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

1. Promoting Transparent Pricing in the Microfinance Industry Session I: Why We Need Transparent Pricing in Microfinance South Africa | February 2011

4. Microfinance started ago as an innovative experiment to help the poorAnd was rewarded with the 2006 Nobel Peace Prize

6. Microfinance has evolved into an established, fast-growing businessBut has some activity gotten too commercial?

7. …the media continues to be skeptical Wall Street Journal, April 2010

8. …the media continues to be skeptical New York Times, Front Page, April 2010

9. Maintaining a Healthy Industry Consumer Protection through: Self-regulation Certification Codes of Ethics Transparency of Financial Information Financial Statements Ratings Agencies Transparent Pricing Dialogue with governments about appropriate regulation

10. MFTransparencyLaunched at the Microcredit Summit in Bali July 2008

11. The Importance of Pricing Transparency MFIs sell products Products have prices Micro-credit prices are extremely confusing If buyers don’t know true prices, the market doesn’t work If buyers get abused, microfinance becomes a tarnished industry Transparent pricing protects the poor and protects the microfinance industry

12. A Fundamental Issue:There is no one price for all loans:Prices vary according to loan size, changing dramatically as loan size decreases

18. A Fundamental Issue:Costs are relatively flat…WhereasIncome is directly proportional

19. Costs are relatively flat relative to loan size. It costs nearly as much to make a $100 loan as a $1000 loan.

20. Income is generated as a percentage of the loan amount and therefore highly correlated to loan size.

21. For a given interest rate, there is a point where income from a single loan will be equal to the costs of that loan. This is the “breakeven point”.

22. If an institution wants to deliver smaller loans at the same interest rate, they will lose money. What must they do if they want to make these smaller loans financially sustainable?

23. They need to raise the interest rate, say from 30% to 40%.

24. As the loan size decreases, the interest rate must continue to increase in order to have a viable loan product.

25. We can create a graph correlating loan size to financially sustainable interest rates and it forms a distinct curve. (Note that figures and interest rates in this curve serve only as examples and are not figures specific to the microfinance industry.) Higher costs for smaller loan amounts require significantly higher interest rates for sustainability

26. Cost Components that Affect Pricing

27. In the Philippines, we find a curve very close to our theoretical curve. And notice the Operating Cost Ratio range.

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

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

31. Pricing for Different Products

32. Portfolio Yield Isn’t Enough

36. What causes microloan prices to decline over time? Competition? Increased Scale? Improved systems and technology? Or… How much of it is related to changes in loan size?

37. Average Global Balance: 165 USDWeighted Average Yield: 32.82 % 2003

38. Average Global Balance: 187 USD Weighted Average Yield: 31.14 % 2004

39. Average Global Balance: 222 USD Weighted Average Yield: 29.85 % 2005

40. Average Global Balance: 291 USD Weighted Average Yield: 25.17 % 2006

41. Average Global Balance: 428 USD Weighted Average Yield: 22.61 % 2007

42. Average Global Balance: 570 USDWeighted Average Yield: 23.86 % 2008

43. Time Series: 2003-2008

44. Time Series: 2003-2008

45. CMAC Sullana (Peru) 43 Price reductions due to improved efficiencies? Economies of scale? Increased competition?

46. CMAC Sullana (Peru) 44 As we deliberate on what is “responsible pricing”, we must look at other factors, including loan size, loan purpose, loan term, and national market conditions.

47. Now we look at graphs of Portfolio Yield and see that the shape of the graph very closely follows that of the Operating Cost Ratio.

48. WhatwouldhappenifanInterestRateCapwerepassed?

49. These loan productswoulddisappear….

50. Whilethese loan products at abovemarketrates, wouldremain.

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

52. 50 Value of Pricing Transparency “Transparency is the root of every healthy industry. It is fundamental to good business practices.” Asad Mahmood, Deutsche Bank “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.” Maria Sara Jijon, WAM/Ecuador

53. 51 Responsibility to Customers “MFTransparency aims at giving MFIs information to offer better value to customers…. We applaud the effort.” Elizabeth Littlefield, CEO, CGAP/World Bank “It is our duty to clearly communicate true prices to our clients. MFTransparency is taking this very important initiative in the world of microcredit.” Muhammad Yunus, Grameen Bank

54. 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 competing loan products or MFIs based comparative 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

55. 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

56. Promoting Transparent Pricing in the Microfinance Industry