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 MicrofinanceImplementing Transparency in the Indian Microfinance Industry
Which loan has the lowest price?
Interest Rate Quiz - Answers
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%
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!
It is very difficult to be the first or only MFI practicing transparent pricing!
MFT Launched at the Microcredit Summit in Bali July 2008
“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
MFT Works with all Industry Stakeholders
How to achieve Responsible Finance?
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
Now is the time for transparent pricing in the Indian microfinance market.
Promoting Transparent Pricing
in the Microfinance Industry
These loan productswoulddisappear….
Whilethese loan products at abovemarketrates, wouldremain.
Price differential on larger loans leads to much higher profits