Successfully reported this slideshow.
Upcoming SlideShare
×

# Session II: Approaches for Calculating True Prices

995 views

Published on

Workshop presentation at the launch of the Transparent Pricing Initiative in South Africa, Johannesburg and Cape Town, February 2011

• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

### Session II: Approaches for Calculating True Prices

1. 1. Promoting Transparent Pricing in the Microfinance Industry<br />Session II: Approaches for Calculating True Prices<br />South Africa | February 2011<br />
2. 2. Which loan has the lowest price?<br />
3. 3. Interest Rate Quiz - Answers<br />
4. 4. Example of Loan Pricing<br />Interest rate of 3% per month<br />Small closing fee of 2%<br />Savings account with 15% of loan<br />We pay you 5% interest on your savings<br />What do you think the APR of this loan is?<br />(we will calculate APR without compounding, i.e, using the US formula, not the EU formula)<br />
5. 5. Declining Balance interest reflects the textbook definition of interest as a charge for the use of money over time. APR is equivalent to declining balance interest with no fees.<br />
6. 6. With “Flat” interest, interest is charged on the original loan amount resulting 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.<br />
7. 7. In addition, the client is often 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 advertised as 36% interest is now the equivalent of 78% APR.<br />
8. 8. The red area shows money invested in business.<br />The blue line shows money held in savings.<br />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%.<br />
9. 9. 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%.<br />
10. 10. The Downward Spiral<br />How did prices get so confusing and non-transparent?<br />It is a combination of: <br />Lack of transparent pricing regulation<br />Initial motivation of a small minority to mask the true price<br />The result is a downward spiral drawing in nearly all MFIs<br />
11. 11. The Downward Spiral<br />All MFIs have transparent prices<br />MFI 1: <br />Interest: 2.5% decl.<br />MFI 2:<br />Interest: 3.0% decl.<br />
12. 12. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />MFI 1: <br />Interest: 2.5% decl.<br />MFI 2:<br />Interest: 2.0% flat<br />
13. 13. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />All MFIs shift to non-transparent pricing<br />MFI 1: <br />Interest: 1.75% flat<br />MFI 2:<br />Interest: 2.0% flat<br />
14. 14. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />All MFIs shift to non-transparent pricing.. And it continues<br />MFI 1: <br />Interest: 1.75% flat<br />MFI 2:<br />Interest: 1.6% flat, 2% upfront fee<br />
15. 15. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />All MFIs shift to non-transparent pricing<br />Consumers struggle to choose…. Which would YOU choose?<br />MFI 1: <br />Interest: 1.75% flat<br />MFI 2:<br />Interest: 1.6% flat, 2% upfront fee<br />
16. 16. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />All MFIs shift to non-transparent pricing<br />Consumers struggle to choose… Because the prices are far from clear<br />MFI 1: <br />Interest: 1.75% flat<br />APR: 37%<br />MFI 2:<br />Interest: 1.6% flat, 2% upfront fee<br />APR: 57%<br />
17. 17. The Downward Spiral<br />All MFIs have transparent prices<br />Some MFIs shift to flat interest<br />All MFIs shift to non-transparent pricing<br />Consumers struggle to choose<br />Profits are correlated to price<br />MFI 1: <br />Interest: 1.75% flat<br />APR: 37%<br />ROE: 10%<br />MFI 2:<br />Interest: 1.6% flat, 2% upfront fee<br />APR: 57%<br />ROE: 40%<br />
18. 18. The Downward Spiral<br />Prices are far from clear, and thus:<br />Consumers over-consume<br />Market competition is hindered<br />Strong temptation from high profits<br />The poor are harmed<br />Public image is tarnished<br />Governments urged to intervene<br />Transparency, and particularly pricing transparency, is a key element to correct this serious problem in the microfinance industry<br />
19. 19. 19<br />Value of Pricing Transparency<br />“Transparency is the root of every healthy industry. It is fundamental to good business practices.”<br />Asad Mahmood, Deutsche Bank<br />“Financial services are just that - a service. And they should therefore serve the people. Transparent and full disclosure of the real price is an integral part of providing the service in a fair and ethical manner.”<br />Maria Sara Jijon, WAM/Ecuador<br />
20. 20. 20<br />Responsibility to Customers<br />“MFTransparency aims at giving MFIs information to offer better value to customers…. We applaud the effort.”<br />Elizabeth Littlefield, CEO, CGAP/World Bank<br />“It is our duty to clearly communicate true prices to our clients. MFTransparency is taking this very important initiative in the world of microcredit.”<br />Muhammad Yunus, Grameen Bank<br />
21. 21. 21<br />MFTransparencyWorks with All Industry Stakeholders<br />
22. 22. 22<br />How does MFTransparency work?<br />
23. 23. 23<br />Data Output - Sample Graph<br />
24. 24. Participation Rewards <br />24<br />
25. 25. Endorse MFTransparency<br />25<br />We invite all to sign our endorsement statement, committing to transparency in pricing and education of microfinance stakeholders <br />
26. 26.
27. 27.
28. 28.
29. 29.
30. 30.
31. 31.
32. 32.
33. 33.
34. 34.
35. 35.
36. 36.
37. 37. Rapid Progress in Transparency(Results of past 18 months)<br />MFT currently working in 17 countries (adding 1 more each month)<br />300 Institutions<br />1,000 different loan products<br />38 million clients<br />US\$11 billion in outstanding portfolio<br />Microfinance is the first industry of any kind in the world to practice global, voluntary disclosure of true pricing.<br />
38. 38. Promoting Transparent Pricing <br />in the Microfinance Industry<br />