Ecuadorian Innovations in Regulating Pricing Transparency
As I mentioned in my last blog post, I would like to share some insights on Ecuador’s regulatory framework for the microfinance sector and advances in the area of transparency.
Regulations that Support Transparency in Pricing
Ecuador’s regulatory framework already includes several mechanisms for facilitating transparency in pricing. For instance, financial institutions can only charge interest on the remaining balance of a loan, which effectively outlaws flat interest rates. Moreover, regulated institutions are no longer allowed to charge fees. Both these aspects make loan pricing more transparent, allowing borrowers to better understand what they are paying and to compare between the different products available to them. In all marketing materials, financial institutions are required to specify the nominal and effective annual interest rate, the frequency of interest payments and the loan term (Regulación No. 153 del Directorio del Banco Central del Ecuador). The regulation also establishes that all product documentation has to clearly specify the loan amount, term, payment frequency and the nominal and effective annual interest rate. The formulas to calculate these figures are defined in the regulation as well.
The Central Bank publishes a weekly bulletin on interest rates where the weighted average of the effective interest rates is disclosed for different loan terms according to type of financial institution for each loan type segment. Unfortunately, the pricing data currently published is generally aggregated and only incorporates the prices of regulated institutions. Many industry stakeholders are very interested in the detailed, product-specific pricing data our team will collect for all institution types. The policy framework for consumer protection in Ecuador is also strong compared to other countries in the region. The General Consumer Protection Law includes specific provisions on transparency, such as the client’s right to know the true price of the products and services offered in the market.
Interest Rate Caps Implemented by Three-Tiers, Correlated to Loan Size
Ecuador is the first country where we are implementing our Transparent Pricing Initiative that maintains an interest rate cap. The Central Bank defines 3 segments of microcredit according to loan size ranges and establishes a specific maximum rate for each of those segments. The maximum rates are determined on a monthly basis and have been steadily decreasing over the last few years. During the week of our project launch, the interest cap was reduced from 33.90% to 30.50% for the first microcredit segment, and from 33.30% to 27.50% for the second microcredit segment. It remained at 25.50% for the third microcredit segment. Adapting their pricing accordingly was a key challenge that many MFIs expressed to us during the week we were in the country. The cap includes all costs to the borrower, except for insurance costs, tax and the effect of compulsory savings.
Over the next few months, we will continue to work closely with the local microfinance industry to address the potential disincentive the cap may present for some MFIs to participate in our transparency project. This experience will also be helpful for our work in West Africa later this year, where several countries have interest rate ceilings.
We will soon prepare a more detailed case study on the regulatory framework for microfinance in Ecuador based on our experience gained throughout this project and insights from key stakeholders of the local industry.
Check back in the next few days for an update on the highlights of our trip to Bolivia.