Fast Company recently profiled the pioneering work of MIT’s Jameel Poverty Action Lab (J-PAL) (some of which we have partnered with them on). What struck me, though, was a comment by Rachel Glennerster of J-PAL. In discussing a study on the price of malaria bednets, Glennerster claimed that "Charging small amounts is the exact wrong thing to do" when it comes to bednets.  But the evidence from microfinance suggests that this simply isn’t the case as a general rule.

The argument that the poor can’t or aren’t willing to pay full prices for basic goods and services is one I see more and more. The truth, though, is that the poor are generally willing to pay prices that are high when compared to those routinely paid by the better off. In the case of financial services, the poorest customers often end up paying the highest prices because, for financial providers, small-sized transactions mean limited scale economies, and thus high costs per transaction.

Consider the global evidence. In a sample from the Mix Market, the median NGO faces operating costs of about $30 for every $100 of loans outstanding. The median microfinance bank, on the other hand, faces costs of about $12 per $100 of loans outstanding. As a result, NGOs (which tend to serve poorer customers) must charge higher average interest rates and fees than microfinance banks in order to cover their costs.

This isn’t to say that it’s “right” for the poor to pay more, but in most cases, they can.