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SAJGBR
2,1
Profiting from poverty: ethics of
microfinance in BOP
Linda M. Sama and R. Mitch Casselman
Department of Management, Peter J. Tobin College of Business,
82 St. John’s University, New York, New York, USA
Received 17 April 2012
Revised 30 September 2012 Abstract
24 October 2012
9 November 2012 Purpose – This paper seeks to examine the ethical dilemmas that emerge when offering microfinance
13 November 2012 services in BOP markets.
Accepted 14 November 2012 Design/methodology/approach – Utilizing the ethical lenses of deontology, teleology, virtue ethics
and moral relativism, the paper builds on prior research on ethical issues in BOP markets and the
ethics of microfinance to highlight the specific stakeholder impacts facing MFIs. Relevant literature
and examples from practice are utilized to illustrate the different ethical perspectives.
Findings – In general, many of the key dilemmas represent themselves in the extreme poverty
segment of the BOP where commercial business models have the least traction.
Research limitations/implications – Propositions are developed for the corrective actions
in the paper which might allow future research to uncover differences in intervention success in
different BOP markets.
Practical implications – The discussion of potential interventions for the various stakeholders may
ameliorate criticisms of MFIs, suggest opportunities for cross-sectoral partnerships and improve
outreach to the poorest of the poor.
Social implications – For each issue addressed, this paper looks at the types of corrections that are
made or called for through markets, government actions and civil society to respond to the negative
impacts uncovered through our analysis.
Originality/value – The analysis in this paper contributes to the theoretical ethical literature with a
very specific application to an emerging concern in the field of microfinance. It also offers prescriptive
scenarios for industry and public policy makers. It challenges the ethics underlying businesses that
wish to target the full spectrum of Base of Pyramid participants.
Keywords Microfinance, Base of pyramid, Poverty, Ethical philosophies, Ethical dilemma, Ethics
Paper type Conceptual paper

Introduction
Success in base of pyramid (BOP) markets often means linking the optimization
of shareholder wealth with public value creation and the well-being of the local
communities (Rangan et al., 2011; Yunus et al., 2010). Microfinance has been one
effective response to the needs of those in BOP markets. Many microfinance success
stories have been touted in the literature (see, e.g. Akula, 2008; Morduch, 1999),
but there have also been reports of abuses that raise concerns over the ethics of
microfinance (Lewis, 2008; Karnani, 2011), skepticism about the legitimacy of its
claims to reach those most in need (Bateman, 2011) and studies that question whether
they are serving as an instrument of poverty eradication (Adams and Raymond, 2008;
Best and Kumar, 2008). This is particularly true of those microfinance institutions
(MFIs) that have morphed from socially oriented not-for-profit (NFP) organizations
South Asian Journal of Global to commercial, profit-oriented enterprises. The term “mission drift” has been used to
Business Research
Vol. 2 No. 1, 2013
describe what people perceive as the gap between these organizations’ professed and
pp. 82-103 perceived levels of social performance (Mersland and Strøm, 2010).
r Emerald Group Publishing Limited
2045-4457
Ethical issues have been a key concern not only in microfinance but also within the
DOI 10.1108/20454451311303301 wider BOP literature. In microfinance, ethical concerns have been raised surrounding
access to credit as a basic right (Hudon, 2009), social exclusion (Hudon, 2011), trade-offs Ethics of
between profit maximization and poverty reduction (Copestake, 2007; Counts, 2008) microfinance
and abusive credit practices (Hudon, 2011). In BOP, ethical issues have included
concerns over the exploitation of poor consumers vulnerabilities (Karnani, 2007),
conflicts between economics and corporate social responsibility (CSR) (Davidson,
2009), issues of unequal power distribution (Karnani, 2008; Arora and Romijn, 2011),
concerns over environmental sustainability (Wijen, 2008) and inter- and 83
intra-generational justice issues (Hahn, 2009). In practice, MFIs have been criticized
for a lack of transparency (Karnani, 2011), excessively high interest rates (Lewis, 2008),
aggressive loan recovery (Beckett, 2010) and making their clients worse off (Adams
and Raymond, 2008).
This paper expands on existing literature by identifying the ethical dilemmas
or paradoxes that emerge when offering microfinance services in BOP markets,
and explores these issues through various ethical lenses or decision-making
modes. McCullough and Faught (2005, p. 195) define ethical dilemmas as “[y]
situations where moral certainty is compromised by rational cognition,” lending
emphasis to the point that a dilemma has no seemingly right or wrong answer.
We understand an ethical dilemma as a case in which applying a specific form of moral
reasoning may support more than one course of action, causing conflict and differential
impacts on stakeholders
In our examination of ethical issues, we elaborate on the specific impacts that these
ethical dilemmas engender for various stakeholders and stakeholder groups. For each
issue addressed we look at the types of solutions that are made or called for through
markets, government actions and civil society to respond to the negative impacts
uncovered through our analysis and suggest propositions to be tested based on these
potential solutions. This approach expands on prior literature that examines ethical
concerns arising in microfinance (Hudon, 2009, 2011), ethical banking (Prior and
Argandona, 2009) and the ethics of operating in BOP markets (Davidson, 2009; Hahn,
2009; Karnani, 2007, 2008) and helps to delineate the ideals that MFIs who focus on
ethical banking and CSR should strive for.
We begin by looking at ethical concerns in BOP markets and then more specifically
the ethics of microfinance. We follow this with a section that reviews various ethical
lenses to view the resulting dilemmas, incorporating propositions based on potential
interventions. We conclude with a discussion of the implications of our analysis
for research and practice.

