Our opening bid for starting the process of designing ethical standards is this one:

In other words, if a person borrows USD 300 she should not have to pay back more than USD 400 in total, including all interest, service charges, fees or levies. A quick survey has convinced us that the lending operations of many MFIs, probably a majority, work within these margins, which suggests that this criterion is a realistic one. And it also means that MFIs applying more expensive pricing policies can be publicly challenged to account for their reasons for doing so.

At times, there are legitimate reasons for charging more: high levels of inflation, very low average loan sizes or the inability to access reasonably priced capital. Current practice, however, is not to disclose the reasons for charging more; or in some cases where the reasons are known, they are debatable such as excessive operational costs, serious operational inefficiencies, the pursuit of extreme profits or poor portfolio performance.

However, the point is not to reject or disapprove of those reasons. It remains the responsibility of each and every MFI to formulate its own pricing policy, and it is up to the local regulatory authorities to express a formal opinion on what practices are allowed in their respective countries. The point is rather to encourage all investors to look into the pricing levels of their potential investee MFIs and decide if they find it appropriate to invest in an MFI that goes beyond the norm. Nevertheless, if the investor applies public sector or donor capital, we do encourage them to account for that to their own constituencies; and likewise, we encourage these constituencies to demand proper accountability from their investors.

The one-third criterion is a ceiling, not the norm itself. The norm is that customers are fairly treated if the loan costs stay well below our bid. Some MFIs and investors charge the amount a client is prepared to or capable of paying for service delivery. Our position is that this line of reasoning is unethical in its own right if applied in immature markets where customers have little or no alternative shopping options and might be in dire need of cash to survive. It is exploitative in its very nature as it aims to establish how much money can be squeezed out of poor or vulnerable people. Socially responsible investors and funding agencies should simply refrain from investing in MFIs that apply this pricing methodology.

There is common sense logic to the one-third criterion. A gross operational margin of a third of the loan amount allows for proper financing of the main cost items of an average MFI: the cost of capital, operational costs and provisioning and investments. If the cost of capital can remain limited to 10-12 percent per annum, most MFIs would have few problems working prudently within the margins of the one-third norm. And if many MFIs worldwide can comfortably handle such margins, the challenge is for those who exceed this level to explain why. Similarly, if many socially responsible commercial investors feel comfortable with 10-12 percent return on their investment, other investors, particularly those managing public sector or donor capital, face the challenge of explaining why they need more to meet their objectives.