by Jessica Haeussler and Michael Tucci
How do banks and MFIs in Azerbaijan respond when asked to report their interest and fees publicly in a common APR or EIR format?
How does the shape of the price curve for Azerbaijan differ from other countries?
What factors seem to be driving prices in Azerbaijan?
How much variation is there in price for loans of similar size, and how might transparency change prices over time?
These are some of the questions that were explored during MFTransparency’s Webinar to highlight the launch of pricing data for the Azerbaijani microfinance market. On June 1st, Azerbaijan’s microfinance community took a definitive step towards pricing transparency and market efficiency, as 10 of the largest MFIs had their pricing data displayed publicly on MFTransparency.org. We here at MFTransparency would like to congratulate Azerbaijan on this important step forward and for their commitment to providing straightforward pricing information for their clients and other stakeholders. Additionally, we would like to extend our gratitude to the Azerbaijan Microfinance Association (AMFA) for their cooperation and coordination of the Transparency Initiative as well as to KfW, who funded our work in the Azerbaijan market.
Azerbaijan represented a unique challenge for our team at MFTransparency, as it was our first data collection Initiative in the Caucasus region. However, as we familiarized ourselves with the country and overcame the barriers of timezone and language, we were presented with a vibrant and interesting market. The data collected reveal just how diverse and complex pricing can be both within and between microfinance markets the world over. Our data from Azerbaijan has deepened our understanding of both our own data collection process, as well as the strategies and techniques MFIs employ to price their products. For example, we noted that Azeri MFIs reported a particularly complex method of determining product pricing. The figure below shows the numerous factors that price depends on: 67% of the 36 loan products included in our analysis cites interest rate variation due to the length of time as a client, 64% due to client risk and 53% cite collateral as a determining factor. It seems that Azeri MFIs consider a significant amount of information when determining the exact product price.
The distribution of the quoted price on microloans in Azerbaijan was also interesting. The lowest interest rate quoted for the 36 loan products is 2.25% monthly, while the highest rate quoted equals 45.60% annually. The wide range and the difference in using monthly versus annual rates highlight the importance of having a transparent and standard method for reporting prices. The vast majority of MFIs report interest calculated on the declining balance, which makes pricing more transparent. Only one institution reported to charge flat interest. We also observed that fees are common among Azeri MFIs, but are rarely disclosed on the client’s repayment schedule. This can be extremely confusing for poor clients who are unaware of the effect of service charges and fees on their total payments. The dominating lending methodology in the local microfinance market are individual loans, while other services linked to the product appear relatively scarce.
The pricing curve for Azerbaijan is relatively shallow and we can observe quite a range of prices for similarly sized loan products, for both AZN and USD currencies. Looking at the local currency curve (AZN), there is a large range in APRs, especially for smaller loan sizes, while we can see a bit more of a cluster for larger loan sizes. For local currency loans, non-profits appear to offer relatively cheap loans. Another interesting finding is that private for-profits are below the USD market curve, while several are above the AZN market curve. This raises very interesting questions about foreign currency use in microfinance.
Now that the data has been made public, we’d love to hear your feedback. What is your take on the Azerbaijan pricing data? We very much welcome your insights on the Azerbaijani market for microcredit products and your interpretation of the data available on our website!
Finally, we’d like to one last time extend a Thank You to AMFA and Sevda Huseynova who have been a great support and invaluable resource without whom our research in Azerbaijan would not have been possible.
Last 3 posts by Mike Tucci
- Total Cost of Credit vs. APR - June 16th, 2010
- Explaining the Price Curve - May 14th, 2010
- New Research from World Bank Highlights Tradeoffs in Microfinance - March 19th, 2010
Tags: Azerbaijan, Country Curves, Data Analysis, Data Launch, Field Work, Transparent Pricing Initiative, Webinar
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