BOP markets and ethical issues

BOP has been defined both as a market and as a business approach that uses market
mechanisms to alleviate poverty in the world’s poorest four billion people (Prahalad
and Hammond, 2002). The BOP has many characteristics and can be segmented in
different ways. One of the most straightforward ways to segment the BOP is by living
standard. Consumers in emerging markets have been distinguished between high end,
middle market and the very poor (Eyring et al., 2011) or as low income, subsistence and
extreme poverty (Rangan et al., 2011). However, this segmentation may not necessarily
represent the poorest of the poor, since some approaches would see incomes of $2 to $4
per day as middle class (Banerjee and Duflo, 2008). Others have highlighted gender
differences in BOP (Dowla and Barua, 2006) or conducted segmentation based on
rural vs urban, where poverty and infrastructure problems differ (Banerjee and Duflo,
2008). Examining ethical issues among the poorest of the poor, those in rural areas
SAJGBR and other disadvantaged segments is likely to highlight market imperfections
2,1 and stakeholder impacts.
The BOP concept is rooted in the idea that market-based approaches (Prahalad and
Hammond, 2002) and mutual value creation (London et al., 2010) can help alleviate
poverty in impoverished regions. BOP solutions such as small package sizes and
community-based or inclusive distribution models have capitalized on some of the
84 fundamental issues in BOP markets – low consumer purchasing power, restricted
consumer cash flow and challenging socio-geographic conditions (Wijen, 2008).
Success in BOP markets has been a difficult task for many firms. Simanis (2012)
suggests that the typical BOP model of low price, low margin, high volume seems to
only work in circumstances where companies can leverage existing infrastructure and
are selling products that consumers are already familiar with. Simanis goes on to
suggest that these conditions are not typical, with most BOP initiatives facing village
scales and high-touch sales processes. This suggests a more apt BOP business model
might involve: higher margin products sold to customer peer groups (Simanis, 2012);
the co-creation of a venture within an imperfect market (London et al., 2010); the
creation of social capital (Ansari et al., 2012); or focussing on the poor as producers or
distributors rather than consumers (Hahn, 2012; Reficco and Marquez, 2012).
In the drive to make BOP initiatives successful, there has been significant criticism
that the goal of poverty reduction has been abandoned and that many organizations
have failed to act ethically. Karnani (2007) argues that marketing products to the
BOP is a “mirage” and that treating the poor as consumers often exploits their
vulnerabilities. Davidson (2009) provides further delineation of ethical issues in selling
to vulnerable BOP consumers in the areas of pricing, branding, advertising, packaging
and distribution. He highlights specific examples of conflicts between economics and
CSR. Others suggest that BOP is harmful to the poor in de-emphasizing the role of
government (Karnani, 2007, 2008), derailing the natural economic development of BOP
markets and obscuring unequal power relations in support of global capital (Arora
and Romijn, 2011). Some claim that success in the BOP would raise environmental
sustainability issues and their associated inter-generational justice trade-offs (Wijen,
2008; Hahn, 2009). The combination of vulnerable customers, inefficient markets and
powerful corporations creates the potential for exploitation and the associated ethical
concerns that might result from this.
In practice, many BOP initiatives have met with mixed success even when designed
using proven business models that originated in the microfinance industry.
For example, Grameen Bank spun off Grameen Telecom in Bangladesh and utilized
the “lending circle” model in the telecommunications field, enabling women to act as
mobile payphone operators and allowing poor individuals to access communications
more easily (Hart and Christensen, 2002). A similar approach was taken by N-Logue
(Jhunjhunwala et al., 2004) delivering operator assisted internet access in rural villages
that used a business model focussed on proximity to consumers, demand aggregation
and entrepreneurial incubation. However, Best and Kumar (2008), in an empirical
study, show that many of the rural telecenters opened by N-Logue were not sustainable
in the long term. Their study concluded that telecenters that were operated by a NFP
remained in business longer, partially due to additional non-commercial financial
support, but also due to institutional support in developing specific applications to
benefit the poorest consumers. Cecchini and Raina (2005, p. 73) go further to suggest
that success of these telecenters is increased from “[y] community participation and
ownership, as well as implementation of the project by grassroots-based organizations
who have the appropriate incentives to work with marginalized groups.” This suggests Ethics of
that the use of a disruptive business model or the creation of services with minimal microfinance
features are not sufficient conditions for success in BOP. According to Gollakota et al.
(2010) the solution lies in “deep benefit management” and a recognition that BOP
customers have fundamentally different needs. This opens up the possibility that a
deeper understanding of the values and ethical orientation of the participants might
influence the overall success of BOP business models. 85
Questioning the microfinance revolution: basic dilemmas for MFIs in BOP
markets
While MFIs have been operating in BOP markets since their inception, the recent trend
of MFIs toward financial self-sufficiency has altered their strategic intent and resulted
in criticisms of mission drift (Mersland and Strøm, 2010). This raises the question of
whether MFIs can successfully move from NFP to for-profit organizations (Fernando,
2004) and whether this may have negative (Hermes et al., 2011) or positive (Tchakoute-
Tchuigoua, 2010) implications for outreach to the poor. Despite the burgeoning number
of MFIs worldwide, demand for microfinance services far outstrips supply; “[y] in the
Asia and Pacific region alone, it is estimated that about 95% of some 180 million poor
households still do not have access to institutional financial services” (Charitonenko
et al., 2004, p. 1). Social impact statistics are scant and social performance measurement
in the field is still in its infancy. Recent research has shown that there are fundamental
differences in which BOP segments are targeted between NFP and for-profit MFIs in
response to regulatory supervision (Cull et al., 2011), with for-profit institutions backing
away from outreach to women and customers that are costlier to reach. This highlights
that different MFIs may have different strategic objectives and corresponding risk
profiles that present the possibility for conflicts between organizational goals and the
needs of the market. At the same time success in BOP markets often requires co-creation
of solutions such that affinity to particular market segments may be a necessity. These
inherent conflicts for MFIs dealing in BOP markets suggest that the nature of the market
itself creates a number of underlying ethical tensions.
There are a number of specific criticisms of MFIs that have been raised. First, MFIs
have been criticized for charging excessively high interest rates, sometimes in excess
of 100 percent (Lewis, 2008; Karnani, 2011). Associated with this is an issue of the
transparency and complexity of financial products, particularly when most consumers
of microloans lack financial literacy (Karnani, 2011). Third, some MFIs have been
criticized for their abusive loan recovery practices (Karnani, 2011), being overly
aggressive with loan recovery or forcing borrowers to take out multiple loans (Beckett,
2010). Aggressive loan recoveries have even been cited as the cause of mass suicides in
India, and a high dropout rate for borrowers, with borrowers sometimes in a worsened
situation than they were before taking on a loan (Adams and Raymond, 2008).
Microcredit loans have been called “immiserizing,” in that the potential income
growth provided by the loan leaves the borrower worse off than before the loan
(Adams and Raymond, 2008). While studies have tied the occurrence of ethical lapses
in business to the decision-maker’s short-term orientation (Nevins et al., 2007),
religiosity (Albaum and Peterson, 2006), gender (Peterson et al., 1991) and the ethical
climate of the organization in which he or she works (Kaptein, 2011), among other
factors, there is some theoretical support for attributing the incidence of ethical lapses
to the extent to which one’s success is measured by wealth creation (see, e.g. Cornwell
and Naughton, 2003).
SAJGBR These issues have resulted in a call for further regulation of MFIs, including
2,1 protecting consumers from abusive lending and collection policies and providing
standards of transparency or truth in lending. The Pocantico Declaration has been one
response. It is a code of ethics for the microfinance industry collaboratively constructed
by Deutsche Bank AG, the Boulder Institute and the Consultative Group to Assist the
Poor. Its goal is specifically targeted at enhancing microfinance services and promoting
86 transparency. On a microlevel, in the wake of a microcredit crisis in the region, the state
of Andhra Pradesh in India has regulated MFI operations, requiring all MFIs to
register and provide information on the interest rates that are charged and their
practices for debt recovery (Economist Intelligence Unit, 2010).
Ethical dilemmas in microfinance often emanate from a constrained profit model.
MFIs whose success is measured by investors, donors and principals on the basis of
quantifiable outcomes usually find it more palatable to work with clients in the middle
or upper segments of the BOP because this lowers the risk of default and improves
the outcome scores on their portfolios. They simultaneously neglect the needs of the
extremely poor who are most in need of these services, particularly those in remote
rural communities for whom the per unit cost of administering the loan rises
substantially at the same time that the risk of timely collection of the loan
increases. Hence, many of these ethical dilemmas fall under one overarching issue of
balancing risk and profit against the needs of the very poor and the development needs
of emerging economies. Moreover, they may also overlook other qualitatively
important segments of the BOP market – important in terms of the microfinance
revolution’s incipient mission.

