NRT 2011: Overview of MFTransparency - Transparent Pricing Initiative
Promo%ng Transparent Pricing in the Microﬁnance Industry Overview of MFTransparency and the Transparent Pricing Ini8a8ve Philippines | 2011
Which loan looks less expensive? Loan Product Loan Total Cost Length of Amount Loan Loan Op2on A $1,000 $131 16 weeks Loan Op2on B $511 $425 12 months Loan Op2on C $360 $425 12 months The standard way to compare cost of loan op2ons is by calcula2ng the APR (Annual Percentage Rate). We will now see how to calculate APRs.
Example of Loan Pricing • Interest rate of 3% per month • Small loan processing fee of 2% • Loan security savings of 15% • MFI pays client 5% interest on savings • What do you think the APR or EIR of this loan is?
Declining Balance interest reﬂects the textbook deﬁni2on of interest as a charge for the use of money over 8me. APR is equivalent to declining balance interest with no fees.
With “Flat” interest, interest is charged on the original loan amount resul2ng in nearly double the cost of declining balance interest. Why double? The area of the rectangle under the green line is almost double the area under the red stair‐step loan balance.
In addi2on, the client is o^en charged fees for the loan. In this example, a 2% up‐front fee, because of the short loan term, surprisingly adds 13% to the APR. A loan adver2sed as 36% interest is now the equivalent of 78% APR.
The red area shows money invested in business. The blue line shows money held in savings. Compulsory savings adds to the cost. Clients are charged interest on the original loan ($1000) even though they never have use of that amount. In this example, the APR is now 107%.
Clients are paid interest, but signiﬁcantly less interest on their savings than they are charged on their loans. When earning 5% interest, the APR only drops from 107% to 105%.
In this example, the client pays a total cost of $131 for the $1,000 loan for 16 weeks. If she were to renew the loan consistently for an en2re year, she would pay a total of $425 for the year.
Average net loan balance is $360 But, the client never had a $1,000. She only received $850 because of the savings, and then she paid back a por2on each week. She paid $425 to have an average loan balance of $360 for a year, giving an APR greater than 100%.
And with compulsory savings there are some months in which the client actually has more money in savings than invested in her business, giving a nega%ve net loan balance.
Which loan looks less expensive? Loan Product Ini8al Loan Total Cost Length of Loan APR Amount Loan Op2on A $1,000 $131 16 weeks 79% Loan Op2on B $511 $425 12 months 79% Loan Op2on C $360 $425 12 months 105% The three products we were comparing are actually iden8cal in ﬁnancial terms. Loan C includes cost of compulsory savings in the APR calcula2on. Loans adver%sed as 3% per month can have APRs of 79% or even 105%
What is Transparent Pricing? Transparent pricing means the pricing, terms, and condi2ons of ﬁnancial products will be adequately disclosed to the clients in a clear manner that allows both accurate understanding of prices and comparison of diﬀerent products. Diﬀerent levels of transparency: • o regulators / policy makers T• o investors / donors / funders T• o clients and “the market” T
Combined Approach Self Regulated Suppor2ve Prac2ce of Government Transparent Regula8on Pricing Responsible Pricing
How to achieve Responsible Finance? MFTransparency’s Business Model 1. Consul8ng on Legisla8on & Regula8on: MFT provides recommenda2ons to central banks and regulatory authori2es around consumer protec2on and pricing transparency 2. Data Collec8on & Dissemina8on: MFT collects product prices and informa2on to display on its website to facilitate a more transparent market. 3. Technical Assistance & Training to Service Providers: MFT provides technical training to MFIs, ra2ng agencies, industry ini2a2ves, and other organiza2ons to improve prac2ces and create standardized prac2ces in the industry 4. Consumer awareness, educa8on and “ﬁnancial capability”: Provide training materials and resources to improve client consumer literacy 16
Client Protec8on Principles 1. Appropriate product design 2. Transparency 3. Responsible pricing 4. Responsible treatment of clients 5. Eﬀec2ve complaints resolu2on 6. Privacy of client data
Promo%ng Transparent Pricing in the Microﬁnance Industry • U.S. Based Non‐Proﬁt Organiza2on • Work in 28 countries • Mission: to promote pricing transparency in the microﬁnance sector through: • Data collec2on, standardiza2on, & dissemina2on • Training & capacity building for ﬁnancial ins2tu2ons • Development of educa2onal materials • Consul2ng to regulators & policy makers on price disclosure legisla2on
Our Partners Na8onal Argen8na Azerbaijan Benin Bolivia Bosnia Burkina Faso Cambodia Colombia Ecuador India Ivory Coast Kenya Malawi Mali Niger Rwanda Senegal South Africa Direc8on de la Microﬁnance Togo Uganda
