This is a continuation of Oikocredit USA’s Microfinance Investor Education Series, or MIE Series, designed to educate investors, donors and advisors about social impact issues in microfinance investing. In this third installation, Chuck Waterfield, CEO of MicroFinance Transparency, talks with us about pricing methodologies and the progress that has been made in pricing transparency in the last of our three-part series. You can read the first and second installations of the pricing transparency series here.
Oikocredit USA: Give us some background on when the pricing transparency movement began in the sector?
Chuck: Twenty-four years ago when I wrote my first article on interest rates, I was fascinated by pricing yet nothing had been written about pricing. MIX didn’t publish pricing information. For some, it just wasn’t on our radar; for others, it was intentionally hidden. In 2007, as the commercialization of microfinance became more of a reality, the whole industry started talking about pricing. We realized that Compartamos, the Mexican MFI that had just made its initial public offering, was charging 130%, but nobody knew that [previously]. So the industry said, ‘how can we get the issue of pricing transparency out there?’ I was something of an expert at that point and, as a result, 9 months later a group of us created MicrofinanceTransparency.
Before MFT, nobody was looking for pricing transparency. We were the first, but happily we’re no longer the only ones. Pricing transparency information is spreading – that’s an indication of success. In a handful of years we’ve gone from obliviousness about pricing to a broad level of keen interest in pricing.
Today, transparency efforts are taking place in 25 countries reaching also 500 institutions that reach almost 50 million clients.
Oikocredit USA: How have pricing methodologies evolved in the history of the MF sector?
Chuck: There was no pricing standard or methodology for a long time. It was very common to practice confusing pricing: they would charge a flat interest instead of declining balance; they would very frequently charge fees; MFIs used compulsory savings as “security deposits” on the loans. All these factors and more influence what the true price really is.
Bangladesh provides a good example: in Bangladesh in 1996, all MFIs charged a declining balance interest rate. Then in 1997, the first MFIs started switching over to a flat interest rate because it looked cheaper, but reaped twice as much income. And this is the downward spiral of non-transparent pricing – as soon as someone starts to hide the price, others will do the same to appear competitive. Once everyone is hiding their prices, the market becomes broken.
Then the industry adopted the “portfolio yield” in order to understand pricing – we would take an institution’s income, divided by the weighted average of its loan portfolio, and calculate the portfolio yield and we would call that “the price”. However, that proved misleading once institutions started introducing more than one product with more than one price.
Now, MFT encourages MFIs to use“annual percentage rate” or APR. We feel that APR is the most comprehensible, for us and for the clients. We discourage the use of“total cost of credit” or TCC – represented by a monetary amount, rather than a percentage.
Oikocredit USA: What do MFIs who endorse MFI find are effective ways to impart this pricing complexity info to borrowers?
Chuck: A lot of that depends on the country in which you’re operating. If the country is moving toward truth-in-lending legislation, then information might be more readily available. We can teach clients not to trust the marketing – to always ask what the APR is. Once you have the APR, it’s very simple – lower is cheaper.
If you’re in a country that doesn’t have such legislation in place, you still want to educate people clearly and quickly. You warn them of the traps – ask how the interest is calculated, whether it’s a flat or declining rate. You can teach them that the more fees there are, the more expensive it is.
In countries where we are present, MFIs that have reported their data to us can go to MFT’s website and show their clients an objective data source. They can show their clients the price of their loan, and it’s competitiveness relative to other MFIs in the market.
MFT has financial literacy materials available. We’re training in Malawi this week and Rwanda next week. These materials are available on our website and any MFIs can download these materials for free to teach their clients how to look for pricing transparency.
Oikocredit USA: What are the benefits of transparency to investors?
Chuck: Among investors, there’s a fear that an institution receiving funding may someday end up in the headlines as charging exploitative prices to their clientele. Up until now, the due diligence process consisted of looking at an institution’s balance sheet, risk and return, but many if not most investors were not going in and looking at the pricing of products.
MFT provides a pricing calculator and it’s free, and I have investors contacting me almost every day telling me they’re using the calculator. Investors should work pricing information into funding decisions.
Oikocredit USA: What metrics do you use to calculate an MFI’s transparency?
Chuck: MFT calculates a transparency index which can also be used. For example, if an MFI tells their clients they charge 20%, and we go and calculate the APR as 50%, then that MFI’s transparency index would be 40 (on a scale of 100)- meaning they only represent 40% of the true price. Investors should look at the transparency index as an indication of risk, and to understand its commitment to its clients.
Oikocredit USA: Are we seeing a greater move toward transparency?
Chuck: Everybody in the industry is talking about it. Regulators are interested in it; networks [of MFIs] are supporting our movement and want to be involved in perpetuating it. As a result, MFIs are proud and display publicly the fact that they practice pricing transparency voluntarily. In fact, [in these countries] MFIs are in many ways more transparent than traditional banks. Microfinance as an industry is leading the way in client protection and transparency – voluntarily.
Oikocredit USA: Where can investors and other interested parties find pricing data?
The MIX [Microfinance Information Exchange] publishes an institution’s portfolio yield, which is the weighted average of all their products but it’s not reflective of the true price of any specific product.
From the MFT site, there is a widget that allows the user to view MIX data for the institution; this is accessible as a part of our collaboration with the MIX.
 Chuck comments “Grameen Bank actually has the lowest prices of anyone in Bangladesh – but it got press for high prices. But all other MFIs in Bangladesh are charging flat interest rates [while] Grameen Bank charges declining. So actually, Grameen Bank is by far the cheapest, charging 20% declining, while others are charging 12% or 15% flat.”
Chuck Waterfield has 25 years of experience in microfinance, including six years starting MFIs in both Haiti and Bolivia, and serving as microenterprise director for both MEDA and for CARE International. He developed Microfin, the most popular financial planning software in the microfinance industry, and he has a broad range of products and publications including the SEEP FRAME Tool, the CARE Credit and Savings Sourcebook, and CGAP Handbook on Management Information Systems.
Waterfield currently works as an independent consultant with clients across the industry and teaches business planning courses around the world. He currently on faculty of Columbia University School of International and Public Affairs and was formerly on the faculty of the Boulder Microfinance Training Program and Southern New Hampshire University’s Microenterprise Development Institute. In 2008, he founded MicroFinance Transparency where he works as the CEO and President.