Commercialization and Microfinance Interest Rates: Usury or Just Prices?

By Wong, Kenman; Richards, Donovan | Journal of Markets & Morality, Fall 2014 | Go to article overview

Commercialization and Microfinance Interest Rates: Usury or Just Prices?


Wong, Kenman, Richards, Donovan, Journal of Markets & Morality


Prevailing microfinance interest rates can be very high (20-30 percent on average and well exceeding 100 percent in some cases). The number of faith-based (especially Christian) organizations in the field, biblical injunctions against charging interest to poor people, and increasing commercialization present acute ethical tensions. In conjunction with contemporary research, the authors examine biblical passages and reflect theologically, employing a narrative-ethical approach to the issue of interest rates in contemporary microfinance.They conclude that while prohibitions against usury are still appropriate, a broad condemnation of high interest rates in microfinance is presently unwarranted.

During the past decade, microfinance (a.k.a. microcredit) has been heralded as a revolutionary tool in alleviating poverty. The concept has attracted broad-based support, in part, because it is driven more by a market, rather than a charitable, orientation. In theory, extending small loans to "unbankable" poor people (roughly 2-3 billion people) empowers the startup or expansion of tiny enterprises and subsequently aids recipients in lifting themselves out of poverty. Furthermore, because the loans are paid back with interest, the funds can be recycled and costs recovered, leading to an economically sustainable poverty intervention. Based on this type of promise, the United Nations dedicated a year to microcredit in 2005, and, in 2006, a shared Nobel Peace Prize was awarded to Dr. Muhammad Yunus and the Grameen Bank.

More recently, however, the field has come under increased scrutiny. Some critics believe microfinance serves a neoliberal agenda more than it does the interests of poor people. (1) The increasing influence of commercial interests, client debt levels (and reports of resulting suicides in India), lack of pricing transparency, and the bursting of several microcredit "bubbles" have also raised the level of scrutiny. (2) Moreover, initial rigorous studies have yet to find evidence to support the early promise.

Amidst (and to some degree underlying) these controversies has been a contentious moral debate regarding the prevailing rates of interest charged to clients. (3) Stated rates average between 20 and 30 percent annually and can well exceed 100 percent in some cases. While charging interest of any amount to poor borrowers may seem morally questionable, increasing commercialization adds a new dimension. Earning money from interest no longer serves only the objectives of covering costs and/or funding growth--now it also goes toward private gain. The latter strikes some as "profiting on the backs of the poor." (4)

This issue seems to be especially appropriate for Christian ethical reflection. Given the Bible's direct moral injunctions against charging interest to vulnerable people, usury is one of the most contentious issues within the Christian tradition. For example, John Jewel (1522-1571), a former Bishop of Salisbury, cites Ambrose, Chrysostom, and Augustine while condemning interest on loaned goods and/or money as "filthy gains and a work of darkness" that originate from the same source as "the works of the devil and the works of the fesh." (5) Jewel and many other canonists and theologians sought to draw distinctions between immoral usury and legitimate compensation for the lender.

Christian ethical reflection is also important considering the size and influence of organizations involved in microfinance that operate as faith-based (Christian) entities (e.g., Opportunity International, World Vision), were started as such (e.g., Compartamos), or were founded with personal faith as a motivating factor (e.g., Kiva). Although the majority of faith-based organizations are chartered as non-profits and have generally not been directly connected to recent controversies, many charge at or near market rates of interest. They may also have for-profit chartered banks within their networks and/or accept private investment funds. …

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