1 / 11

Issues of Responsible and Transparent Pricing Olga Tomilova October 4, 2012

Issues of Responsible and Transparent Pricing Olga Tomilova October 4, 2012. Responsible pricing

kiral
Download Presentation

Issues of Responsible and Transparent Pricing Olga Tomilova October 4, 2012

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Issues of Responsible and Transparent Pricing Olga Tomilova October 4, 2012

  2. Responsible pricing Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable. Providers will strive to provide positive real returns on deposits. SMART Campaign Client Protection Principles

  3. Is it possible to draw a meaningful line between “justifiable” and “exploitative” interest rates? • Interest rate is a function of several factors: an MFI’s cost of funds (including inflation), operating costs, costs of delinquency and loan losses, and target rate of returns. • CGAP Occasional Paper No. 1 “Microcredit Interest Rates”. 2002 R = AE + LL + CF + K - II 1 - LL

  4. Revisiting the IR Factors – Deconstructing the Sustainable IR Concept • MFIs have no control over the inflation rate and little control over the cost of funds. So logically, higher interest rates would be typical in markets where funding is more expensive and inflation is higher. • Operational costs and loan losses: the most accepted approach is to compare MFIs with their peers.

  5. Peer Groups – Examples • Type (legal form) • Age • Size • Methodology • Target group • …

  6. How to Determine Peer Groups if MFI is not Fully Transparent? • Peer group comparisons are either impossible or not of much value without transparency on the standard performance metrics that allow one to assess the assumptions that are built into an MFI’s business model

  7. Challenges of Peer Group Comparisons (1) • Loan loss costs: • “Classic” MFIs  tend to keep their loan losses very low (below 1-2 percent of the loan portfolio per annum) through careful client screening and selection.  • Many consumer lenders and credit card companies often use rough credit scoring or forego client analysis altogether, relying on high volume and passing high projected loan loss rates onto their clients in the form of higher interest rates. 

  8. Challenges of Peer Group Comparisons (2) • Target profit rates: • Benchmarking the “responsibility” of profit margins against others in the market is simply not possible in the absence of this data

  9. Challenges of Peer Group Comparisons (3) • A relatively newer dimension of responsible pricing in MF – compensation transparency: is the total pay consistent with a commitment to responsible finance?

  10. So, “how much is too much”? • Greater transparency and benchmarking is a first step • Nuanced analysis as to WHY are costs as high as they are, distinguishing between the cost drivers, with a particular focus on the elements of projected loss rates and profits (and allocation of profits)

More Related