MFTransparency Launches Microloan Pricing Data at Industry Conference in Quito, Ecuador
Some exciting recent accomplishments of MFTransparency’s Latin America team are the data launch conferences we recently hosted in Ecuador and Bolivia. In this blog post, I’d like to share a summary of the Ecuador conference which took place in Quito on November 30. Stakeholders drawn from a wide spectrum of the Ecuadorian microfinance industry actively participated in the data launch conference in Quito, among them MFIs, the local network Red Financiera Rural (RFR), the Superintendency of Banks and Insurances (SBS), the World Council of Credit Unions (WOCCU), social investors, rating agencies, and industry support institutions. At this conference, MFTransparency displayed the Ecuadorian microcredit pricing data for the first time in history and engaged in lively dialogue with industry leaders on the local market, the government policies to restrict predatory lending as well as local pricing structures. Javier Vaca, CEO of RFR, early collaborator in the Transparent Pricing Initiative in Ecuador, joined Chuck Waterfield in welcoming the diverse audience. One of the highlights of the day was certainly the keynote speech given by Iván Velástegui, General Director of the
“I applaud MFTransparency’s achievements by holding this type of event which, with the support of the institutions involved, not only represents benefits for the consumer of financial services, but also has a positive impact on the financial institutions themselves by having clients who are better informed and more aware of their rights as well as their responsibilities.”
– Iván Velástegui, General Director, Superintendency of Banks and Insurances (SBS)
Superintendency of Banks and Insurances (SBS) who inaugurated the conference, highlighting the importance of the Transparent Pricing Initiative in Ecuador and the value of the results of data analysis launched. As a strong supporter of our Initiative since its launch in April 2010, we greatly appreciate the superintendency’s invaluable contributions to our conference and overall initiative.
Presentation of Pricing Data
The brand new pricing data published on our website represents a significant share of the local microfinance market (based on figures from the MIX, RFR members and submitted to MFTransaparency) with approximately 88% in terms of gross loan portfolio, and 79% of active borrowers, at this initial stage of the initiative. Of participating MFIs, 69% are unregulated and had not previously reported their loan prices to any other initiative, so their decision to make the pricing of their microcredit products transparent was entirely voluntary. For our analysis of Ecuador data, we used the national formula defined by the Central Bank of Ecuador to calculate the effective interest rate, called “TEA” by its Spanish acronym. This calculation method mirrors the EIR formula widely used in countries around the world, but does not include insurance charges while it does incorporate the effect of compulsory savings. On our website, we publish the results of the national calculation method along with our usual APR and EIR calculations. In a separate blog post, I will share some insights on the national formulas used to calculate annual interest rates in different countries across Latin America and other parts of the world.
Pricing is relatively sophisticated among the participating institutions. For 41 products (46%), interest rates can vary for the same loan product according to different factors. Loan size is the most important pricing differentiation factor, determining the interest rate for 56% of the 41 products, followed by client profile and risk (24%), loan purpose (17%), collateral (15%), length of time as a client (10%) and branch office location (7%). For most products there are multiple factors that determine the interest rate paid by each client. An overwhelming majority of Ecuadorian MFIs charge interest rates on the declining balance, and flat interest is pretty uncommon in the local market. Another positive feature of the Ecuadorian sector is that commissions other than insurance fees are prohibited by law and are also very uncommon among unregulated MFIs. Insurance fees, on the other hand, both at disbursement and throughout the loan term are common, as many MFIs offer credit insurance along with their loan products. At the data launch conference we also presented operating cost analysis, which I will discuss in full in an upcoming post.
The small group discussions led by a range of industry leaders, addressed current industry topics such as the experiences of unregulated MFIs in the promotion of pricing transparency to clients, regulation of the microfinance sector and the business case for pricing transparency. The first breakout session entitled “Experiences of Unregulated MFIs in the Promotion of Pricing Transparency with their Clients” was moderated by our Board Member, María Sara Jijón, who facilitated an excellent discussion between the panelists and audience, addressing topics such as financial literacy training. “Education and training is clearly the only tool that ensures transparency, and those who practice it benefit from it as well as their family and community,” stated Luis Tatés, General Manager of COAC Padre Vicente.
“Both the panelists and participants in the audience shared the same philosophy of social responsibility and expressed their commitment to MFTransparency’s initiative to enhance pricing transparency practices in the local sector and beyond, contributing to a microfinance industry that helps the people it serves escape poverty and access to financial services for the most vulnerable groups of society of any gender and ethnic background”
– Maria Teresa Alarcón, President, WAM Ecuador
Cristian Murgueytio, National Director of Studies of SBS moderated the second session focusing on regulation, which proved to be a popular topic among the conference participants. This session provided a forum for dialogue on public policies to promote a transparent and inclusive framework for microfinance, and address the regulatory particularities in Ecuador. The third group session discussed the business case for pricing transparency. The panelists shared an overview of the most important tools social investors use as a basis for their investment decisions, such as financial reports and the balanced scorecard, which allow them to define parameters for sustainable growth that benefits and protects the clients in microfinance. Moreover, they highlighted the link between MFTransparency’s initiative and the MIX/SPTF Social Performance Report. From the perspective of strengthening financial services, the group discussed the need for MFIs to live up to the commitment with their clients and addressed responsible practices that promote client loyalty and institutional sustainability.
The Practice of Pricing Transparency at the Client Level
This session provided an excellent opportunity for some pioneer MFIs to share good practices that are already well underway in the local microfinance sector. These examples sought to inspire other MFIs in Ecuador and the region to implement transparent pricing practices and effectively communicate the prices of microloan products to their clients. The session also sparked a lively discussion about possible ways to communicate these new insights gained from the dataset to microfinance clients, so that they can directly benefit from it.
We would like to thank all panelists, guest speakers and participants for their invaluable contributions to this important event. For the first time in the history of Ecuadorian microfinance, the prices of microcredit products have been made widely available. Thank you for making this happen! We encourage all MFIs that haven’t submitted data to our initiative yet, to join the 27 Ecuadorian pioneers and participate in this important movement towards transparency.