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# NRT 2011: Overview of MFTransparency - Transparent Pricing Initiative

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NRT 2011
May 23-24, 2011
Manila

Session 3:
The Price is Right

By: Ms. Laila Deles,
Research Associate/Project Manager for MFTransparency's Transparent Pricing Initiative

Published in: Economy & Finance, Business
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### NRT 2011: Overview of MFTransparency - Transparent Pricing Initiative

1. 1. Promo%ng Transparent Pricing in the Microﬁnance Industry  Overview of  MFTransparency  and the  Transparent  Pricing Ini8a8ve  Philippines | 2011
2. 2. 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.
3. 3. 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?
4. 4. 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.
5. 5. 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.
6. 6. 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.
7. 7. 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%.
8. 8. 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%.
9. 9. 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.
10. 10. 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%.
11. 11. 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.
12. 12. 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%
13. 13. 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
14. 14. Combined Approach Self Regulated  Suppor2ve  Prac2ce of  Government  Transparent  Regula8on  Pricing  Responsible  Pricing
15. 15. 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
16. 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
17. 17. Social Performance Indicators
18. 18. 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
19. 19. MFTransparency Coverage
20. 20. Our Sponsors  Ford Foundation Elena Nelson  • Anna Maria Zegarra• Nancy Goyburo  Maria Sara Jijon• Bill Maddocks• Kim Wilson • 21 21 NarasimhanSrinivasan• Point Loma Nazarene University
21. 21. Our Partners Global Regional AFRICA
22. 22. 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
23. 23. 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
24. 24. 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
25. 25. MFT Works with all Industry Stakeholders  Networks,  MFIs  Associa2ons, Industry  Ini2a2ves, Ra2ng  Agencies  MFT Regulators, Supervisory  Bodies, Consumer  Donors & Investors  Protec2on Agencies  26
26. 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
27. 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
28. 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
29. 29. Par8cipa8on Rewards    30
30. 30. Endorse MFT We invite all to sign our endorsement statement, commimng to transparency in pricing and educa2on of MF stakeholders   31
31. 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
32. 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.
33. 33. 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
34. 34. 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
35. 35. 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
36. 36. Standardized Repayment Schedule
37. 37. Standardized Pricing Disclosure Repor8ng
38. 38. Standardized Pricing Dissemina8on
39. 39. Standardized Pricing Dissemina8on
40. 40. MFTransparency also does  Pricing Cer8ﬁca8on Reports (in countries where we are not ac8ve)
41. 41. 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
42. 42. 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
43. 43. 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
44. 44. 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
45. 45. Promo8ng Transparent Pricing   in the Microﬁnance Industry
46. 46. Promo8ng Transparent Pricing   in the Microﬁnance Industry