Interest Rate Ethics: An Aspect of Social Performance in Microfinance

This paper examines interest rate ethics as well as related questions of governance and transparency of interest rates. It also discusses inclusion of interest rates in social performance metrics.

The paper examines the Compartamos case, and indicates that governance issues may arise for organizations that convert from not-for-profit to for-profit models.

The paper states that levels of interest rates, the sharing within the range of possible interest rates, and the transparency of interest rates are all elements to be included in the social performance rating of MFIs. Recommendations include:

• MFIs' interest rates must be compared with the average in the country as well as average globally;
• MFIs in high interest rate countries would be penalized compared to low interest rate countries for international comparisons;
• Social welfare functions of the country must be respected by highlighting usury ceilings imposed by citizens;
• Instead of using usury ceilings, comparison could be made with the average money lender rate or consumer credit rate;
• Transparency of interest rates to poor borrowers in application, as well as in terms of a written contract, must be measured.