Interest Rate Transparency in Brazil: Addressing Cultural Questions
by Martin Hadsell do Nascimento
Brazilians, as I’ve learned from having lived in the Northeast of the country over the past several months, love credit. Common are the signs sitting in most São Paulo storefronts that advertise the interest rate of products by the “vez”. The number of “vezes” or “aprestações” is the number of months across which the full price of a product can be divided, giving the consumer the number of installments in which one is allowed to pay for a good that can range from a car to a cellular phone to a t-shirt to a plate of beans and rice. Given the strictly monthly nature of such installment plans, perhaps it is logical that the interest rates associated with the purchases be denominated in monthly terms. However, when applied to Brazil’s microfinance industry, denoting prices in familiar monthly terms may also hide important factors that influence the true price of the loan.
In Brazil, it is common practice for MFIs to publish microloan product interest rates in ‘monthly’ terms as opposed to ‘annual’ or ‘effective’ terms. Plainly put, instead of informing a client that she will end up having to repay an annualized rate of 30% of a loan offered her, clients are typically informed by Brazilian MFIs that they will be asked to pay a monthly interest rate of between 2-5% on their loan (depending on loan repayment frequency, loan term, grace periods, interest rate method used, and other factors). For example, CrediAMIGO, Brazil and South America’s largest MFI, advertises a 1.32% interest rate on it’s “Giro Popular Solidário” (Solidarity Group) loan product. Nonetheless, the fine print of its brochures recognize that an effective interest rate (EIR) recalculation of the posted rate can result in an EIR of ranging from 33.33% to 62.71% annually, depending solely on the term of the loan.
Despite the confusing and muddying effect of using monthly rates in microfinance lending, in Brazil it is common to report interest rates on loans in monthly terms. This is certainly true for car loans. And real estate loans. And consumer credit. And interest on savings. In fact, just about anything that involves the payment of interest is quoted in monthly terms as opposed to the annual or effective terms so prevalent in the United States and Europe. Indeed, interest rates quoted in monthly terms are so ubiquitous that to denote them otherwise would likely confuse the majority of Brazilians. Given the low-level of financial literacy, quoting a true annual equivalent would likely send clients running in the other direction where borrowing is concerned.
This fact has a profound impact for those of us involved in thinking about interest rate transparency in microfinance. The cultural dimension of how societies are accustomed to denoting interest rates must be taken into account as well. In the case of the Brazilian MFI named CEAPE-SE (Centro de Apoio aos Pequenos Empreendimentos-Sergipe), rates are quoted in monthly terms “not in order to confuse clients but for precisely the opposite reason: because clients may not understand rates if advertised in annual or effective terms” according to Tereza Faro Passos, director of the organization.
But the fact that Brazilians are used to monthly interest rates does not negate the fact that these rates can hide the true price of the loans.
While on the one hand those working in the international arena must be dedicated to respecting differences that may exist between cultures, on the other hand we must realize that beyond the short-term there are real dangers involved in posting prices in monthly terms as opposed to annual or effective terms. In order for clients to make informed decisions, they must be able to compare rates. For this to happen, rates must be standardized, and the current posting of monthly rates does not occur in a standardized fashion. As demonstrated above and elsewhere, it is possible for the true cost of borrowing to be hidden in interest rates calculated in monthly terms. Without standardization, clients, MFI staff, donors, and researchers alike will experience greater difficulty in understanding the full cost of borrowing, to the detriment of either their personal financial situation, their functioning of their industries, or their reputation and professional credibility.
The answer to the question of what can or should be done in such a situation necessarily involves the participation and buy-in of local microfinance industry stakeholders. For those of us who are accustomed to looking and working beyond our own national borders, the question of the respecting cultural differences while addressing sub-optimal market circumstances is one that can be difficult to navigate, but it is important none the less. Ultimately, we must work to create trust and understanding in order to be able to distinguish between cultural norms and price obfuscation so that we can promote true poverty alleviation and economic development through microfinance.
Martin is a former intern for MFTransparency who has spent the past few months living and studying in Brazil.