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Transparent Pricing in Microfinance Implementing Transparency in the Indian Microfinance Industry

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

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  1. Transparent Pricing in MicrofinanceImplementing Transparency in the Indian Microfinance Industry MicroFinance Transparency Sa-Dhan Conference Delhi, India March 2010

  2. Which loan has the lowest price?

  3. Interest Rate Quiz - Answers

  4. Agenda • TheContext – Theneedforpricingtransparencyglobally • MFTransparency– How MFTransparencyfacilitatespricingtransparency in microfinance • India pricingtransparency– Implementation plan

  5. 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

  6. The Good News in October 2006

  7. … the bad press began a year later

  8. And extends now to efforts to restrain ProfiteeringNicaragua sets interest rates by law

  9. A Fundamental Issue:Costs are relatively flat…WhereasIncome is directly proportional

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

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

  12. 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”.

  13. Loans larger than this amount will generate profit.

  14. Loans lower will generate financial loss.

  15. 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?

  16. They need to raise the interest rate, say from 30% to 40%.

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

  18. 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

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

  20. Common industry benchmark of 15-20% OpCost Ratio is appropriate for larger loans

  21. But smaller loans generate an Op Cost Ratio well in excess of 20%

  22. 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!

  23. 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

  24. The Role of MF Transparency in facilitating transparent pricing

  25. MFT Launched at the Microcredit Summit in Bali July 2008

  26. 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

  27. MFT Works with all Industry Stakeholders

  28. 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

  29. 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

  30. 2010 Implementation Plan

  31. How data is presented on the MFTransparency website

  32. 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

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