Microfinance is typically popular in emerging markets where the rules and regulations that balance the interests of various market parties are not yet in place. The high demand for microfinance creates a huge gap between demand and supply that makes the industry a sellers market in most countries. This results in a potentially vulnerable situation for those who buy microfinance services.

The Alliance for Fair Microfinance is an initiative that actively promotes customer or client interests in the microfinance industry. It aims to promote ways and means to strengthen the market position of customers. Over time, as the microfinance industry continues to develop, the market position of customers will likely be strengthened by the introduction of rules and regulations such as those that exist in mature financial markets. Until then, however, some self-regulation on the part of other stakeholders such as practitioners and investors might be considered as a prudent means to protect customer interests.

First discussion 

We want to announce the start of our first discussion on the development of an ethical standard on the consumer price of micro-financial services. At the website you will find the opening bid for discussion, as formulated by the initiators of the Alliance. Simply put, our suggestion is that the costs of a micro-loan should not exceed one-third of the actual loan amount, fairly irrespective of interest rates, loan tenure and calculation methodologies. If one borrows 100 dollars, one should not have to pay more than 33 dollars for the privilege of borrowing: as simple as a standard can possibly be.

Obviously such a standard may need some modification in practice. Preferably costing levels should be lower and in case of very short tenures (up to two or three months) substantially lower. At the same time for a range of countries it seems appropriate to factor in local inflation rates. But those are considerations that do not necessarily affect the basic simplicity of the proposed standard.

The first issue that needs to be addressed to see if this standard potentially makes sense is a reality check. We would greatly appreciate if practitioners participating in this forum would be able to compare this standard to the actual pricing policies of their institutions. Likewise, consultants and researchers are invited to share their observations with us. We have done some initial checks ourselves and will share our findings with you in the course of the discussion.

The second issue is one to be considered by participating investors in the microfinance industry. Does this standard allow for a reasonable return on investment? Again, we have done some initial checks ourselves and will bring these to the table, but first we would like to learn about your own return expectations and practices. Obviously practitioners and consultants with some experience as regards investor capital pricing are most welcome to share their experience as well.

The third issue is about practical adjustment of this general standard to deal with realities on the ground. What are reasonable considerations for adjustment upwards or downwards and what could be considered reasonable bandwidths for those?

The idea is to open the floor for this discussion for two weeks, after which the moderator will produce a summary and, if possible, some points of consensus among participants. We will then move on the next batch of issues. The expectation is that after two months we would be able to see if there is sufficient rational to move forward with the Alliance and see what steps need to be taken in practice to create a distinct ‘fair microfinance’ category of service delivery within the microfinance industry at large.         

Your moderator for the first round of discussion is Robert Hogervorst, a Dutch economist and microfinance consultant.

To participate in the discussion, you will also need to apply for membership at the Alliance’s Yahoo discussion group. A weblink to this group can be found at the right on the Alliance’s home page. If you do not yet have a Yahoo account, you will first need to create one, before you can apply for membership of our Yahoo discussion group. After applying for membership, and if you are a member of the Alliance, you will be approved and can start participating in the discussion.