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Fair interest rates when lending to the poor: Are fair prices derived from basic principles of justice?

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  • Marek Hudon

Abstract

This paper addresses the fairness of prices, with a focus on fair interest rates as they apply to microlending transactions for the poor. Under different assumptions on fairness in interest rate policies and the principles of justice as described in A Theory of Justice (Rawsl, 1976), the paper determines the extent of the ‘just’ range of a price. Using the original notion of fair reservation price and fair bargaining range, it is shown that some unfair considerations can make the fair bargaining range negative. Therefore, we propose an additional criterion for fairness: a fair distribution of the benefits within the fair bargaining range between borrowers and lenders. This new criterion is particularly useful and relevant, at minimum, for socially-minded ones active on the microfinance markets.

Suggested Citation

  • Marek Hudon, 2006. "Fair interest rates when lending to the poor: Are fair prices derived from basic principles of justice?," Working Papers CEB 06-015.RS, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:sol:wpaper:06-015
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    References listed on IDEAS

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    5. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
    6. Dehejia, Rajeev & Montgomery, Heather & Morduch, Jonathan, 2012. "Do interest rates matter? Credit demand in the Dhaka slums," Journal of Development Economics, Elsevier, vol. 97(2), pages 437-449.
    7. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages 107-133, February.
    8. Kershnar, Stephen, 2005. "Giving Capitalists Their Due," Economics and Philosophy, Cambridge University Press, vol. 21(1), pages 65-87, April.
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    Cited by:

    1. Hailu Abebe Wondirad, 2022. "Interest rates in microfinance: What is a fair interest rate when we lend to the poor?," Quality & Quantity: International Journal of Methodology, Springer, vol. 56(6), pages 4537-4548, December.

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    More about this item

    Keywords

    justice; microfinance; interest rate; principles.;
    All these keywords.

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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