question matters enough to me to deserve its own post. I do not have practical advice for Debbie, who is looking to lend more through kiva.org. But I must confront the challenge of defining just lending in the coming months, as I write the chapter on “development as freedom.”
Philosophers and religious thinkers have struggled with this question since the dawn of history—check out this papal decision in 1515—so don’t expect me to nail it. My sense is that several factors enter the moral calculus:
- The interest rate.
- The transparency of the rates and rules. It is one thing to knowingly pay 100%/year; it is another to agree to do so unwittingly because of hidden fees or complicated and undisclosed penalties.
- Other consumer protections, including prevention of inappropriately coercive collection techniques (hat tip to commenter Lindsey).
- Whether the local credit market is competitive. A creditor who must compete can’t extort monopoly profits so easily.
- What it costs to deliver the credit. Costs depend on factors such as population density and the wage level for the skilled workers who staff microfinance institutions.
- Whether the lender has demonstrated culture and practices designed to soften the edges of credit and keep it out of the hands of those at risk of getting into trouble with it, what Gary Woller calls “Social Performance.”
It seems to me that much of the moral burden rests on Kiva.org and other intermediaries to develop policies on these issues and explain them to their funders and investors.
Thoughts welcome on this tough question.
This just in:
Concerns that microcredit interest rates are unjustifiably high don’t find much support in the available data, according to a new CGAP report, The New Moneylenders: Are the Poor Being Exploited by High Microcredit Interest Rates.
The report finds that while there are a few institutions charging rates that seem unreasonably high, most interest rates seem to be in line with MFIs costs. The report also finds that microcredit rates have been dropping by 2.3 percentage points each year since 2003, much more steeply than the decline of bank loan rates. Administrative costs are also declining along with lenders’ profits- the savings are being passed to borrowers.
Note the “most interest rates seem to be in line with MFIs costs.” That’s the cost argument the pope made 500 years ago.
February 26, 2009 at 9:59 pm
David – Your reference and link to the papal decision of 1515 makes me curious about the historical Christian prohibition against interest, the opening that this gave to Jews to carve out a niche as money lenders, the resulting subsequent rise (or excuse for) antisemitism, and the current (as I understand it) Muslim prohibition against lending for interest.
All of this is perhaps wide of your original mission to focus on microcredit, but I wonder if it is not perhaps relevant, and I don’t recall it being addressed in your extensive chapter 3 on the history of microfinance. Is the Muslim prohibition against lending for credit not a problem in Bangladesh? Anyway, if you haven’t done it already, a brief discussion of how religious and moral teaching have influenced the availability (and morality) of credit practices would be quite interesting.
April 12, 2009 at 9:49 am
David:
I look at the interest rate issue from a different point of view. Rates may be high because we do not think of the price until we are ready to roll on the product. The whole is goes to (1) organizational structure of the institution; and (2) pricing modality. Most microfinance institutions use cost plus method, which is also the recommended one internationally. So you have to recover cost and you add a margin to that make a profit, and you get your price. What if we think of the whole process differently and reverse it: you determine the price point for what you plan to produce and then produce to sell at that; make sure your production is organized from the very beginning to ensure that you can sell at that price “X”. This is described by some management gurus as “Japanese model of pricing.’ Anyway it is Japanese any more. $100 lap top production; nanocar in India, and many others as examples outside Japan. If this is used for microfinance , one would build lean and mean organizations, not fancy alomost HSBC like banks to provide microfinance. They will use human resources carefully and control costs like what ASA does in Bangladesh.. This about the implications of this kind of an apporach.. The Problem is most organizations are not set up to operate as lean and mean organizations; poor pay the price for that neglect.. they are compelled to pay.. to be correct. Like to hear how you would look at this point of view…