Ethical theory lenses for viewing “profiting from poverty” dilemmas

Viewing these ethical issues through the philosophical lens of ethical theory sharpens
our insights regarding the more precise nature of these problems and sheds light on
practical solutions that would improve the state of the field. Further, our analysis
becomes useful in the education of key players about the moral implications of their
decisions when decision makers (MFI managers, government and industry policy
makers and activist stakeholders) simply recognize that a particular situation is an
ethical dilemma (Pimentel et al., 2010).
The spectrum of ethical lenses available for addressing moral dilemmas in business
is wide and comprehensive. In determining which ethical lenses to use, we selected
a range of widely accepted lenses that would enhance the analytic generalization
(Yin, 1994) of the analysis, provide promise for prediction and explanation and align
with potential interventions to key MFI issues. Specifically, we look at deontological
theories (rights and duties, and justice as fairness approaches), teleological theories
(specifically utilitarianism), virtue ethics and moral relativism.
Deontological theories (from the Greek meaning “science of duty”) consider
motivation for actions as well as the action itself. The rights and duties perspective is
relevant to a discussion about MFIs in BOP markets since one might argue that the
profit motive characterizing newer forays in the industry may distort or derail
adherence to moral duty and it ignores potential harmful outcomes. Justice as fairness
(Rawls, 1999) is critically important to our analysis as it refers to fair access to
opportunity, a tenet that Yunus has emphasized in his various explications of why
microfinance should be a fundamental human right for all individuals.
Teleological (from the Greek meaning “science of ends”) perspectives are focussed
on the ends that any particular action are likely to promote. The most widely applied
teleological lens, particularly in business ethics, is that of utilitarianism, which Ethics of
prescribes “the greatest good for the greatest number.” This lens is relevant to moral microfinance
dilemmas that occur in communities where stakeholders are many and varied.
Virtue ethics and moral relativism are the last two ethical lenses we employ in this
analysis. These theories remain significant to the microfinance agents acting in BOP
markets since, in the former case of virtue ethics, a focus on community as well as the
potentiality of individuals comes into play; and, in the latter case of moral relativism, 87
the cultural distinctions of the various operational fields may pose very specific ethical
challenges that the MFI must remain attuned to and remedy.
For each ethical category, we provide a concise definition of the perspective and its
application to our problem, citing examples of the ethical dilemmas that a particular
lens may be clarifying and specific limitations to its application. We then identify legal/
regulatory interventions, market mechanisms and civil society perspectives relevant to
the ethical issue that recommend feasible solutions (see Table I) and offer related
propositions to guide future research.

Rights and duties perspective (deontology)

Yunus et al. (2010) views access to credit as a fundamental human right, and as such,
the field of microfinance can perceive its mission of providing credit to those without
access to traditional sources of funds as a moral imperative. Further, rights give rise to
duties, which Kant (1964) recognizes as morally basic, and the duties that accompany
this right to credit apply to both the lenders and the borrowers. Duties can be “morally
obligatory” (Werhane and Freeman, 1997, p. 180) actions that do not associate with
any specific right, suggesting – perhaps arguably – that lenders may have moral duties
toward borrowers without, necessarily, an accompanying right to make a profit.
The rights and duties lens highlights conflicts over whose rights prevail and whose
duties are paramount.
Stakeholder impacts. Examining the dilemma of universal provision of credit
through the ethical lens of “rights and duties,” it has been previously argued that
access to credit should be both a moral and legal right (Hudon, 2009) and that this
access should be provided at a reasonable cost. However, it is also acknowledged that
“There is a very thin line separating ‘laudable’ activities of organizations providing
services to financially excluded citizens, and those of moneylenders, who are
commonly viewed as ‘extorting money’ from their poor clients” (Hudon, 2009, p. 18).
On the other side of this right to credit is the right of the lender to a fair profit, to be able
to determine whether to accept an individual as a customer, to the management of a
portfolio of customers and to the management of their risk. Similarly, effective
provision of credit on reasonable terms necessitates that organizations in the financial
industry are competitive and operate efficiently (Prior and Argandona, 2009).
The conflict between these opposing rights and duties in this scenario is clear and
it pits potentially excessive interest rates against rates of profit and a duty of
organizational efficiency. This is of particular interest when we examine BOP
customers, who, at the very base of the pyramid, are characterized as “unbankable,”
encouraging MFIs to focus their efforts on the “better off poor” in these markets as they
strive to sustain profits. Borrowers carry a duty to pay back loans in a timely fashion,
to run legitimate businesses and to treat each other with mutual care and respect in the
context of a group lending model. At the same time, lenders have duties to their
investors and donors to provide accurate and timely reports on the uses of funds and
default rates, and duties to their borrowers to be transparent and to help to create
 2,1

