by Jordan Filko
In a recent post on his Open Book Blog, David Roodman discusses the difference between the pricing information provided by MFTransparency and the MIX Market. This is essentially the difference between portfolio yield, used by the MIX as a proxy for price, and the product-specific pricing information published by MFTransparency. The full post is available here.
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The Microfinance Institutions Network (MFIN) is one of the organizations that MFTransparency has partnered with on the Transparent Pricing Initiative in India. MFIN has played a big role during the data collection process by motivating its members to participate. MFIN is a self- regulatory body floated by the top microfinance institutions (MFIs) of the country, with 43 non-bank financial companies (NBFCs) as its members. MFIN’s objective is to work with regulators to promote microfinance, enhance responsible lending and institutionalize the process of credit information sharing. MFIN has also designed a Code of Conduct for its members. Mr. Vijay Mahajan, Chairman of the Microfinance India Network, says of the code, “Proper enforcement of the code of conduct would lead to greater financial inclusion. The aim is to stop multiple lending, which leads to delinquency.”
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We are excited to announce that 80 microfinance institutions in India have indicated their interest in participating in the Transparent Pricing Initiative in India by submitting product pricing data to MFTransparency. Of these, 65 data submissions have been completed and approved by the senior management of the institution and the remaining 15 are underway. While our official deadline for data submission has now passed, we are still accepting data from MFIs who need a few extra days to complete their submission.
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MFTransparency spoke with Mr. Vasudevan PN, Founder and Managing Director of Equitas Microfinance India, about the need for transparency in microfinance, what responsible finance means, and policies that can help to further promote transparency in the Indian microfinance market. Equitas Microfinance is a member of MFIN, and was the first institution to submit data as part of MFTransparency’s Transparent Pricing Initiative in India. Located in Chennai, Equitas Microfinance is one of the largest MFIs in India with a Gross Loan Portfolio of INR 6,050,000,000 (approx. US$ 131,521,739) and a total of 880,000 active clients.
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Working on the Transparent Pricing Initiative in India is a very different experience as compared to any of MFTransparency’s other country initiatives. The microfinance market in India is unique in many ways related to outreach, products and practices that all affect pricing. In this post I will introduce you to some of the factors that give this colorful market its character.
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I find myself at home this weekend – Lancaster, PA. This is the first time I’ve been home in three weeks, and I’ll be leaving Monday morning for another two weeks. My latest trip took me completely around the globe – US to London to Nairobi (for the Microcredit Summit). From Nairobi I flew to Dubai and Delhi, to launch the India Pricing Transparency Initiative. I was scheduled to fly back via Frankfurt, but the volcano changed those plans. So instead I flew from Delhi to Bangkok to Tokyo to NY to DC.
A few weeks ago I made an unplanned and very interesting trip to India. MFTransparency had no plans of working in India this year, but a broad group of stakeholders in the India microfinance industry had been discussing the need for pricing transparency and then invited us to come and meet with them. We met and heard them describe their desire to transition to transparent prices and their need to have our team help to facilitate that transition. We connected quickly, brought together by shared commitment to treat people fairly. Plans for implementation are now moving forward rapidly.
When beginning dialogue about pricing transparency in a given country, our experience in the past year has been consistently positive. The need to correct this problem is evident in most countries, but working with the national industry to determine the steps forward has moved especially fast in India. MFIs in India are currently making a strong effort to independently practice pricing transparency .
I was both intrigued and inspired by this. And though my trip was just a few days long, I did find opportunity to go and visit Gandhi’s memorial. I’ve always been greatly inspired by Gandhi’s views of how we should live and how we should address the problems we confront in the world, but I had never had opportunity to visit his memorial. Many people were congregated around Gandhi’s memorial, mostly Indians and many of them children, all expressing their solemn respect.
by Noah Simpson
Mobile banking is defining modern microfinance. Within the space of a few short years it has exploded to become a hot-button issue in the microfinance community, especially because of its potential to reach the unbanked. CGAP’s Technology Blog has covered the emergence of branchless banking extensively, and several of its recent posts have been written on the topic. In view of mobile banking’s extensive influence, it seems fitting to reflect upon the benefits and challenges it holds for consumer protection in general and for transparency in particular.
