A Microfinance Investor Education Series update
MicrofinanceTransparency is the leading – if not the only - microfinance pricing watchdog and analyst in the global microfinance industry. Last year we heard from our colleagues at MFT about trends in pricing transparency as part of Oikocredit USA’s guest-blog series, Microfinance Investor Education series.
You can read those blog posts here:
- Pricing Transparency in Microfinance: Path to Pricing Clarity in a Market for Low-Income Borrowers
- Pricing Transparency in Microfinance: "There is no single market price for micro-loans"
- Pricing Transparency in Microfinance: Interview with Chuck Waterfield, CEO of MicrofinanceTransparency
We learned that the true definition of transparent pricing means the pricing, terms, and conditions of loans will be adequately disclosed to the clients in a clear manner that allows both accurate understanding of prices and comparison of different products. We also learned that, contrary to popular belief, there is no single market price for microloans, because price is influenced by the size of the loan, the maturity of the market, the location and experience of the borrower, in addition to many other factors when determining the price of a microloan.
Photo: Chuck Waterfield, during a transparency training
Finally, during an interview with MFT founder and CEO Chuck Waterfield, we learned about the work MFT does to ensure prices are transparently disclosed to clients so that they may make the most informed decision. In April, as MicrofinanceTransparency celebrated its 5 year anniversary,we got back in touch with Chuck to hear updates on MFT’s progress over the last year and understand the state of the pricing transparency movement.
Oikocredit USA: Last year when we began the series, MFT had conducted pricing transparency evaluations in around 30 countries. Can you share with us any key developments with respect to the pricing initiative. In how many countries is MFT currently working and how many MFIs have shared information with the MFT?
Chuck Waterfield: We haven’t done a new country in the past year. In the first years, we had to demonstrate that we could do it; phase II is working with partner institutions to collect the data and training them – refreshing the current 30 countries to keep the data current.
As of last year, we had collected data from 400-some MFIs. [This year, when we add Pakistan & Morocco], we’ll hit the 500 institution mark – which is pretty good considering this is only our 5th year, and there still is no other vehicle through which MFIs can submit their pricing!
OUSA: From a pricing transparency standpoint, what do you think about regulation of microfinance?
CW: I’ve always been vocal about my support of the regulation of microfinance. As an industry, we created our own problems and now we’re paying the price – microfinance is far from a perfectly functioning market! The market principles are not in place: when clients do not know the prices they’re being charged, the definition of a market cannot exist.
MFT is training regulators – last year we had a conference for regulators for 22 countries in Africa! … And the central bank of the Philippines introduced a transparent pricing law – they followed the lead of countries like Cambodia that banned flat interest rates – which is a distortion, and makes the price of a loan twice as high. As of now, that’s illegal in the Philippines.
OUSA: We’ve heard that there were two key reasons for the lack of transparency: (1) No single market price for micro-credit loans; and (2) No single pricing methodology. Has progress been made on the use of a common pricing methodology and do we see a trend towards similar pricing for similar products in any specific markets?
CW: Is there a single market price? Bigger loans have lower prices; as loans get extremely small – like in the Philippines or in Mexico, where the prices are extremely high – as the loan sizes approach zero, the price that you need to charge is higher.
Microfinance is not all the same product. It depends where you are on the product continuum. When we publish the data for 2,000 products among 500 institutions, we see 2000 different prices, and a correlation between different kinds of products and the prices they charge. So while there is no single price, we can make better inferences about the curve.
OUSA: In terms of trends, are you observing a move towards greater pricing transparency in the microfinance market? Are there regional differences?
CW: The data is more rational or expected in Latin America, which has a more mature MF market – maybe it’s because they’ve been at it longer, maybe it’s because there are a lot more microfinance institutions, maybe it’s because there is more regulation.
When we look at Africa, there are a lot less MFIs. Some of the places we go only have a dozen MFIs and they’re younger, smaller, they only have a few thousand clients. So you see less logical correlation to a price curve. Prices in Uganda tend to be between 50% and 150%. You don’t find that kind of price range when you look at the Ecuador or Bolivia data. We’re early stages in Africa. This month we published our second set of data for Uganda so we can see what they charged a year ago and what they charge now.
MFT is in the early stages now of having multiple-year data for about 10 countries, and we’re just beginning to be able to ask “how does transparent pricing affect the pricing level of products – if at all?”
OUSA: What are some best practices being used by microfinance institutions to help their clients better understand the full prices behind microloans?
CW: Imagine: we ourselves don’t really know what the prices are. So then how do we get 60,000,000 clients to “get it”? We’re approaching this in stages. First – we didn’t have data. Now we have data. The industry stakeholders are learning. The next step is to increase the ways we can educate those clients.
Some MFIs set transparent pricing – and their price looks higher than competition. So how do you explain to clients that these prices that look higher are in fact lower? There are some nice examples where you sit with a group and you teach them to see through the facts. That takes time, literacy, and some skill. It’s difficult to teach clients not to believe the marketing literature, if they don't have a legal alternative. With truth-in-lending regulation, clients can be taught in two steps. "Step 1: Always ask for the APR - the true price - and by law the lenders must tell you the true price. Step 2: Lower APR is cheaper." That’s all the education you need. You can compare and make an accurate and informed decision.
OUSA: To the individual or institutional investor who entrust Oikocredit with their investment but have little experience in microfinance,what would be one or two factors they should use to evaluate any investments made in microfinance if they’re concerned about responsible pricing?
CW: I’m really pleased when people ask that question – but what’s the best answer? This is going to sound strange, because we’re all about transparent pricing – but then to say “how do I find an institution that’s charging responsible pricing?” If they’re in a country we report on, then you can check to see if they’re on the curve.
If they’re making a lot of profit – that’s a warning sign. Dig in deeper – what’s the highest level of profit that you would consider still fair? Define your line. For me, the line is 15% – 25% Return on Equity. If you see an institution that’s making 30 to 40% return on equity – as an investor that’s attractive. But is that social business, making 30 to 40% off the backs of poor women?
OUSA: What about the lay investor? What should they be looking for their MIV to do?
CW: If you’re looking at an investment fund – you ask “how do you screen your institutions?” what do you use to reject institutions? What I’ve seen time and again is “risk is too high, we don’t want to risk your money” or “we’re not making enough profit.” There’s a minimum threshold of profit. But if there’s no high bar, then you’re attracted or you let in those making 30-40-50% on equity, and then you get the reputational risk. So the best institution is one that uses selective criteria, and publishes this criteria.