1. Financial Systems for the Majority: Costs and Pricing of Loan Products Chuck Waterfield MicroFinance Transparency Micro Credit Summit, Cartagena, Colombia 8 June 2009

2. Overview There are significant differences in market segments for microfinance We need a range of micro-loan products to reach the majority Each product range has significantly different costs Therefore, each product range needs significantly different prices That range of prices has important implications for the future of microfinance

3. We use data from the MIX to create a graph correlating the Average Outstanding Loan Balance to the Operating Cost Ratio and it forms a distinct curve.

6. Common industry benchmark of 15-20% OpCost Ratio is appropriate for larger loans

7. But smaller loans generate an Op Cost Ratio well in excess of 20%

8. Prices for different Products

9. Calculating the Operating Cost Ratio Operating Cost / Loan Portfolio We will do an analysis at the level of a single loan Costs for a single loan Cost to initiate the loan (once per loan) Monitoring cost (monthly cost) We annualize these cost “Portfolio” – for a single loan Initial loan amount divided by 2

35. What would happen if an Interest Rate Cap were passed?

36. These loan products would disappear….

37. While these loan products at above market rates, would remain.

38. Price differential on larger loans leads to much higher profits

40. TheIncomeDistributionPyramid

41. TheIncomeDistributionPyramid Individual Lending Solidarity Groups Village Banking Self-Help Groups

42. TheIncomeDistributionPyramid Individual Lending Solidarity Groups Village Banking Self-Help Groups

43. Reaching the Majority Microcredit delivery costs are highly dependent on the loan amount What important steps are needed in order to have financial systems that work for the majority? Educate on what factors influence costs and prices Transparency of pricing information to make true costs clear for all stakeholders Use SHG/VSA to get the smallest loans to the poor