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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
a fundamental issue costs are relatively flat whereas income is directly proportional
A Fundamental Issue:Costs are relatively flat…WhereasIncome is directly proportional
slide10

Costs are relatively flat relative to loan size. It costs nearly as much to make a $100 loan as a $1000 loan.

slide11

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

slide12

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”.

slide15

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?

slide17

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

slide18

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

slide19

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

why should the industry advocate pricing transparency
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!

how can the industry advocate pricing transparency
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
who will monitor mf transparency info
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

slide31

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

countries covered in 2009
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
slide50

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
slide51

Promoting Transparent Pricing

in the Microfinance Industry

objectives
Objectives
  • 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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