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The Price of Money

Within the microfinance movement there is a debate about the ethics of lending and, in particular, the practice of charging for providing credit services to those who are already poor. Some argue that the principal ethical issue in microfinance concerns the price charged for a loan: the lower the cost of credit, the better from a moral point of view.

There are two reasons to doubt this argument. First, since lending small amounts for short periods is inherently expensive it follows that microcredit would only be ethically sound when it was economically unsound: the only good micro-lender would be an insolvent micro-lender. Unless the sector is to be funded wholly by government subsidy or private charity there must be a case for micro-lenders developing sustainable business models which price loans according to what they cost to deliver. The price charged for making loans turns out to be a by-product of a range of economic factors - cost of capital, cost of staff, cost of processing loans, cost of defaults and so forth - rather than a ethical decision.

Second, by focusing our attention on the price of the loan we ignore the more important issue of the process whereby the loan is made. There are two elements to the loan process that are important from an ethical point of view. First, whether lender acts responsibly when making the loan; that is, does the lender take into account the likely impact of the loan (including the repayment costs) on the economic well-being of the borrower. If making the loan is likely to make the borrower worse-off, by increasing their indebtedness to an unsustainable level, then the loan should not be made, irrespective of the price that would be charged.

In addition, the manner in which the lender treats the borrower during the process of making the loan is an important part of the "microfinance revolution". Rather than reinforcing established patterns of status and power within the community, micro-lending should challenge the status quo by providing credit to those whom the mainstream lenders ignore. Credit is supplied on the basis of trust that the borrower will repay, rather than on the security provided by existing assets or reputation. The micro-lender should, if acting ethically, treat all customers with equal respect, whatever their status within the community.

Those who equate ethical issues in microfinance with pricing issues in micro-credit are making two mistakes. First, they create pressure on micro-lenders to cut their prices, which will decrease the likelihood that they ever become sustainable businesses. Second, they distract attention from the more important moral issue of treating customers in a responsible and respectful way.

It is easy to be a low cost micro-lender (until the money runs out). It is much harder to be a good micro-lender. The ethics of microfinance resides in the process and not in the price.

© Mark Hannam 2012