Transparent Pricing in
Microfinance
Implementing Transparency in the Indian
Microfinance Industry
MicroFinance Transparency
Sa-Dhan Conference
Delhi, India
March 2010
Which loan has the lowest price?
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.
Interest Rate Quiz - Answers
Option
Amount
Term
Interest
Method
Upfron
t 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%
Agenda
The Context – The need for pricing transparency
globally
 MFTransparency – How MFTransparency facilitates
pricing transparency in microfinance
 India pricing transparency – Implementation plan

The Role of Transparency in the
Health of an Industry

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MFIs sell products
Products have prices
Micro-credit prices are extremely confusing
If buyers don’t know true prices, the market doesn’t
work
If buyers get abused, microfinance becomes a tarnished
industry
Transparent 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..
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.)
Higher costs for smaller loan amounts require significantly
higher interest rates for sustainability
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%
28
29
Why should the industry advocate pricing
transparency?
•
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!
30
How can the industry advocate pricing
transparency?
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
33
The Role of MF Transparency in
facilitating transparent pricing
34
MFT Launched at the Microcredit Summit in
Bali July 2008
35
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
36
MFT Works with all Industry Stakeholders
Networks,
Associations, Industry
Initiatives, Rating
Agencies
MFIs
MFT
Regulators, Supervisory
Bodies, Consumer
Protection Agencies
Donors & Investors
38
How to achieve Responsible Finance?
MFT’s Business Model
1. Collect and Publish Accurate, Transparent
Pricing Data
2. Consulting on Legislation & Regulation
3. Technical Assistance & Training to Service
Providers
4. Consumer awareness, “financial literacy”
materials
39
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
44
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
45
 How data is presented on the
MFTransparency website
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56
57
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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
64
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
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
1.