88

Table I.
SAJGBR

BOP markets
to MFI operations in
Applying an ethical lens
Theoretical ethical lens Key ethical dilemma Stakeholder impacts Potential interventions

Rights and duties Rights conflicts Client: right to credit
Lender: rights to a fair profit, customer
selection, portfolio diversification,
risk management
Rights and duties Duty conflicts Client: duties of borrowers to manage
debt; financial disclosure
Lender: duties of lenders to operate
efficiently and effectively screen
borrowers
Justice as fairness Equitable distribution of Client: profitable reinvestment interest
(distributive justice) economic benefits rate; misrepresentation; negative
affectivity
Lender: reputational impacts; economic
responsibility
Justice as fairness Fair access to credit Client: responsible borrowing
(procedural and Fair, transparent and Lender: transparent loan approval with
interactional justice) unbiased loan process proprietary loan processes
Justice as fairness Moral hazard Client: misrepresentation or unusual risks
to escape poverty
Lender: balancing risks with strong
information asymmetries and potentially
usurious interest rates
Utilitarianism Maximizing the social good Lender: impacts on self-sufficiency. Line
vs loans to poorest between microfinance and normal
commercial loans
Client: borrowers voice in process; what is
the nature of reporting and
underreporting for those in the margins?
Government: loan incentives for poorest.
Usury laws; credit bureaus
Market-initiated investor relations reports;
industry-specific codes of conduct
Government: infrastructure for enabling
environment
Markets: competitive marketplace; duty
prioritization schemes
Client: self-education; peer groups and lender
investigation
Government and civil society: subsidization;
financial literacy
Market: reporting systems
Government: regulations on transparency
Market: open and transparent review;
payment term and repayment disclosure
Civil society: cross-sectoral partnering;
supplemental reporting; peer savings groups
Market: set consistent repayment and
loan terms
Government: visible hand regulates interest
rates to curtail opportunistic behavior
Civil society: watch groups and independent
rating agencies
Markets: double or triple bottom line
reporting; partnering
Civil society: social development programs;
social impact studies
Government: social benefit measures. Welfare
programs; inclusive policy development

(continued)
Theoretical ethical lens Key ethical dilemma
Virtue ethics For profit vs virtuous
Virtue ethics Happiness, flourishing or
well-being of borrowers
Moral relativism Cultural sensitivity vs
universal moral imperatives
Table I.
Stakeholder impacts
Lender: reputation impacts
Client: self-actualization and
empowerment
Lender: loan terms with hope
Civil society: social network impacts
and community standing
Client: communication of local values
Lender: local values conducive to
successful lending models; reporting
impacts; efficiency impacts
Potential interventions
Markets: larger portfolio of products and
services; participation in reputation ratings
Government: welfare interventions
Civil society: measurement of social action;
focus on reputation/values; charitable
contributions
Market: community outreach; build client
social capital; skill development program
Government: loan education programs
Civil society: impact studies to measure
well-being and flourishing
Market, government and civil society:
partnerships to enhance community
participation, trust and friendship
Civil society: advocate for preservation of local
cultural norms; education
Markets: adjust practices to align with local
norms; deep research into cultural mores and
cross-cultural differences
microfinance
89
Ethics of
SAJGBR enabling environments. An enabling environment (Thindwa, 2001) is important to
2,1 permit the awareness and exercising of rights. Without voice or the ability to dissent
when rights are not properly defined or protected, the rights conundrum goes
unsolved. This harks back to the social contract writings of Locke and Rawls (1999);
and, has been a foundational element of the work by Donaldson and Dunfee (1994) in
integrative social contracts theory (ISCT).
90 Potential interventions. These dilemmas suggest that governments intervene to
make transparent the real rate of interest and to mandate a “duty of care” to the lower
levels of the BOP, however remotely situated, to ensure a borrower’s ability to exercise
their right to credit. Moreover, interest rate caps legislated and enforced by
governments – such as the 27 percent cap imposed on microfinance loans in
Bangladesh – have been seen to help alleviate the burden on borrowers in an otherwise
unregulated environment. Critics, however, suggest that capping interest rates is a
perilous approach to protecting borrowers’ rights, since it may at the same time inhibit
MFIs from attracting needed investment to fund growth (The Economist, 2010). Other
regulatory avenues to preserving clients’ rights include rules on capital buffers, and
credit bureaus designed to track borrower’s credit burden. Another suggestion is to
allow MFIs to accept deposits, thus reducing the reliance on capital markets for
funding (The Economist, 2010).
In terms of the market, professional duties could be developed for the industry and
codified so that players in the field would be normatively bound to the “rules of the
game.” Institutional isomorphism dictates that as peers in the field adopt positive
conduct norms, others will follow suit in a “bandwagon effect” (DiMaggio and Powell,
1983). Market players can also offer true and accurate reporting to investors/donors
and clear and transparent transactional terms to borrowers. Duty prioritization
schemes, applying the deontological lens of moral duty, might encourage market
players to evaluate the real costs of abandoning the poor – who constitute a real
and viable market – against the actual costs of serving the poor. Finally, markets,
along with civil society and governments, can work together to develop enabling
environments to include the necessary infrastructure and technology platforms for
facilitating a level playing field for MFIs and improved access to credit for their clients.

