Why We Need Transparent Pricing in Microfinance

MicroFinance TransparencyBaku, Azerbaijan

October 2009

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Why has microfinance practiced and tolerated such universal non-transparency?

• There is no “single interest rate” for microfinance products

• MFIs have very different products and they need to be priced very differently

• Difficult to communicate and educate the public about these issues

• This is the major reason for non-transparent pricing in microfinance

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1. Interest rates vary significantly relative to loan size, making transparency difficult

2. We operate in an industry where non-transparent pricing is common

3. Non-transparent pricing creates a serious market imperfection, generating the potential for high profits from lending to the poor

Four Key Points on Pricing Transparency

Analysis shows that some MFIs charge interest rates outside of the normal range

Price differential leads to much higher profits

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Analysis also shows a very wide range of prices (from 38% to 90%)

within a similarly-sized loan product

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Why is Portfolio Yield insufficient?

Average Portfolio Yield of an MFI

An MFI can have TWO products with APRsthat are very different. The average

portfolio yield is very misleading.

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Why is Portfolio Yield insufficient?

» What the industry has done up to the present:

– Decades of innovation and testing, resulting in dramatic success

– Strong efforts to raise a solid public image of microfinance as a noble means to lift the poor out of poverty

– Strong efforts to attract investor money into the industry

– Weak efforts in consumer protection policies and transparency

» What are the implications of our actions?

» We have laid the groundwork attracting a new contingent of actors to enter the industry, but we have neglected to build any serious checks-and-balances necessary to protect the poor

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A Significant Industry Turning Point

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1. Interest rates vary significantly relative to loan size, making transparency difficult

2. We operate in an industry where non-transparent pricing is common

3. Non-transparent pricing creates a serious market imperfection, generating the potential for high profits from lending to the poor

4. Pricing transparency is essential to well-functioning markets, promoting efficiency, healthy competition, and better prices for millions of poor people

Four Points on Pricing Transparency

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• The answer should be obvious:

Transparent pricing is the right thing to do!

The irony is that informed decisions and fair competition require a “market price”….

… and without transparent pricing there is no market price!

Why should the industry advocate pricing transparency?

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Why should the industry advocate pricing transparency?

• Another answer: MFIs benefit from transparent pricing

• “I hope and think that MFIs that will embed client protection principles into their core business activities will have a competitive advantage, with all stakeholders: not just with clients but with investors, donors, governments, and policy makers.

• Pricing transparency along with efficiency and yield analysis shows the organisation understands the nature of its business and is actively managing its margins and how they are allocated to different shareholders .” -- JM, Triodos Bank

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Why should the industry advocate pricing transparency?

• “There are a lot of challenges that foundations/ supporters face when looking at MFIs and trying to determine if they are efficient and pro-poor.” Transparency is a must and somewhat expected. “Instead, it is more about being accurateand consistent in the same market. Many MFIs say they charge market rates but it is very difficult to validate that statement. ”

--SW, Whole Foods Foundation

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The challenge is how to practice transparency in an environment where non-transparency is the norm…

It is very difficult to be the first or only MFI practicing transparent pricing!

• MFTransparency will create the proper “enabling environment”• Enable industry-supported “truth-in-lending”• Publish APR-equivalent interest rates all-at-

once, country-by-country• Educate the public on why interest rates vary by loan

size

How can the industry advocate pricing transparency?

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Who will monitor MFTransparency Info?

“MFTransparency aims at giving MFIs information to offer

better value to customers. And it will give investors and others the information they need to put pressure on those institutions that may be charging unreasonably high fees or hiding the full cost of their services. We applaud the effort.”

Elizabeth Littlefield, CEO, CGAP

“MFIs will find the service of MFTransparency very helpful. Investors, donors, policy makers, researchers, and practitioners will immensely benefit from their service.”

Muhammad Yunus, Managing Director, Grameen Bank

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MFT Launched at the Microcredit Summit in Bali July 2008

Staff

Chuck Waterfield, CEO & Board Chair

Larry Reed, President

Alexandra Fiorillo, Vice President

Tim Langeman, Website DeveloperBoard of Directors

Howard Brady (USA)

Nejira Nalid (Bosnia)

Tony Sheldon (USA)

Narasimhan Srinivasan (India)

MFT Staff & Board

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Endorsers represent:• 79 MFIs• 62 Industry Supporters• 35 Independents• 36 MFI Networks &

Associations

MFI coverage: 30,071,792 23% Apex coverage: 49,800,000 37% Total 79,871,792 60% of total clients in the worldTotal world clients: 133,000,000 counted by Microcredit Summit

Sponsors & Endorsers

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1. Consulting on Legislation & Regulation: MFT provides recommendations to central banks and regulatory authorities around consumer protection and pricing transparency

2. Technical Assistance & Training to Service Providers: MFT provides technical training to MFIs, rating agencies, industry initiatives, and other organizations to improve practices and create standardized practices in the industry

3. Consumer awareness, education and “financial capability”: Provide training materials and resources to improve client consumer literacy

How to achieve Responsible Finance? MFT’s Business Model

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MFIsNetworks, Association

s, Industry Initiatives, Rating

Agencies

Regulators, Supervisory Bodies, Consumer

Protection AgenciesDonors & Investors

MFT

MFT Works with all Industry Stakeholders

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Country selection

Data collection preparation

Meetings with market

stakeholders

Training workshops in

country

Data Collection

Work with MFIs one-on-

one, if needed

Data verification

Data analysis & synthesis

Dissemination of pricing data

How does MFT work?

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Data Output - Sample Graph

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• Methodology tested in Peru and Bosnia in March 2009

• Of the MFIs that attended the training sessions:–13/14 Bosnian MFIs submitted data (93%)*

–35/43 Peruvian MFIs submitted data (81%)

• Data will be shared internally, then disseminated worldwide

• Report with pricing analysis to follow

*14th MFI changing loan products but has committed to submitting data in June 2009

CGAP Funded Pilot Project

2009 Implementation Plan

• 6 – 8 countries

• Peru and Bosnia complete by July; Data live in October

• Cambodia and Bangladesh complete in August; Data live in

October

• Azerbaijan scheduled for early October

• Kenya scheduled for mid-October

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Participation Rewards

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“We have made major investments in improving the quality and clarity of information on microfinance institutions. But we have not yet invested as much as we should in making sure costs of financial services for poor clients are clear and fair. MFTransparency’s initiative is a bold one that promises to fill an important gap.”

Elizabeth Littlefield, Director and CEO, CGAP

A long-overlooked need

Promoting Transparent Pricing

in the Microfinance Industry

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