Frequently Asked Questions
- How will MFTransparency collect data?
- How will MFTransparency ensure the accuracy of data reported on its website?
- Will public knowledge of APR interest rates lead to government regulations that restrict the supply of credit?
- Will small-scale investors or social investors unfamiliar with microfinance interest rates be alienated from microfinance due to these disclosures?
- Isn’t this same information on prices available by reviewing other data sources, such as the MIX, or by calculating portfolio yield from financial statements?
- Will you incorporate penalty interest or non-payment fees?
- How can I compare APR interest rates from one country to another?
How will MFTransparency collect data?
All APR pricing calculations will come directly from actual repayment schedules for each product offered by the MFIs. Our goal is that all repayment schedules be provided directly from the MFI in order to confirm accuracy of the information and minimize complications and misunderstandings that can occur when communication passes through multiple channels. We will ask for supplemental basic product information as well, but most of the supplement information is not essential to the APR calculation. Collecting repayment schedules from every loan product offered by every MFI in the world requires a systematic, semi-automated, and accurate approach and that will be one of our principle goals. We will phase in our coverage, focusing at first on a limited number of countries and then expanding country-by-country to global reporting. Analysts will work in teams to review odd or unusual data, and they will cross-check data with information available from other sources.
How will MFTransparency ensure the accuracy of data reported on its website?
Accuracy is one of the paramount values of MFTransparency. Accuracy starts with MFI staff, who know the products best, with the ability to follow a simple questionnaire and then send the repayment schedule (either scanned or by fax) to MFTranparency where the amounts are verified by MFTransparency staff. Every repayment schedule used to calculate the reported APR will be available on the MFTransparency.org website for all to see and comment if there are discrepancies. If an MFI is tempted to deliver a falsified repayment schedule to MFTransparency, they must balance that temptation with the awareness that competitors, journalists, regulators, and industry analysts will all have access to that repayment schedule and will almost certainly and quickly bring attention to any falsified data. In addition, we have a system for auditing schedules and resulting calculations on a random basis as well as identifying outlying data which will be selected for 100% verification.
MFIs may contact us at anytime if they feel the data is incorrect. We work in partnership with the MFIs, but we insist on mutual commitment to transparency and honesty. Every attempt will be made to contact the MFIs to verify their schedules and dialogue with an appropriate individual regarding the accuracy of the submitted data. MFIs will be able to update schedules whenever their prices change, and we will do regular, systematic follow-ups and reminders to ensure that data is kept current.
Will public knowledge of APR interest rates lead to government regulations that restrict the supply of credit?
The mainstream public media is already reporting the level of interest rates typically charged in microfinance. What was little known just a few years ago is now publicly-available knowledge, but there is little explanation or understanding of why microfinance interest rates are higher than previously believed, nor why there is significant variation in interest rates among different institutions. MFTransparency is not “breaking the silence” that we have had for some twenty years about true interest rates. Rather MFTransparency is creating a forum for the industry to report – in a clear, consistent and fair fashion – what actual interest rates are and why interest rates in competitive microfinance markets need to be higher than in commercial finance.
Partly motivated by the lack of pricing transparency in microfinance, well-intentioned politicians and regulators in a number of countries have chosen to use regulation or legislation to limit interest rates charged by MFIs. We firmly believe this is a mistake and is not the purpose of MFTransparency. We support truth-in-lending legislation, but we oppose simplistic interest rate cap legislation. We will provide analysts, donors, investors, journalists and others with accurate, consistently calculated, information that will allow them to draw informed conclusions. Our educational components will clearly inform why interest rates in microfinance must be higher than interest rates charged on larger, formal-sector loans.
Regulators and politicians often get involved in placing ceilings where industries are not self-regulating. Without accurate and complete information, ceilings will be established “by feel” rather than through educated study, often resulting in unintended consequences. MFTransparency will be the first and most comprehensive website to accurately and transparently inform the world about microfinance product pricing and to educate all stakeholders on microfinance interest rates. Politicians and regulators will be encouraged to see that MFTransparency, along with other initiatives focused on client rights, come from the microfinance industry and are positive steps toward a self-regulating industry.
Will small-scale investors or social investors unfamiliar with microfinance interest rates be alienated from microfinance due to these disclosures?
Small-scale investors should not be alienated to microfinance when they understand competitively-set interest rates paid by the borrowers. In fact, we believe the opposite will be true. Microfinance investors will be empowered with interest rate information and will be able to understand exactly how much the MFI is charging its borrowers. This empowering information will more perfectly align investors’ beliefs and the MFI’s interest rate policies where currently no such parity is possible. The graphical nature of the way interest rates will be presented on the MFTransparency website will quickly educate the investors about interest rate differences by country. Investors will be able to quickly identify if 40% is low, medium, or high in a given country. We believe that interest rate transparency will actually encourage, not discourage, microfinance investment.
Isn’t this same information on prices available by reviewing other data sources, such as the MIX, or by calculating portfolio yield from financial statements?
Portfolio yield (interest and fee income divided by average loan portfolio) is calculated with the institution in mind. The APR is calculated with the client in mind.
Back when MFIs had one product per MFI, the portfolio yield was a useful proxy. When MFIs started adding more products but were unsophisticated in product pricing and had nearly the same price on each product, portfolio yield was still sufficient. But this is no longer the case. When an institution offers multiple products to varying market segments, all priced at different amounts, the average portfolio yield becomes highly misleading for understanding what clients are actually paying. An MFI with an average portfolio yield of 30% can be charging 25% on one product and 80% on another product.
In addition, there is currently no comprehensive source – even of average portfolio yield – for the microfinance industry. The MBB provides peer group averages but does not provide portfolio yield for each MFI. The MIX data, which does have information on individual MFIs, provides financial income as a percentage of total assets but does not report portfolio yield. With effort, MIX data can be analyzed to estimate average portfolio yield, but their data set consists only of a limited number of MFIs who voluntarily provide their financial statements for analysis.
Finally, it is possible that there is a gap between what the MFI charges and what it “yields”. The portfolio yield almost always under-reports what the client is being charged. The APR is an accurate, objective measure of what the client is legally required to pay at the moment the loan contract is signed.
Will you incorporate penalty interest or non-payment fees?
Our APR formula calculates what the client is legally required to pay assuming the client respects the contractual repayment schedule. Clients who fall behind in payment may pay higher fees, but these are not considered part of the APR formulas legislated in countries with truth-in-lending laws.
How can I compare APR interest rates from one country to another?
Since our primary purpose is to provide country-level transparent data to encourage free-market competition within each country, we have chosen not to compare interest rates between countries, nor to benchmark or relate the interest rates based on GNP (Gross National Product) or minimum wage data. Such analysis is interesting and valuable, but it goes beyond the goal of MFTransparency to increase transparent communication within a closed market of pricing between providers and consumers of microcredit products. For those wishing to study the effect of GNP on loan sizes and interest rates, GNP data is available country wise at: http://www.mixmarket.org/mfi