Justice as fairness perspective (deontology)

Applying rules of justice and fairness in lending has long been the realm of banking
regulators, but the field of microfinance, born as it was in the NFP sector, escaped
similar scrutiny for many years and the fairness principal has been invoked to critique
current practices in the field. Most pertinent to our discussion is the principal of
distributive justice, which can be understood as the meting out of resources according
to strict egalitarianism. The shifting of resources from the wealthy developed world to
BOP countries has been largely dependent on decision rules made and executed
by multinationals. These allocative decisions in the corporate realm are driven by
risk-reward calculations and do not operate under a veil of ignorance (Rawls,
1999), a concept that suggests that entities block out personal considerations in
the process of allocating benefits and burdens justly. An alternate perspective, the
“difference principle” (Rawls, 1999) suggests that resource allocation need not conform
to strict equality when and if inequality will better and materially benefit the least
advantaged in society.
In procedural justice, we concern ourselves with the perceptions of fairness around
specific procedures related to microfinance in BOP markets such as loan processes,
dispute resolution and negotiation procedures. Similarly, interactional justice refers to Ethics of
“a person’s perception that he or she has been treated interpersonally fairly, with microfinance
sensitivity, consideration, honesty and respect” (Werhane and Freeman, 1997, p. 340).
Procedural justice has a very powerful impact on people’s perceptions of and attitudes
about the institutions involved even more so than in their perceptions of the outcome
of the procedural decision (Lind and Tyler, 1988). Interactions that are considered just
will take into consideration the “other’s” viewpoint and when a decision must run 91
counter to that viewpoint, will take pains to explain the rationale for that decision.
Information is presented honestly and without artifice. This is an important concept in
BOP markets since the marginalized may perceive that their concerns are not taken
into account or that they are not being treated in an honest and candid fashion.
The result can be negative affectivity on the part of potential borrowers that could
jeopardize their candidacy for a loan or even interest in taking a out a loan; or, for
existing borrowers, could jeopardize the integrity of their transaction with the MFI.
Borrowers may resort to less than honest behaviors themselves, misrepresenting their
credit history or falsely representing the business they operate in order to secure credit.
These issues of moral hazard – that is, opportunism in the face of a contractual
relationship – are bi-directional and call for scrutiny by governments, markets and
civil society working in tandem.
Stakeholder impacts. Stakeholder dilemmas emerge as we apply the justice
as fairness perspective to MFIs operating in BOP markets. Clear evaluation of
egalitarianism suffers from built-in biases when reporting social impact. Lender MFIs
are encouraged to publish success measures, but program placement is not random
and that is often not reflected in these measures or studies. Villages that are more
entrepreneurial, better organized, have more dynamic leaders and are less poor (thus
posing less risk), figure into the positive criteria for placing microfinance programs,
and clearly bias the index of reported success (Coleman, 2006). These criteria abandon
the neediest communities that might represent greater risk for MFIs.
Calls for transparent procedures gives rise to another ethical dilemma: that of
balancing the proprietary lending practices in a competitive market against the
requirement for fair, unbiased and transparent lending practices for the borrower.
In this case, regulatory interventions must consider the cost of such regulation to
practitioners weighed against the benefit of providing clear and honest information
to the borrowing community. Quantification of burdens and benefits is not easily
captured in a heuristic that suits all markets, all types of lenders and all strata of the
BOP equally – a key deficiency of the justice perspective.
Potential interventions. The market failures that can result from this moral
challenge have been addressed through various efforts to ensure that the poor are
not suffering all the burdens and receiving none of the benefits, and that they are not
harmed by information asymmetries of an imperfect market. Distributive justice can
be enhanced by government subsidies to extend the reach of microloan programs.
One civil society response to the cost of extending credit services to the ultra
poor in remote areas has been “savings led” microfinance instruments, relying on peer
savings groups to provide loans where MFIs are absent. Self-help groups and peer
groups also have been shown to be efficacious, contributing to gender development for
women in south India (Tesoriero, 2006). Civil society can assist in the quantification of
benefits and burdens in an allocative decision by supplementing any calculative
formulae with qualitative data that would refine understanding of the impacts on
either lenders or borrowers.
SAJGBR Government regulatory interventions to assure fair and transparent lending
2,1 practices, market reporting mechanisms that embrace transparency while
simultaneously enhancing MFI reputation, and MFI initiatives to subject their
loan processes to transparent review might enhance dilemmas posed by procedural
and interactional justice. Borrowers can self-educate, while governments and civil
society can assist this effort through the development of financial literacy programs
92 that equip borrowers with the tools necessary to make educated decisions about
their personal finances.
The moral hazard question seeks responses from all sectors. The moral hazard at
play in the context of our analysis is primarily that of opportunism, and market
mechanisms can either advance or impede opportunistic agendas. Baumol (1991)
addresses this issue directly, arguing that markets approaching the state of perfect
markets structurally inhibit firms from operating in socially desirable ways. However,
in a counter argument, Sethi (1994) acknowledges that imperfect markets (monopolistic
or oligarchic markets, for example) may also breed unethical behavior and invite the
moral hazard dilemma. He frames the dilemma in terms of the justice as fairness lens
by concluding that the issue is not “[y] between right and wrong, or between guilty
and innocent, but between one type of inequity and another” (p. 813).
Indeed, imperfect markets that lack sufficient regulatory power and a strong
judicial infrastructure to dampen the effects of opportunism thwart virtuous behavior.
While it is true that imperfect markets afford firms the slack they need to devote
resources toward virtuous ends, they will not do so unless the inducements are
apparent, rewards are imminent and the other players in the market seek similar goals.
This argues for interventions on the part of markets to set consistent and rationalized
repayment terms that focus on the common good; on the part of governments
to regulate interest rates that result in eradicating usurious practices; on the part of
clients to improve their own risk profiles through adherence to strict repayment terms
and application of peer pressure to free riders in the community; and, on the part of
civil society to engage watch groups and rating agencies in actively monitoring
deviant behavior as a direct response to market failure.
Deontological propositions. The previous discussion of two deontological
perspectives suggests that the BOP market is a largely imperfect one. Governments
can effectively operate to create a more level playing field, diminishing the impact
of imperfect economic conditions while helping to ensure that rights are exercised
with commensurate duties intact, through calls for transparency and regulated caps on
deviant behavior. Hence, we propose that:

P1. Rights and duties of MFIs and clients come less into conflict and fair access to
credit is perceived more favorably in communities where government
establishes and enforces laws and regulations, particularly related to
transparency and credit monitoring.

