Is Transparency Enough? What is Fair and Ethical When it Comes to Prices in Microfinance?

This paper is the first in a series of three papers that examine the challenges MFIs face in maintaining the balance of being sustainable institutions that responsibly provide financial products to the poor. The three papers look at three intertwined components of pricing, namely MFI’s delivery costs, prices that MFIs currently charge, and price levels that clients can afford.

The paper focuses on the challenges of loan delivery costs for the smallest of loans. It proposes that the microfinance industry should take on the challenge of broadly defining ethical and responsible practice, and within that the issue of fair and ethical pricing. The paper:

• Discusses foundational issues about how to define a transparent financial price, why non-transparency inhibits a market from functioning properly, and how regulators of formal finance help to correct the problem;
• Examines and compares product delivery cost data across countries and proposes a new generalized benchmark for assessing approximate efficiency levels of MFIs;
• Addresses the issue of profits and degree of profits, stating that there is a direct correlation between fair and ethical prices and the amount of profit MFIs make from those at the Bottom of the Economic Pyramid.