Last week, MFTransparency – a global initiative for fair and transparent pricing in microfinance – published the world’s first true-cost pricing data. In an interview with MIX, Vice President Alexandra Fiorillo shares more about the initiative, its benefits to MFIs and clients, and findings from the first reports.
Ms. Fiorillo: MFTransparency’s primary mission is to promote transparent pricing in the microfinance industry. We have learned over the past year that promoting fair pricing is a much more complicated endeavor. What our data and experience show is that every market is unique and coming to one global definition of fair pricing is impossible, especially if you are looking for a specific number. We have discussed the possibility of coming to a definition based on “n standard deviations away from the market price curve” but even that is difficult and may vary according to the market. We do believe, however, that transparent pricing is a necessary condition in order to get to fair pricing.
We are currently involved in several industry discussions related to the issue of fair pricing and it seems the conversation is moving towards a definition centered around affordable products that do not over-indebt clients. I think you’ll see more of this evolution coming in the next few months as the language of the Client Protection Principles is updated and MFTransparency delivers more educational materials on the subject. This is a topic that will continue to evolve as we learn more about pricing practices around the world.
MIX: A commitment to transparent pricing can benefit MFIs in several ways—for example, by improving client retention and customer loyalty. But how can transparent pricing assist microfinance clients to acquire a better understanding of the real cost of loans and help them make more informed decisions?
Ms. Fiorillo: Transparent pricing, whose central principle is using the Annual Percentage Rate (APR) and Effective Interest Rate (EIR) calculations, allows clients to more easily compare similar financial products in a specific market. The true price of a loan includes not only interest but other charges required by the lender as well as other techniques that influence the amount of money the client actually has and the amount of time the client has use of that money. Because of these multiple factors as well as differences in interest calculation methods, comparing the prices of different loan products can be very challenging for any individual client. The APR and EIR are used to express the true price as a standard measure that allows clients to compare credit charges among loan products that may have different loan terms.
Finally, we believe that transparent pricing will lead to a more competitive market that will ultimately benefit clients. If information on loan-specific pricing is available, service providers will be encouraged to compete on price in addition to the other factors they already compete on, such as geographic access and quick loan approval and disbursement. Eventually, we expect transparent and competitive pricing will lead to the development of better products and a focus on lowering the cost to clients.
MIX: In your experience with collecting data on interest and fees charged by MFIs, what can you tell us about MFIs’ familiarity with calculating EIR/APR?
Ms. Fiorillo: Since joining MFTransparency in March 2009, I have met with over 100 MFIs around the world to discuss product pricing and transparency. I have learned so much from MFIs about their pricing policies and calculations and have been able to adjust our operational practices to better represent what is happening around the world. MFIs know the various payments their clients make for a specific loan – interest and principal payments and other upfront or continuous fees or commissions. However, in our experience, most MFIs do not aggregate the interest payments, fees, and commissions paid and other costs added on to a loan (ex. taxes) so the client has one total figure of what they are paying for the loan. Similarly, fewer MFIs use an APR or EIR calculation to determine the total cost of a loan from a client’s perspective. Most quote nominal interest rates and fees or commissions separately to their clients.
I have received a lot of positive feedback about our training workshops on APR/EIR calculations. The tools we use allow MFIs to see the monetary effect of a 2% loan appraisal fee or a .5% mandatory monthly insurance payment on a client’s loan price. Similarly, our tools allow MFIs to test out different pricing methodologies – examining the difference between declining or flat interest, fees paid up-front versus fees paid over the course of the loan, and how different repayment practices (weekly versus monthly, for example) change the total price of the loan. Some MFIs have been quite surprised at the differences. We continue to learn from service providers and update our tools and methodologies to better reflect the realities in the field. Similarly, I think some MFIs have learned from our workshops and will reexamine their pricing practices using our tools.
MIX: You just published the first transparent pricing data on Bosnia and Herzegovina and Cambodia. Next week will be Peru. What can you tell us about pricing data in these three countries?
Ms Fiorillo: As you consider the data for Bosnia, Cambodia, and Peru, the most notable observation is that every market is unique and has very different pricing practices. The price curves look different – Bosnia is quite shallow, Peru is steeper, and Cambodia is almost a flat line. Loans of under KM1,000 in Bosnia have an average APR of over 30%, while those of KM8,000 or more have an average APR of under 20%. This fits with the reality that costs of loans – expressed as a proportion of the loan amount – increase as the loan size decreases, and therefore the price charged to cover those costs must increase as well. The Cambodia data is quite interesting because we present it in the three currencies used by service providers and there are some differences between the currencies.
This month, we are hosting two Data Launch Webinars where we will show the data, explain the data collection process, and facilitate a dialogue about the pricing data in our three launch countries. The webinars are scheduled for Wednesday, November 18 at 10:00pm EST and Friday, November 20 at 11:00am EST. You can find more information on how to join the Webinars on our website: www.mftransparency.org.
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