1. Responsible, “fair” interest rate in microfinance 2010 European Microfinance Week Prof. Marek Hudon Solvay Brussels School-EM (ULB) Centre for European Research in Microfinance (CERMi) Novembre 2010

2. CERMi and EMP CERMi –Research centre devoted to microfinance management (eg. governance, ethics, innovation etc.) –Created three years ago in Brussels and Mons –9 PhD students in microfinance –Network of 30+ research associates EMP (European Microfinance Programme) –4 European Universities + 5 partner NGOs –Started in 2005 –+- 40 students selected among 150 applications –20+ nationalities

3. Recent news!

4. Agenda Brief (recent) “historical” perspective Terms and concepts Responsible pricing: What does fairness entail?

5. New concern? ”Remember Jubilee 2000, canceling Third World debt, imagine if these social activists focus on the fact that many of our very good microfinance institutions are charging 100% and making returns higher than banks “, E. Littlefield (past CEO, CGAP) at 2006 Microcredit Summit in Halifax

6. After Compartamos Clash (IR: 86% + VAT) CGAP Portfolio (Dec, 2008) “Critics worry that microfinance institutions (MFIs) may be charging exploitative rates because of the weak bargaining power of their poor clients, who can't get loans elsewhere”.

7. Why now? Criticism % financial sector Overindebtedness Impact (Banerjee et al., 2009)

8. “Microcredit interest rates”? Wide range!

9. Agenda Brief (recent) “historical” perspective Terms and concepts Responsible pricing: What does fairness entail?

10. Why is there a debate? What is a credit? - Agreement of both, no constrain - Win-win - Market-based - No reference to bargaining powers - Socio-economic circumstances - Poverty of clients - Moral responsibility to intervene - Priority lending or (goal)right to credit Moral Bargaining

11. What is a credit? Implications Agreement of both, no constrain Win-win Market-based No reference to bargaining powers Socio-economic circumstances Poverty of clients Moral responsibility to intervene Priority lending or (goal)right to credit Moral Bargaining * Transparency * Compliance * Injustice * Fairness

12. Agenda Brief (recent) “historical” perspective Terms and concepts Responsible pricing: What does fairness entail?

13. Fair, responsible: What is the question? Systemic Issues Corporate Issues Individual Issues Morality of financial System Morality of corporate culture Concepts from Velasquez (2006) Transaction Costs (e.g. smaller cake to divide)  Which benchmark? Trade-off between SPM (ALS) and FSS (e.g. Bédécarrats et al., 2009; Lensink et al., forthcoming) Manager put pressure on loan officer

14. Three conceptions of fairness Ceiling Sometimes Religious Unequal powers But counter- productive? Demand- based Repayment rate Second loan But unfair initial situation? Mix MFI constrains OSS, FSS or market return? What if nothing left? “Allows the institution to operate as a going concern, but at the same time is as low cost to the customer as possible” “Clients themselves obviously judge that the loans are good for them (…)” (Rosenberg, 2007) “Cost of fund + 10 to 15%” (Yunus, 2009)(Rhyne, 2004)

15. Fair interest rate or fair price/ deal? Other fees Mandatory savings  Annual Effective Rate Compl exity Transport Opportunity costs of meetings  Risk of mission drift if focus on IR? Externa lities

16. Conclusion Interest rate is a complex issue (e.g. fairness compared to?) but also an important one Putting the whole sector at risk! Fair trade definition? “Stable price, above market price + sufficient to finance other projects” Clients need cheap service (all included, not only yield/ IR) but also flexibility & reliability More problems and discussions to come (with various outsiders)