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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?. Interest Rate Quiz - Answers. Agenda.

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Transparent pricing in microfinance implementing transparency in the indian microfinance industry

Transparent Pricing in MicrofinanceImplementing Transparency in the Indian Microfinance Industry

MicroFinance Transparency

Sa-Dhan Conference

Delhi, India

March 2010




Agenda
Agenda

  • TheContext – Theneedforpricingtransparencyglobally

  • MFTransparency– How MFTransparencyfacilitatespricingtransparency in microfinance

  • India pricingtransparency– Implementation plan


The role of transparency in the health of an industry
The Role of Transparency in the Health of an Industry

  • 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 bad press began a year later
the bad press began a year later


And extends now to efforts to restrain profiteering nicaragua sets interest rates by law
And extends now to efforts to restrain ProfiteeringNicaragua sets interest rates by law


A fundamental issue costs are relatively flat whereas income is directly proportional
A Fundamental Issue:Costs are relatively flat…WhereasIncome 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. from a single loan will be equal to the costs of that loan. This is the “


Loans lower will generate financial loss. from a single loan will be equal to the costs of that loan. This is the “


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%. interest rate, they will lose money. What must they do if they want to make these smaller loans financially sustainable?


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 to increase in order to have a viable loan product..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 to increase in order to have a viable loan product..curve very close to our theoretical curve. And notice the Operating Cost Ratio range.


Common industry benchmark of 15-20% to increase in order to have a viable loan product..OpCost Ratio is appropriate for larger loans



Why should the industry advocate pricing transparency
Why of 20% 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!


How can the industry advocate pricing transparency
How of 20% 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




Who will monitor mf transparency info
Who will monitor pricingMFTransparency 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



How to achieve Responsible Finance? pricing

MFT’s Business Model

Collect and Publish Accurate, Transparent Pricing Data

Consulting on Legislation & Regulation

Technical Assistance & Training to Service Providers

Consumer awareness, “financial literacy” materials


Countries covered in 2009
Countries Covered in 2009 pricing

  • 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




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 microfinance market.

in the Microfinance Industry


What microfinance market.wouldhappenifanInterestRateCapwerepassed?


These microfinance market. loan productswoulddisappear….


While microfinance market.these loan products at abovemarketrates, wouldremain.



Objectives
Objectives profits

  • Understand why pricing transparency is important for microfinance

  • Understand why pricing transparency is important for your financial institution

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

  • Prepare your institution for participation in MFTransparency’sTransparent Pricing Initiative


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