Similarly, improvement in MFI reporting should benefit borrowers and yield positive
reputational effects, leading us to propose that:

P2. MFIs will evidence greater efficiencies (lowered costs of operations and
moderated risk), address a wider swath of the BOP market and enjoy enhanced
reputation effects when they engage in accurate, transparent and voluntary
reporting to investors and industry watchdogs.
It is difficult to measure the impact civil society’s efforts have on its targeted Ethics of
communities, but their mere presence can oftentimes thwart otherwise fraudulent or microfinance
harmful activities, and so we propose:

P3. Rights and duties of MFIs and clients come less into conflict (as measured in
terms of more productive, collaborative lender-borrower relations) and fair
access to credit is perceived more favorably in communities where civil society 93
agents are operating in larger numbers.

P4. Allocative justice and perceptions of fairness increase where civil society
agents monitor lending activity and assist in the development of informal
peer savings groups.

Utilitarianism perspective (teleology or consequentialist ethics)

Utilitarianism refers to a consequential theory of ethics. Consequentialism dictates that
one should maximize the “good” and minimize the “bad” through a process of
rational thought and justification and results in seeming impartial calculations and
actions. Unfortunately, while utilitarianism offers guidance for both actions and
setting rules that would translate into “good” outcomes, it is often reduced to a
simple heuristic in the practice of business that overlooks the moral responsibility
originally weaved into the theory, such as Mill’s focus on education as intellectual
pleasure. Education is an important corollary to broad-based microfinance offerings
and it has been suggested that skills and literacy training make for better borrowers
and improve overall client welfare (Dunford, 2001). Moreover, translating
utilitarianism into a simple cost/benefit calculation neglects all the potential
consequences of a decision that are not as easily quantified, such as social welfare,
moral rectitude, community-building and trust. Certainly in a simple risk-reward
calculation, the poorest of the poor lose out, as the increased risk they pose as
clients most certainly will result, in terms of pure economics, in increased prices (i.e.
interest rates) that the poorest of the poor cannot afford to pay. The vicious moral
cycle that this engenders is a severe form of the market failing its constituents.
Interventions on the part of government and the market can help alleviate this
concern. Moreover, it is worthy to note that the utilitarian view presumes that the
future is knowable and consequences predictable, which is unlikely in culturally
distant environments and where so many factors that affect consequences (climate
changes, political instability and natural resource scarcity, for example) are outside
of the control of the decision maker.
Stakeholder impacts. Serving the world’s poorest through microcredit poses serious
challenges to the goal of self-sustainability, such as high transaction costs or high
repayment risk that traditional banks do not encounter, thus forcing an adjustment of
the calculation used to ascertain the costs and benefits of doing business in these
specialized markets. A very deliberate distinction must be drawn between the
operations of MFIs and the role of traditional banks in these societies in order to more
honestly address how the “greatest good” is recognized and the “greatest number”
accounted for. Clients themselves must exercise their voice in order to be counted and
generate reports that can inform both the industry and the government in their
calculations. Empowering clients to have a voice ultimately benefits not only the
borrowers, but those who lend to them as the true risks are better enumerated when
true costs and benefits are known.
SAJGBR Potential interventions. Interventions to ensure more reliable assessments in a
2,1 utilitarian calculation and to safeguard the services to the poorest of the poor would
include the adoption of double or triple bottom line reporting by MFIs, and the creative
expansion of microfinance services to include social development programs, such
as skills and literacy training, health programs, technology development tools,
microinsurance and clean water programs, to name a few. Where these programs may
94 not be cost-effective for some MFIs to administer, or they lack expertise, a joint venture
with organizations in civil society including religious organizations, educational
institutions and health providers is recommended. For their part, governments may
consider including the ultra poor in the decision-making process in order to give them a
voice, through local representation in government-related policy debate and proposing
information gathering and dissemination that is widespread and inclusive. Parallel
governance systems, such as tribal chieftainships (Williams, 2004), may allow for more
pronounced regional identification and representation in decision making but also
require that MFIs are able to understand and penetrate these informal institutions in
order to make significant inroads in the servicing of the poor.
Teleological propositions. The greatest good for the greatest number carries inherent
risks for those living on the margins, specifically the worse-off poor, women and
remotely rural populations. The effectiveness of government, the MFI industry
and civil society in addressing this concern is reflected in the following propositions:

P5. Greater percentages of the “worse off poor” will be served with microcredit
where governments have taken action to establish social welfare systems to
alleviate financial, health and education deficiencies in their populaces.

P6. Greater percentages of the “worse off poor” will be served with microcredit
where there are greater numbers of MFIs with NFP status, a strong social
mission and double and triple bottom line reporting.

P7. Greater percentages of the “worse off poor” will be served with microcredit
where civil society actively engages in advocating for impact studies and for the
development of social programs to complement microcredit activities, including
education, health, insurance and recovery.

Virtue ethics perspective (actualization and potentiality)

