Bolivia Transparency Part 1: Pricing Strategies & Challenges
As promised in my last blog post on the Bolivia launch, I’d like to share some insights on the regulatory framework in Bolivia and outstanding transparency efforts we learned about during our initial trip to Bolivia where we recently launched the Transparent Pricing Initiative. Over the next few days I’ll be providing a series of posts to tell you a bit about what we’ve discovered. In this first part, I’ll focus on pricing strategies in Bolivia as well as challenges associated with current pricing practices and general challenges currently perceived in the local microfinance community.
Pricing is pretty sophisticated in the Bolivian microfinance market and our initial trip to the country was a great opportunity to learn about various perspectives on the current pricing environment from a range of stakeholders.
During the in-country launch of our Initiative, we realized that variable interest rates are very common among financial institutions in Bolivia. Several local MFIs told us clients are no longer misled by hidden costs due to fees – a new challenge is the common pricing strategy of charging variable interest rates. During the first few months of the loan term, the client is often charged a fixed interest rate which then changes to a variable rate. The variable rate is equal to the Central Bank’s reference rate (TRe) or an international rate published by the Central Bank, plus a spread. Various key stakeholders informed us that many microfinance clients don’t understand the concept of variable interest rates and are often surprised and upset when the fixed rate suddenly changes to a variable rate. This is an important challenge we will seek to address when developing our educational materials for the local microfinance industry in Bolivia.
Both calculation methods, flat and declining balance, are used by Bolivian MFI and likewise a few institutions told us during our in-country meetings that many clients are still misled by seemingly low interest rates that are actually much higher as interest is charged flat. We also learned that some funders require MFIs to offer loans at subsidized rates and have consequently updated our data collection tool to include this new aspect affecting pricing decision.
Another interesting finding from our meetings with some of the leading MFIs is that prices vary according to many factors in the Bolivian microfinance sector and there is almost always room for negotiation. Among the common pricing variation factors are the time the client has been with the MFI, the risk of the client as well as the number of loans the client currently holds, and it is also worth noting that only those clients who actively negotiate obtain a discount. This makes financial negotiation skills an important topic for any educational materials tailored to microfinance clients in Bolivia.
As for other challenges, our workshops and meetings revealed a general concern among MFIs that the government might push interest rates down to unsustainable levels. A striking number of MFIs also raised concerns at the current risk of client over-indebtedness. Some of our meeting partners showed us the extensive record they keep of each client’s payment history, which revealed that various clients had taken out loans from several MFIs at the same time. This information is made available by the local credit bureaus. However, representatives of the local microfinance community fear that high levels of competition from downscaling banks might force MFIs to cut down on operating costs and lead them to conduct a less thorough analysis of the borrowers’ debt capacity.
My next post will focus on interest rate disclosure to clients and the public.