Transparency at the Consumer Level
I visited AlSol, a Mexican NGO MFI serving women in mainly rural and indigenous communities in the State of Chiapas, several months ago. Together with one of AlSol’s loan officers and two tsotsil-speaking trainers I visited a solidarity group of women entrepreneurs in the community of Zinacantán, near San Cristóbal de las Casas. AlSol’s training program is targeted at illiterate women entrepreneurs below and just above the poverty line. It was fascinating to be part of the participatory training and see how openly the group of women discussed topics such as debt management, business development, and preventive health practices with the trainers. Their secret of success? They work with the trainer’s guides developed by Freedom From Hunger and adapt the details of each training session to the Chiapas context.
Over the last few weeks, I have been reviewing the Global Financial Education Program led by a strategic partnership between Microfinance Opportunities and Freedom from Hunger. The Financial Education Curriculum is targeted at households below and just above the poverty line in developing countries. So far, I have focused my review on the core curriculum which consists of five modules: budgeting, debt management, savings, bank services and financial negotiations. More recently, the Global Financial Education Program developed four new modules targeting specific populations and specific products: young people, remittances, risk management and insurance, and consumer protection. In addition to a content note, trainer’s guide and training-of-trainers manual, each module includes an implementation guidance manual, covering technical information on market research, the principles of adult learning, and measuring outcomes. MFTransparency has defined the development of educational materials for the consumer level as an important priority for 2010-2011.
Our team is going to create, develop and tailor appropriate materials for the unique and diverse microfinance markets around the world, using proven financial literacy models and lessons learned from other countries around the globe. Such training programs and educational materials for clients may also be developed in partnership with leading organizations in the area of financial education. Our materials will include explicit training guides as well as templates MFIs can use to better disclose the true cost of loan products to their clients. We will translate all of these guides and templates into a range of languages and make them available for download on our website. Our intention is to provide guidance on how to use these materials at industry conferences and during webinars.
This initiative for transparency at the consumer level is aimed at helping clients understand interest rates and compare products from different lenders. One of the challenges is that clients are often not familiar with annual percentage rates or effective interest rates, so beyond disclosure of APR and EIR, it’s important to educate borrowers on how to use APR/ EIR as a tool for comparison that allows them to make informed decisions. Moreover, I believe an understanding of the basic concepts of APR/EIR will enable borrowers to observe the impact different product features – such as grace period, compulsory savings, calculation method, fees and commissions – have on the true cost and take these effects into account when comparing loan offers.
What’s the incentive for MFIs to educate microfinance clients? Their social bottom-line and commitment to consumer protection is perhaps the most prominent reason for MFIs to educate their clients about financial products and pricing – responsible finance also means treating clients as equal partners. Beyond the social mission, for MFIs with prices below the market average (by definition half of all MFIs in the market), it’s a powerful incentive to advertise this fact to their own and their competitor’s clients and educate them about how to compare prices by using APR/EIR as an indicator that allows for enhanced comparability. It’s in their business interest to do so.