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

2. Promo%ng Transparent Pricing in the Microfinance Industry
Overview of
MFTransparency
and the
Transparent
Pricing Ini8a8ve
Philippines | 2011

3. 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.

4. 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?

5. 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.

6. 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.

7. 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.

8. 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%.

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%.

10. 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.

11. 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%.

12. 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.

13. 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%

14. 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

15. Combined Approach
Self Regulated
Suppor2ve
Prac2ce of
Government
Transparent
Regula8on
Pricing
Responsible
Pricing

16. 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

17. 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

18. Social Performance Indicators

19. 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

20. MFTransparency Coverage

21. 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

22. Our Partners
Global
Regional
AFRICA

23. 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

24. 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

25. 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

26. MFT Works with all Industry Stakeholders
Networks,
MFIs Associa2ons, Industry
Ini2a2ves, Ra2ng
Agencies
MFT
Regulators, Supervisory
Bodies, Consumer Donors & Investors
Protec2on Agencies
26

27. 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

28. 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

29. 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

30. Par8cipa8on Rewards
30

31. Endorse MFT
We invite all to
sign our
endorsement
statement,
commimng to
transparency in
pricing and
educa2on of MF
stakeholders
31

32. 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

33. 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.

34. 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

35. 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

36. 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

37. Standardized Repayment Schedule

38. Standardized Pricing Disclosure Repor8ng

39. Standardized Pricing Dissemina8on

40. Standardized Pricing Dissemina8on

41. MFTransparency also does
Pricing Cer8fica8on Reports
(in countries where we are not ac8ve)

42. 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

43. 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

44. 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

45. 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

46. Promo8ng Transparent Pricing
in the Microfinance Industry

47. Promo8ng Transparent Pricing
in the Microfinance Industry