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Ethiopia’s practice of responsible pricing

Published on January 19, 2012

Home to one of the world’s fastest growing microfinance sectors, and with one of the largest microfinance markets in Africa, Ethiopia and its microfinance pricing dynamics are of keen interest to the industry. MFTransparency’s work in Ethiopia has provided a unique insight into a market where several MFIs have achieved financial and operational sustainability whilst at the same time maintaining a strong social mission and very low product pricing. We were pleased to see many examples in Ethiopia on the practice of responsible pricing.

Concluding months of research and analysis we launched our transparent pricing dataset for Ethiopia last week. This can be viewed here, accompanied by a webinar recording of MFTransparency’s CEO Chuck Waterfield giving an overview of the data. The interactive dataset includes institutions serving more than 2 million active clients with over 1,000 branch networks across the country. Many interesting themes can be seen within the data, including a strong focus on enterprise financing and lengthy average loan terms. Amongst the trends seen, MFTransparency research highlights that:

  • Ethiopian microfinance institutions are demonstrating the successful large scale use of declining balance methodologies. Some of Ethiopia’s largest institutions, representing a significant portion of the market share, use declining balance interest rate for the price calculation of all of their products, and have been doing so for many years using manual amortization tables to ensure the highest level of transparency for clients.
  • Ethiopian microfinance institutions have moved away from traditional group lending methodologies. Nearly 65% of the lending methodologies cited within our dataset were for individual loans, with 35% using group loan methodologies. This focus on individual lending shows Ethiopia’s institutions are catering for the cash flow and credit needs of their clients individually rather than as a homogenous group.
  • Ethiopian microfinance institutions are charging some of the lowest interest rates in Africa. It is striking that some of these institutions can charge these low prices whilst maintaining sustainability. This has been achieved largely through the low cost of operations. However, challenges facing the industry such as high inflation, increasing competition and the professionalization of the industry will see a growing need for more sophisticated pricing techniques. MFTransparency’s research will be valuable in helping Ethiopia’s institutions price their products appropriately.

Participation of microfinance institutions in our Transparent Pricing Initiatives is voluntary, and involves microfinance institutions working with us to thoroughly assess their product pricing and client documentation. Institutions representing 96% of the market (by active borrower numbers) participated by voluntarily submitting their data, indicating how highly valued transparency is within the Ethiopia’s microfinance industry.  We wish to express our thanks to Ethiopia’s microfinance institutions and staff for their support and efforts to provide all the necessary information, in some cases from remote branches.

Whilst social performance and client protection is verbally supported in the Ethiopian microfinance sector, the work of MFTransparency, and various other organizations in the field of consumer protection, aims to enable Ethiopia’s microfinance institutions to catalyze this endorsement into concrete impact. One of the challenges we noticed in Ethiopia was the lack of clear client documentation given by some institutions to their clients. Our website provides resources offering solid solutions to this, enabling institutions to communicate the true cost of their loans more transparently with clients. Our tools are also available to all institutions to help them calculate their loan prices, allowing them to set a product pricing strategy that both upholds the sector’s social mission and encourage the industry’s sustainability. We are excited to see how the microfinance sector in Ethiopia will develop and evolve over the coming years, and in turn how the rest of the industry can learn from some of the impressive examples of transparent pricing practices seen by Ethiopia.

One Comment

  1. Yusuf says:

    That is good sucess from that sector and this is the results of our cometed political leadership

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