Transparent Pricing in MicrofinanceImplementing Transparency in the Indian Microfinance

Industry

MicroFinance TransparencySa-Dhan Conference

Delhi, IndiaMarch 2010

Option Amount Term Interest Method Upfront Fees

Upfront Savings

Savings Interest Total Cost

Option 1 $1,000 6 months 3% declining 2% 0% 0% $125

Option 2 $1,000 4 months 2% flat 2% 0% 0% $94

Option 3 $1,000 4 months 3% declining 0% 20% 5% $56

Option 4 All loans have the same APR.

Which loan has the lowest price?

Option Amount Term Interest Method Upfront Fees

Upfront Savings

Savings Interest

Total Cost APR Poll

Results

Option 1 $1,000 6

months 3% declining 2% 0% 0% $125 43% 22%

Option 2 $1,000 4

months 2% flat 2% 0% 0% $94 57% 16%

Option 3 $1,000 4

months 3% declining 0% 20% 5% $56 54% 50%

Option 4 All loans have the same APR. 12%

Interest Rate Quiz - Answers

Agenda The Context – The need for pricing transparency

globallyMFTransparency – How MFTransparency facilitates

pricing transparency in microfinanceIndia pricing transparency – Implementation plan

The Role of Transparency in the Health of an Industry

MFIs sell productsProducts have pricesMicro-credit prices are extremely confusingIf buyers don’t know true prices, the market doesn’t

workIf buyers get abused, microfinance becomes a tarnished

industryTransparent pricing protects the poor and protects the

microfinance industry

The Good News in October 2006

… the bad press began a year later

And extends now to efforts to restrain Profiteering

Nicaragua sets interest rates by law

A Fundamental Issue:

Costs are relatively flat…Whereas

Income is directly proportional

Costs are relatively flat relative to loan size. It costs nearly as much to make a $100 loan as a

$1000 loan.

Income is generated as a percentage of the loan amount and therefore highly correlated to loan size.

For a given interest rate, there is a point where income from a single loan will be equal to the costs of that loan. This is the “breakeven point”.

Loans larger than this amount will generate profit.

Loans lower will generate financial loss.

If an institution wants to deliver smaller loans at the same interest rate, they will lose money. What must they do if they want to make these smaller loans financially sustainable?

They need to raise the interest rate, say from 30% to 40%.

As the loan size decreases, the interest rate must continue to increase in order to have a viable loan product..

Higher costs for smaller loan amounts require significantly higher interest rates for sustainability

We can create a graph correlating loan size to financially sustainable interest rates and it forms a distinct curve.

(Note that figures and interest rates in this curve serve only as examples and are not figures specific to the microfinance industry.)

Data for the Philippines shows a curve very close to our theoretical curve. And notice the Operating Cost Ratio range.

Common industry benchmark of 15-20% OpCost Ratio is appropriate for larger loans

But smaller loans generate an Op Cost Ratio well in excess of 20%

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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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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 act as a neutral party to 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?

The Role of MF Transparency in facilitating transparent pricing

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MFT Launched at the Microcredit Summit in Bali July 2008

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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

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MFIs Networks, Associations, Industry

Initiatives, Rating Agencies

Regulators, Supervisory Bodies, Consumer

Protection Agencies Donors &

Investors

MFT

MFT Works with all Industry Stakeholders

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1. Collect and Publish Accurate, Transparent Pricing Data

2. Consulting on Legislation & Regulation3. Technical Assistance & Training to Service

Providers4. Consumer awareness, “financial literacy”

materials

How to achieve Responsible Finance? MFT’s Business Model

Countries Covered in 2009

• Peru and Bosnia complete in July 2009

• Cambodia and Bangladesh complete in August 2009

• Azerbaijan complete in March 2010

• Kenya complete in April 2010

• India, Bolivia, and Ecuador to be started in April 2010

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2010 Implementation Plan

Latin America West Africa East/Southern Africa Asia

Bolivia Burkina Faso Malawi India

Ecuador Senegal Uganda Philippines

Colombia Ivory Coast Rwanda Nepal

Argentina Togo Ghana

Mali South Africa

Benin Zambia

Guinea Bissau Tanzania

Niger Ethiopia

Mozambique

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How data is presented on the MFTransparency website

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Now is the time for transparent pricing in the Indian microfinance market.

• One of the fastest growing microfinance markets in the world

• Strong regulation in place for consumer protection

• Increasing interest from commercial investors

• Networks with a strong commitment to consumer protection and responsible finance

Promoting Transparent Pricing in the Microfinance Industry

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What would happen if an Interest Rate Cap were passed?

These loan products would disappear….

While these loan products at above market rates, would remain.

Price differential on larger loans leads to much higher

profits

Objectives

1. Understand why pricing transparency is important for microfinance

2. Understand why pricing transparency is important for your financial institution

3. Learn how we can implement transparent pricing in the Indian microfinance industry

4. Prepare your institution for participation in MFTransparency’s Transparent Pricing Initiative