On many levels, mobile banking is great for consumers. It is allowing many traditionally unbanked people to have remote access to banking services and puts some power in the hands of the consumer. Additionally, when middlemen are taken out of the picture there is less fraud and mishandling of money. Finally, and perhaps most importantly, mobile banking tends to be cheaper than traditional banking. Some barriers exist, such as obtaining a phone in the first place, but banking-capable phones are rapidly dropping in price (e.g. Vodafone’s new phone under $15US, featured in a Technology Blog post). Despite the barriers, the declining costs of mobile banking is allowing greater financial inclusion.
by Noah Simpson
According to a recent report by MicroCapital, a new bill introduced in the Indian parliament would remove the existing cap on microloan interest rates. This has important implications for transparency, and provides a unique opportunity to examine the effects of rate caps on microfinance.
Setting an interest rate cap has been advocated as a means of client protection, but often it can end up harming those it seeks to protect. Due to the higher interest rates that are traditionally associated with smaller loans, the poorest clients who seek these loans often are left without access to credit when interest rate caps are implemented. This is because the smallest microloans become less appealing to MFIs seeking financial sustainability. In other words, MFIs have trouble affording smaller loans when the cap on rates is set below the interest rate needed to make those loan products sustainable. Efficiency and market penetration have been shown to decrease in the presence of loan rate caps (see a presentation by CGAP’s Richard Rosenberg on this topic here), and the poorest people bare the brunt of this problem. In addition, pricing often becomes less transparent in the presence of these caps because MFIs often add-on additional fees and charges to attempt to achieve sustainable products. Thus, despite noble intentions interest rate caps contribute to unhealthy microfinance markets.
In my last post, I examined data for Russia, Mexico and India, three large microfinance markets in different regions. We looked at the correlation between portfolio yield and loan size and discussed interest rates and profitability for MFIs with different focuses in terms of rural/urban populations and share of female clients. Comparing these markets, we observed a much broader range of yields in the Russian and Mexican market as compared to the Indian market.
How about operating expenses? It may be interesting to note that operating expenses are particularly high in Mexico, given that the cost of transportation, communication as well as salaries are higher than in many other countries and among the highest in Latin America. This is reflected in the median operating expense ratio reported by the MIX, which is 61.45% in Mexico, 16.21% in Russia and 11.12% in India. Looking at the median for only those MFIs with an ROA > 0 (sustainable), the median for the Mexican market is 48%, while it is 15% for Russia and 11% for India. From these numbers we can conclude that the median operating expense ratio for Mexican MFIs in considerably higher than for Indian MFIs, which could explain the higher market curve (yield) for Mexico. We might expect Mexican MFIs to be less profitable due to their higher operating costs, yet the analysis suggests pretty high ROEs. Could this be the result of an opaque pricing environment? What other factors could explain these findings? Will enhanced pricing transparency have an impact on this, as it promotes healthy consumer choice and competition among institutions?
We have looked at the correlation between loan size and portfolio yield on several occasions and noticed that the shape of the curve closely follows that of loan size and operating expenses. For several markets, these country graphs suggest that a number of MFIs are making yields above the market average in a given loan-size category. Are these MFIs also more profitable than MFIs with yields closer to the market curve? We would expect operating expenses to be higher in rural areas. Do MFIs serving rural areas have higher yields than those operating in urban areas so as to cover these higher cost? Are they less profitable in terms of ROE? And are MFIs less profitable in those markets with relatively higher operating expenses as compared to other markets? Let’s look at three relatively large microfinance sectors in different regions: Russia, Mexico and India.
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