Virtue ethicists highlight one’s character as a basis for resolving an ethical dilemma or
judging the moral magnitude of a situation. As such, virtue ethics puts a great
emphasis on developing the human person so that his or her strong character traits will
result in good decisions. What is humanly good and desirable is what actualizes the
human being and that is deemed to be immutable. Virtue ethics evaluates situations in
an absolutist manner. While this may pose problems for MFIs operating in a variety of
different cultures with presumably differing ideas about values and vices, this is
no more true for virtue ethics than it is for deontological or teleological ethical
perspectives. In fact, while virtue ethics is considered non-relativistic, it does remain
sensitive to the situational case when guiding persons in their actions. Nonetheless,
the guidance is slippery and may create a dilemma for MFIs, particularly since the
identification of one’s good character can be a source of alternative collateral when
evaluating a potential borrower’s loan application. Efforts to develop a portrait of
“good character” are stymied when the picture is universal and the subject is local.
ISCT (Donaldson and Dunfee, 1994) has attempted to address this via the concepts Ethics of
of hypernorms (universally ascribed to trans-cultural virtues) and moral free space microfinance
(providing flexibility at the microlevel to allow for lower-level norms that are
compatible with hypernorms, but possibly inconsistent with legitimate norms of
other local communities).
While virtue ethics is less prevalent in the literature on applied ethics it does have
significance for our analysis. First, it would advocate for the social responsibility of 95
business, thus clarifying at least somewhat the normative role of the MFI in BOP
markets as one that should be focussed on serving the needs of the poorest of the poor.
Second, it creates a mandate for self-actualization, which is pertinent to the lending
agent as well as the borrower. Self-actualization would call for deliberate actions on
the part of MFIs to achieve solid reputations and virtuous traits – thus improving
future prospects of winning business and investors – while recommending to the
borrower the importance of character building as well, to increase his or her likelihood
to be considered for an initial or follow-on loan.
Virtue ethics invokes the concepts of community, partnership and friendship – all
critical to understanding the ethical dilemmas inherent in providing loans to the
ultra poor (Koehn, 1995, 1998). The ethics of care, a feminist perspective on ethics,
similarly emphasizes the importance of relationships, connectivity, communication
and attachment and the interdependence between individuals in achieving any goal
(Gilligan, 1982). This is an important concept in microfinance since one of the
successful models of lending in poor communities has been that of the group loan.
Group loans, the foundation upon which the Grameen Bank was built and practiced
more frequently internationally than in the USA, rely on community and friendship
as a safeguard to loan recovery and have a proven track record in terms of recovery
rates, as demonstrated in a study published by Sharma and Zeller (1997). The
authors analyzed the repayment rates of 128 credit groups in the South Asian nation
of Bangladesh, and found that, among other factors, group formation improved
successful loan repayments for even the most poor and remote communities
in this country.
Stakeholder impacts. The dilemma posed by applying the virtue ethics lens to the
operation of MFIs in BOP markets begs the question: “Can MFIs earning profits from
serving the poor be virtuous?” MFIs that may not be mission driven to helping those in
poverty rise out of poverty are also likely to act in less than virtuous ways in those
markets. Studies have sought to create empirical links between morality in business
(CSR) and wealth enhancement (Griffin and Mahon, 1997), suggesting that virtue is, in
effect, its own reward. However, sound and consistent evidence is lacking in the
literature (Margolis and Walsh, 2003). What we do glimpse from our understanding
of effective practices in BOP markets, is that a foundation of mutual trust is essential
to building positive business relationships in microlending. For that reason alone,
it behooves MFIs to create a positive reputation through virtuous behavior when
working with borrowers if sustainability is the sought after reward. Further, to
promote lending that results in positive well-being and flourishing for the client,
MFIs must attend to the terms of the loans they offer in a manner that takes into
account the many diverse needs of their communities. If borrowers view their situation
as one of an endless cycle of debt, repayment is meaningless to them. Loans have been
shown to empower the borrower and provide a dignified route out of poverty,
improving both self-perception and improved perceptions by outside agencies and
civil society organizations.
SAJGBR Potential interventions. Markets, government and civil society all have a normative
2,1 role to play in responding to the dilemmas posed within the context of virtue ethics in
microlending to the BOP. MFIs might enhance their portfolio of products and services
in an effort to be more responsive to the diverse needs of the borrower communities
where they operate, thus promoting increased well-being and empowerment. Their
voluntary participation in reputation surveys would allow borrowers and other
96 interested parties within civil society to gauge the virtue of their actions and make
important suggestions for improvement. To the extent possible, MFIs should extend
their reach beyond the mere provision of a loan to the establishment of capital and
social networks needed to lift up the borrower community. Governments can join in
this effort through the provision of government-funded education and literacy training
programs to borrowers, as well as information on the risks and benefits of taking
out a loan. The best interventions will come from the collaboration between the three
sectors – industry, government and civil society – to form partnerships that leverage
the relevant skills in each sector for the betterment of the community. Such
partnerships will excel when accompanied by good governance and strong conflict
resolution mechanisms (Reficco and Marquez, 2012).
Virtue ethics propositions. As with deontological and teleological perspectives,
the virtue ethics lens and the proposed interventions that are linked to it
carve out propositions for government, markets and civil society. These may be
summarized as follows:

P8. Greater percentages of the “worse off poor” will report increased happiness
and self-efficacy after receiving a loan where governments have provided more
information on the relevant costs and benefits of borrowing and contributed to
financial education initiatives.

P9. MFIs will be perceived as more virtuous by their borrower communities and
civil society organizations to the extent they supplement loans with peripheral
services that address both the financial and social networking needs of clients.

P10. Greater percentages of the “worse off poor” will be served with microcredit
and report higher incidences of success (repayment), happiness and improved
financial/social well-being in communities where civil society agents promote
measurement of social action and a focus on values; and where they enhance
market efforts through charitable contributions.

Moral relativism perspective (cultural view)