Self‐Regula8on MFTransparency facilitates self‐regula8on on pricing transparency Our Approach • Country by country • Partner with local networks, policy‐ makers, regulators and stakeholders • Publish true prices all at the same 2me • Objec2ve, equal treatment of all MFIs
Transparency for a Healthy Microﬁnance Industry Policy / Regula8on Regulators 75 Countries Analy8cal Conferences and MFI Industry Educa8onal Materials Publica8ons 5,000 MFIs Transparency Public and Press Consumers 100 million Pricing Data Website Educa8on Eﬀec8ve policy requires building a strong founda8on at the Bogom of the Pyramid ‐‐ Pricing Transparency and educa8on of all stakeholders creates an enabling environment for a healthy microﬁnance industry
MFT Works with all Industry Stakeholders Networks, MFIs Associa2ons, Industry Ini2a2ves, Ra2ng Agencies MFT Regulators, Supervisory Bodies, Consumer Donors & Investors Protec2on Agencies 26
Funded Pilot Project • Methodology tested in Peru and Bosnia in March 2009 • Of the MFIs that alended the training sessions: • 14/14 Bosnian MFIs submiged data (100%) • 35/43 Peruvian MFIs submiged data (81%) • Bosnia data live on www.m^ransparency.org 27
Immediate Eﬀects of the Transparent Pricing Ini1a1ve • MFIs lowering prices for products priced high rela2ve to the market • MFIs increasing their prices for products priced low rela2ve to the market • Progress by regulators toward new pro‐poor policies 28
MFTransparency Transparent Pricing Ini8a8ve in the Philippines 1. Data Collec2on, Standardiza2on & Dissemina2on 2. Training and Capacity Building 3. Promo2on of Transparent Pricing Standards 4. Promo2on & Implementa2on of Pricing Disclosure Policy 5. Development of Educa2onal Resources for the Sector
Endorse MFT We invite all to sign our endorsement statement, commimng to transparency in pricing and educa2on of MF stakeholders 31
Partner to Develop or Distribute Educa8onal Materials • MFT is looking for partners to develop educa2onal materials • Possible ac2ons: • Co‐author materials • Allow MFT to distribute your materials • Host pricing & transparency workshops with MFT 32
Rapid Progress in Transparency (Results of past 18 months) MFTransparency currently working in 27 countries (adding nearly 1 more each month) ◦ 300+ Ins2tu2ons ◦ 1,000+ diﬀerent loan products ◦ 38 million clients ◦ US$11 billion in outstanding porpolio Microﬁnance is the ﬁrst industry of any kind in the world to prac2ce global, voluntary disclosure of true pricing.
Example 1: Cambodia Prices • Must be disclosed • Charging ﬂat interest rates prohibited • Calcula2on of compounding interest rates required Pricing Informa8on • Informa2on about prices must be published on MFI websites
Example 2: Bosnia Prices • Compounding calcula2ons required • Must be included on loan contract and repayment schedule Repor8ng • Prices by product must be reported to regulators Pricing Informa8on • Informa2on about prices must be published on MFI website
Example 3: Peru Interest Rates • Interest rates must be disclosed • Calcula2on of compounding interest required Repor8ng • Prices by product must be reported to regulator Pricing Informa8on • All fees and insurance charges must be disclosed • Informa2on about prices must be published on the MFI website
MFTransparency also does Pricing Cer8ﬁca8on Reports (in countries where we are not ac8ve)
Who Beneﬁts from Pricing Transparency? Consumers: ◦ They get to know the real price – they can decide whether they want to borrow ◦ They can decide between compe2ng loan products or MFIs based compara2ve data MFIs ◦ They learn what the market price is, where they stand, and can take steps to reﬁne their pricing strategy Industry ◦ Microﬁnance sector gets a database from which it can take up issues with policy makers
Who Beneﬁts from Pricing Transparency? Funders and donors: ◦ They know what their client MFIs charge their customers, and can choose their partners accordingly Regulators ◦ Observe the prices prevailing in the market, sharpening their ability to intervene speciﬁcally and reﬁne policy
Conclusions Transparent pricing is a prerequisite for responsible pricing • We need beler knowledge and understanding of pricing, and beler data to analyze Porlolio yield is far from adequate • Individual product pricing is essen2al, and it is alainable if we work together Transparent pricing leads to more compe88on and beger decisions by all stakeholders • More compe22on and beler decisions lead to more responsible pricing
Next Steps in the Philippines Review materials One‐on‐one discussions and dialogue Begin data submission process Addi2onal training & technical support Consider recommenda2ons on price transparency Implement ﬁnancial educa2on resources
Promo8ng Transparent Pricing in the Microﬁnance Industry
Promo8ng Transparent Pricing in the Microﬁnance Industry