Calculating Transparent Prices in Malawi – Overview of Methodology
The true price of a loan takes into consideration pricing techniques that influence the amount of money the client actually has and the amount of time the client has use of that money, including not only interest but additional mandatory charges such as fees, security or cash deposits, commissions and other charges. The “true price” of a loan refers to the cost of borrowing from the perspective of an individual borrower, not the aggregate cost for a group of borrowers.
In Malawi, many MFIs disburse loans at the group level and only produce loan documentation at the group level; they do not produce separate repayment schedules for each group member. This makes sense from the institution’s perspective because they are disbursing one loan to a group and receiving payments on one loan from the group. However, each group member may receive a different loan amount, which results in varying repayment amounts. Therefore, a group loan is actually several separate individual loans bundled together. From the perspective of a client, she has a unique and individual cash flow during her repayment period that results in a unique and individual “true price”. As such, prices in Malawi should be represented at the client level, as in other countries, and not on the group amount. The value in this dataset lies in the ability of all stakeholders to understand and apply the information it reveals. In order to facilitate a thorough understanding of pricing data, and to uphold the principle of transparency that we promote throughout the world, we will explain the unique methodology we used to calculate transparent prices in Malawi.
Calculating Individual Prices from a Group Repayment Schedule
The pricing dataset for Malawi is a bit different from the others we have published in terms of the calculations used. In all cases, we calculate the Annual Percentage Rate (APR) and Effective Interest Rate (EIR) of each independent loan from the actual repayment schedule given to the client for that loan. In the absence of repayment schedules for individual loans within a group lending methodology, MFTransparency developed a system of averaging to identify the approximate price of each loan at the individual level, even within a group scheme. The methodology we used is as follows:
Group Loans Without Individual Documentation – No Fixed Fees
To calculate the APRs and EIRs for group loans without individual repayment schedules, where no fixed fees are charged, we used the following steps:
- Calculate APR/EIR for group loan: We calculated the APR/EIR of the group loan as a whole, using the repayment schedule of the entire loan. For example, if the group loan was MKW 300,000 then we calculated the APR for a loan of that size, even though in reality it was divided into separate smaller loans among the group members.
- Determine average individual loan amount: If there are 10 members in the group receiving one loan of MKW 300,000, the average loan size for each member is MKW 30,000. Although some members may have a loan bigger or smaller than MKW 30,000, calculating the APR and EIR of a MKW 30,000 loan can be considered “representative” of the price paid by each member of the group.
- Calculate APR/EIR for individual loans: We then calculated the APR and EIR of the average individual loan amount within the group. This is actually the same as the APR/EIR of the total group loan amount. This is because for two loans of different sizes, as long as term, repayment frequency, nominal interest rate and the percentage of the loan amount paid in fees are the same, then the APR/EIR are also the same. In other words, if all these factors are fixed then APR/EIR is the same, independent of loan size.
- Label all averaged loan prices: On the interactive graph, each price that was determined through this averaging method has been labeled. Hover over a dot on the graph to see more information about the loan it represents. If a given price has been calculated using an average loan amount, we have noted it.
Group Loans Without Individual Documentation – Fixed Fees
When we say “fixed fees” we refer to fees that specify an amount rather than a percent, for example a loan processing fee of MKW 1,000 rather than 1% of the loan amount. We must account for the different amount in fixed fees paid by each group member in our APR and EIR calculations. To calculate the APRs and EIRs for group loans with fixed fees and without individual repayment schedules, we followed the following steps:
- Calculate APR/EIR for group loan EXCLUDING fixed fees: We followed Step 1 as above except we did not include the fixed fees in the APR/EIR calculation as we normally would.
- Determine average individual loan amount: We followed Step 2 as above.
- Calculate APR/EIR for individual loans EXCLUDING fixed fees: We calculated the APR/EIR for each individual loan amount, as described in Step 3 above. This still does not take into account the fixed fees.
- Calculate increment of APR/EIR that fixed fees account for: In order to determine the incremental effect of the fixed fees on the APR/EIR of each group member’s loan, we used the following formula:
Increment of APR/EIR that fixed fees account for = Total amount in fixed fees / Average loan amount
We first found the sum of the fixed fees. For example, suppose a group must pay MKW 1,000 as a loan processing fee and MKW 120 as a funeral expense cover. The total amount in fixed fees that the group as a whole is responsible for is MKW 1,120. We then divide this sum by the average, or individual loan amount. Let’s say for this example that the average loan amount is MKW 10,000. The incremental amount of APR/EIR that fixed fees account for in terms of each group member’s loan is therefore 0.112 or 11.2%.
- Calculate APR/EIR for individual loans INCLUDING fixed fees: We added the incremental amount that fixed fees account for to the APR/EIR we calculated for the average loan amount in Step 3. For example, if the APR for the average loan amount was 20% and the increment of APR/EIR that fixed fees account for was 11.2%, then the APR including fixed fees for each individual group member’s loan is 31.2%.
- Label all averaged loan prices: As in Step 4 above, all prices calculated using these steps are labeled as such on the Malawi Market graph.
While this method produces prices that are closer to those actually paid by each individual client than the price of the group loan, they are approximations. Without an individual repayment schedule for each group member’s loan it is impossible to determine the exact cost of borrowing for each group member. This is a major limitation of only providing group loan documentation.
Prices Calculated with Average Loan Size Methodology
While the methodology described above provides a good approximation, the dataset as a whole is still less precise than it would be if prices were calculated from individual repayment schedules. In particular, we have used the approach described above to calculate prices for the following products:
|Opportunity International Bank of Malawi (OIBM)||Maziko (Group Loan)
|Malawi Rural Finance Company (MRFC)||Agriculture Loan|
|Microloan Foundation||Standard Loan
Knitting & Sewing Loan
|Malawi Rural Development Fund (MARDEF)||Group Loan|
|Finance Trust For The Self Employed (FITSE)||Agriculture Loan I (Irrigation Loan)
Agriculture Loan II (Rain fed)
|Finance Cooperative Limited (FINCOOP)||Female Group Loan
Group Business Loan
|FINCA Malawi Ltd||Village Banking Loan|
|CUMO Microfinance Ltd||Agriculture Loan (Fumba)
Village Enterprise Loan (Masika)
It is our hope that the various rates we have calculated and displayed for MFTransparency’s Transparent Pricing Initiative in Malawi will help MFIs, regulators and other industry stakeholders in Malawi to work together towards defining a standard interest rate calculation and loan documentation system for all microfinance institutions in the market. We also hope this works helps build consensus on reporting standards in order to be transparent and protect the rights of consumers. It is important to always consider the true price of a loan from the point-of-view of the client – how much money does a client have to spend in order to access a loan? It is only when we take into account the actual cash flow of each specific client that we can accurately understand how much a loan costs. We believe that by considering the cost of borrowing from the client’s perspective all stakeholders in the industry can use the pricing data we have collected in Malawi for the strengthening of the market as a whole.