> Posted by Elisabeth Rhyne

Jonathan Lewis, founder of MicroCredit Enterprises, loves spirited dialogue, and that’s why as moderator of the recent Microfinance USA 2010 panel on interest rates, he went for the jugular.   He knew that the hardest – and most sensational – questions to answer are: How much is too much? and Who changes too much?  I was interviewed by a reporter recently, who kept repeating this request: Give me a number. Give me a name. We like the concreteness of the numbers and the moral satisfaction of scolding price gougers.

Of course I didn’t want to give a name or a number, though I was surprised that two panelists did come up with upper bounds for the U.S. (Paul Leonard of the Center for Responsible Lending said 36 percent per FDIC limits, while Lynn Trojan of ACCION said that 50 percent would allow everyone to be reached sustainably).

But these questions take the dialogue in the wrong direction. They ask us to ignore the contextual factors that determine the right balance between client affordability and institutional sustainability, necessary to ensure that services remain available to all those who seek them. I am only prepared to call the price a lender charges responsible if I understand how large the loans are, what kind of cost structure the lender faces and how it uses its profits.

The best question of the day came from an audience member who asked, “Why is the price of money so emotionally charged when the price of other goods is not?” The answers to this question are very important to keep in mind as we work for consumer protection. First, loans bind people for the future. If they are not entered into carefully, they can harm clients who fall into debt traps.  People are often bad at betting on the future (as the panel on behavioral economics affirmed), and to exacerbate the situation, lenders enjoy a power imbalance over microfinance clients. Lenders must practice self-restraint, always hard, both for people and for businesses.  And the public tends to regard the costs of providing money in the form of a loans as negligible or somehow not fully legitimate.

Finally, as Paul pointed out, interest rates are not the whole story. It is important to examine the full range of terms and conditions that accompany a loan. The amount, the term, and the fit to the client’s needs and ability to repay may all matter more to the client’s well-being than the interest rate.