The Relevance and Meaning of Charity in the Context of Microfinance

Abstract

Microfinance is a sector which often balances on the business-charity border. In this pa-per I claim that it is necessary to clearly distinguish between charitable and commercial forms of microfinance. The issue is especially important for (potential) donors to MFIs which rely on fundraising to finance their operations. I therefore propose theoretical pa-rameters for charitable microfinance institutions (MFIs) and for the identification of char-itable products: in this proposal, I define such institutions and products based mostly on a so-called normal profit criterion. Due to the difficulty of objectively calculating the level of normal profit, I suggest approximating the level of normal profit in microfinance based on the average prices of products in the commercial banking sector, as well as using other (country-specific) criteria. I also propose a system of product certification for charitable MFIs and charitable microfinance which is aimed at simplifying orientation in the micro-finance sector, mainly for donors, but also for clients and other stakeholders.