Thoughts After Skoll World Forum – Part III by Alvaro Rodríguez Compartamos Banco
Some have questioned the ethics of the level of interest rates in microfinance. There is no question that there is an issue on the level of interest rates in microfinance because they tend to be very high – much higher than the interest rates paid by those in the top of the socioeconomic pyramid.
There is an economic and fundamental why interest rates in microfinance are high: because the costs to serve the client as a percentage of the size of the loan is quite high.
If we want to secure access to financial services to the population is the base of the socioeconomic pyramid, the institutions providing such services need to be sustainable in the long term. To secure that viability, such institutions need to cover their costs, which are high.
One area where everyone in the microfinance industry should be working on is to make the cost of serving the client more efficient – there are two main areas that require work in order for this to happen: access to better information of the client (credit bureaus) and more efficient transaction mechanism (electronic payment systems). These will take time to develop, in the meantime, interest rates will remain high.
Some continue however to cry foul that the interest are unethically high. Probably the most successful microfinance institutions, who by definition are more profitable than the competition, could reduce interest rates maybe to a level that are considered ethical – whatever that level may be.
However, where are the ethics when the lower interest rates will result, at least in the short term, in lower profitability? This lower profitability will result in slower growth and therefore the ability to reach those clients that have yet to have access curtailed. Where are the ethics that we will decide in advance that we will not reach that unserved client? What will that client think of out ethics? Does she care whether we make money or not or all she cares about for the opportunity to have access regardless of how profitable we are?
If the market leader decides to lower interest rates to an “ethical level”, the smaller players that provide financial services to lower income communities will most likely suffer and most will collapse. Provoking their demise is an ethical decision? The client having access to more choices is the right ethical decision.
Many limit the relationship to the microfinance client and the ethics of such interaction to the level of interest rates – assuming that the lower, the more ethical. As we seen above, the ethics of the level of interest rates can cut both ways. Also, the relationship with the client and the profitability of an institution is much more complex than just price.