Relativist ethics offers a contextualized view of the dilemmas challenging the
microfinance industry in BOP markets. This descriptive model explains how conceptions
of truth and moral values are not absolute but are relative to the persons or groups
holding them. Cultural relativism claims that ethical practices differ among cultures,
while conceding that there are certain moral principles upon which all civilized societies
might agree (harking back to our earlier referencing of hypernorms and ISCT, for
example; or, alternatively, the UN Declaration of Human Rights). Nonetheless, social and
financial cooperation at the level needed and expected in the microlending industry
would require sensitivity to culture and the local moral norms that dictate practice.
One useful example of how relativist ethics has significance for our research is
that of Islam and microcredit. Approximately half of the world’s poor are Muslims. Yet
conventional microcredit is incompatible with Islamic financial principles, resulting in Ethics of
a huge unmet demand for enterprise capital at the bottom of the pyramid. Surveys in microfinance
the Middle East, for example, revealed that 20-40 percent of respondents cite religious
reasons for not accessing conventional microloans (Mohammed and Hasan, 2008); this
is at least as relevant to the South Asia case, where India, Pakistan and Bangladesh
figure among the ten countries with the largest Muslim population
in 2010, according to a Pew Forum on Religion and Public Life (2011). However, 97
innovations in Islamic financial products are increasingly being adapted by
microfinance providers.
The ethical dilemma that emerges through a relativist ethics lens is that of
designing appropriate responses to various cultural traditions without compromising
one’s morals or undermining one’s financial integrity. This requires creative models
that are best constructed with input from local cultural gurus, while acknowledging
that a fine line must be walked between cultural sensitivity and abdication of moral
truth. In terms of culturally embedded concepts relevant to the provision of microcredit
in BOP markets, we can consider terms such as charity, need, empowerment, truth,
trust and inclusion as some examples, not to mention the very notions of “good and
bad,” or “right and wrong.”
Stakeholder impacts. In the language of ISCT, legitimate local norms must be
respected and honored, as long as they do not nullify hypernorms, but even if they are
at odds with the norms of other local communities. This makes the job of MFIs a
complicated and perhaps more costly one, as programs and products have to adapt to
the diverse norms of each local community where they operate. This is less of an issue
for regional or local MFIs with a strong social mission, as they are typically founded
and run by people from that community. Yet for the growing number of MFIs that
operate in many different communities, attending to local norms is an intricate task. As
repayment rates and loan terms may be dictated by norms attached to the MFI and not
the local community, the establishment of an effective microlending business can be
thwarted. Further, MFIs that neglect the borrowers’ voice in the process, or who do not
provide them with a ready and reasoned means of “exiting” the market, violate the tenets
of ISCT and risk introducing inauthentic norms not bolstered by community consent.
Potential interventions. In the case of moral relativism, the interventions must come
from both civil society and from the MFIs. Civil society’s contributions to alleviating
this dilemma may include actively advocating for the preservation of local norms
and customs that are challenged by a lending system otherwise inattentive to them.
Education of both the community and the lender will help to forge a better
understanding of how adjustments might be made to benefit both. Markets are asked
in this context to adjust lending practices as dictated by legitimated local norms.
When this is impossible, it is best to withdraw from that market or to align with a local
MFI better equipped to understand the deep cultural implications of operating a
lending business in those communities.
Moral relativist proposition. Both markets and civil society are called upon to advance
and endorse the local norms such that more diverse populations and communities
(a broader spectrum of borrowers) will have access to legitimate forms of credit and better
success rates in managing their loans. In light of this, we offer the following proposition:

P11. Civil society and market-based interventions that advocate for preservation of
local cultural norms will correlate positively with more diverse communities
benefitting from microloans.
SAJGBR Conclusion
2,1 Microfinance continues to offer the promise of a dignified route out of poverty for
so many who reside at the base of the pyramid. As practices have diffused within the
industry, inviting new players to the field with assorted missions, scrutiny of those
practices has increased and questions about the ethics of microfinance have been
raised. Critics concern themselves with perceived mission drift (Epstein and Yuthas,
98 2010), transparency, particularly around interest rates (Karnani, 2011), social impact
assessments that point to real effects of microloans on poverty eradication (Best and
Kumar, 2008), and the lack of reach to those in greatest need (Bateman, 2011).
Addressing poverty in some of the world’s most remote and inaccessible communities
is a challenge that most MFIs have shied away from, preferring instead to rationally
allocate resources to a risk-adjusted portfolio of borrowers that will improve returns
and reported statistics of success. The conundrum is not that simple, however.
Many communities in need lack the training to start a business, the technology to
operate it, the health to sustain it, the infrastructure to permit easy monitoring
or even to give them access to markets, the networks to support it and the consumers
to buy their goods and services. MFIs are ill equipped to tackle all of these issues,
as the expertise they have carefully bundled in-house and that serves as a
source of their sustainable competitive advantage is unrelated to many of the
social ills that prevent them from assisting this under-served market. Add to this the
cost of administering small loans and the associated risk of default in the most
indigent communities, and it is difficult to point fingers. Nonetheless, these
vulnerable populations require solutions not excuses, and we are particularly
interested in the ethical nature of the problem that is presented as a result (see
also Davidson, 2009).
In this paper, we provided a descriptive narrative about the problem and the
attendant ethical dilemmas it engenders, while offering a theoretically based analysis
of these dilemmas in the context of practice. We applied a series of ethical lenses to
view the dilemmas and recommended interventions from the public, private and civil
society sectors, sometimes in partnership, to address the impact that these ethical
issues have on affected stakeholders. Indeed, the stakeholders are more numerous than
those cited here, but the examples launch us in the direction of future research that may
use primary and secondary data to begin a qualitative and exploratory analysis of
where the interventions are working successfully, where they have failed, and if, in fact,
they have been imagined at all. A stakeholder salience model can assist us in more
precisely identifying the impact of ethical issues that relate to MFIs in BOP markets –
and determining the degree to which stakeholders who are most affected have a voice
or the power to stimulate change. In the absence of that voice or power, and in many
cases imperfect information, future research may more deeply explore how traditional
market mechanisms are insufficient to address the very specific challenges that reside
at the BOP and highlight various non-market alternatives that promote poverty
reduction in line with the interventions we describe.
Our review of ethical dilemmas for MFIs operating in the poorest corners of the
globe provides us with some insights into how successful BOP models – models
of disruptive innovation – would work for areas of extreme poverty. We reason that
authentic successes in imperfect BOP markets are borne of ventures that are
inclusive, collaborative and developmental in the creation of social capital. With this
approach to BOP markets, poverty alleviation may be attainable in the long term
(Ansari et al., 2012).
 The analysis in this paper contributes to the theoretical ethical literature with a very Ethics of
specific application to an emerging concern in the field of microfinance. It also offers microfinance
prescriptive scenarios for industry and public policy makers. In the end, we must ask
if profiting from poverty, to the extent it is an observable fact, is ethically justifiable
under any theoretical lens one might apply.

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About the authors Ethics of
Linda M. Sama is the Executive Director of the Center for Global Business Stewardship at
St. John’s University, USA; Director of GLOBE, a student managed microfinance institution; and
microfinance
the Joseph F. Adams Professor of Management and Associate Dean for Global Initiatives at the
Peter J. Tobin College of Business. She received her PhD from City University of New York, USA.
Her research interests include: microfinance institutions, sustainability, corporate social
responsibility and business ethics. 103
R. Mitch Casselman is the Director of the Center for Global Business Stewardship and an
Assistant Professor of Management at St. John’s University, USA. He received his PhD from the
University of Melbourne, Australia. His research interests include: Base of Pyramid, corporate
social responsibility, innovation and knowledge-based view of the firm. R. Mitch Casselman is
the corresponding author and can be contacted at: casselmr@stjohns.edu

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