I just returned from a two-week field trip to Argentina to meet up with local financial institutions and provide technical assistance in the data collection process. During this trip I gained some new insights on the importance of contextualizing microloan prices.
Posts Tagged ‘Pricing’
The Case for Contextualizing Microloan Prices
Friday, June 17th, 2011Usury Rates in Colombia
Thursday, January 27th, 2011by Alex Perez
MFTransparency’s Transparent Pricing Initiative in Colombia is meeting with great success, 22 MFIs having already submitted their data and 4 more currently underway with the data collection process.
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Quick: What’s the Grameen Bank’s Interest Rate?
Monday, September 27th, 2010Recently David Roodman posted an interesting discussion on his blog. You can read what he wrote here: “Quick: What’s the Grameen Bank’s Interest Rate?”
There are some very interesting points in his posting, to which I wrote the following reply. You’ll find it best to read his posting first, but even without that context, the following points are relevant. (more…)
Independent Study Course on Interest Rates: Session 1
Friday, September 3rd, 2010The most recent addition to our new Resources library is Session 1 of our independent study course on transparent pricing. This series of training sessions will provide you with the tools you need to demystify transparent pricing. Featuring practical examples, screenshots from the Calculating Transparent Prices Tool and practice exercises, this educational resource provides you with classroom-quality lessons for a solid foundation in the concepts of transparent pricing.
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Credit Insurance and Microcredit Interest Rates
Tuesday, August 24th, 2010by Deepak Goswami & Alexandra Fiorillo
Microcredit products often carry additional fees on top of the basic nominal interest rate charged to the client. In this blog post I will discuss credit insurance, also known as credit-life or credit-plus insurance, as it is one of the most common charges associated with microcredit products.
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Price Curves at the Grocery Store
Saturday, August 7th, 2010
by Tim Langeman
One of the most important concepts that MFTransparency addresses in all of our trainings and educational materials is the relationship between interest rates and loan size in microfinance, which we represent with a curve. This curve is even depicted as part of our logo. Throughout this web site, there are a series of graphs that plot this relationship using real data. In many cases, the graph trend line follows a curve in which the smaller-sized loans carry higher interest rates than larger-sized loans. As the loan size increases, interest rates tend to decrease.
Several posts on this blog have addressed the price curve in microfinance. In this post I will consider the relationship between price and quantity in other industries. What accounts for the curve, and is this type of curve present in industries other than microfinance?
As an experiment, I decided to visit a local grocery store and look for items that are sold in multiple package sizes. Two good examples are soft drinks and ice cream.
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Responsible Pricing: The State of the Practice
Thursday, August 5th, 2010by Jordan Filko
Yesterday the Smart Campaign published the paper “Responsible Pricing: The State of the Practice,” co-authored by MFTransparency Vice President Alexandra Fiorillo. We are proud to have contributed our research and guidance to the content of this paper, which outlines the progress of the microfinance industry toward transparent and responsible pricing.
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New Paper: The Challenge of Understanding Pricing of Micro-loans
Tuesday, August 3rd, 2010Just how difficult is it to calculate the true cost of a loan? For many clients of MFIs, it is nearly impossible. Despite the public image of microfinance lenders as being altruistic and philanthropic, some are as predatory as the moneylenders they are supposed replace as a better alternative for their clients. With clients with a low level of financial literacy and a market lacking standardized pricing, many MFIs, including winners of responsible business awards, issue loans with actual costs orders of magnitude higher than advertised costs.
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Bolivia Transparency Part 4: How MFTransparency’s Pricing Data Complements Current Regulation
Friday, June 25th, 2010In my series of Bolivia posts so far, I have shared insights on several positive aspects of pricing transparency in the Bolivian microfinance industry. In today’s post, I’d like to highlight how MFTransparency’s pricing data will complement the Bolivian microfinance regulation and transparency efforts already underway.
Bolivia Transparency Part 3: Transparency in Loan Contracts & Publicity
Thursday, June 24th, 2010Today, I’d like to continue my previous post on interest rate disclosure to clients and the general public, and share some insights on transparency in loan contracts and publicity.
While interest rates are freely negotiated between both parties, the loan contracts have to include several pricing details. As a minimum requirement, the contract has to specify the:
- loan amount
- details of all financial charges
- whether the interest rate is fixed or variable and its value at disbursement
- the periodic interest rate and the corresponding annual rate (TEAC)
- the method used to calculate the balances of the financial operation, as well as the calculation method of any financial charges
- the amount of credit service charge and cumulative total of payments, as well as the penal interest to be applied in case of default
- any insurance fees if applicable
- The contract also has to include the corresponding repayment schedule.
- In the case of variable interest rates, the loan contract must specify the variation and how the reference rate will be applied.
Bolivia Transparency Part 2: Interest Rate Disclosure to Clients & the Public
Wednesday, June 23rd, 2010There are several positive mechanisms in place to facilitate interest rate disclosure to microfinance clients and the general public. Our recent trip to Bolivia was a wonderful opportunity to see firsthand how a range of legal requirements play out in practice.
Bolivia Transparency Part 1: Pricing Strategies & Challenges
Monday, June 21st, 2010As promised in my last blog post on the Bolivia launch, I’d like to share some insights on the regulatory framework in Bolivia and outstanding transparency efforts we learned about during our initial trip to Bolivia where we recently launched the Transparent Pricing Initiative. Over the next few days I’ll be providing a series of posts to tell you a bit about what we’ve discovered. In this first part, I’ll focus on pricing strategies in Bolivia as well as challenges associated with current pricing practices and general challenges currently perceived in the local microfinance community.
Total Cost of Credit vs. APR
Wednesday, June 16th, 2010Often when we talk about reporting the “true cost” of loans we are asked why it isn’t enough to simply tell borrowers the “total cost” of their loan—in other words, the total amount of interest they will pay over the life of the loan. At first glance this can seem like an obvious solution, but in reality it’s a deceptive way of thinking about loan price.
To see why, consider the following loans, all for the same amount:
Explaining the Price Curve
Friday, May 14th, 2010If you have perused our data, you may have noticed the market average curve present on all our country graphs. This curve is so fundamental to MFTransparency that its characteristic downward slope is even represented in our logo. This is the curve relating interest rates to loan size, and it is extremely important in analyzing the price of microloan products. The recent New York Times article highlighted the high price that some MFIs charge in order to reap big financial gains from the poor. But it’s important to have a deeper understanding of this phenomenon: high prices don’t always mean big profits; the reason for high interest rates is more complex than this, as highlighted in this recent blog post from Elisabeth Rhyne at the Center for Financial Inclusion at ACCION International. The curve that MFTransparency uses to analyze loan rates is key in understanding pricing in microfinance. This blog post provides an overview of some of the informational materials that MFTransparency has come up with in order to help others understand pricing in microfinance.
Interest Rate Transparency in Brazil: Addressing Cultural Questions
Tuesday, March 30th, 2010by 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.
New Research from World Bank Highlights Tradeoffs in Microfinance
Friday, March 19th, 2010Asli Demirguc-Kunt, a chief economist at the World Bank, recently posted an article entitled “Microfinance: Dream versus Reality”. Her post provides an overview of the tough tradeoffs faced by microfinance institutions: between serving the poorest clients and achieving financial sustainability (and profitability). I highly suggest reading it, as it provides a synopsis of recent World Bank research and conclusions on the state of microfinance markets, including analysis using data culled from the MIX. The economists stress that their findings highlight the sometimes white-washed and downplayed tension between “meeting social goals and maximizing commercial success.” They conclude that “reaching the very poor with small-scale services remains a tough business and often entails charging high fees or depending on steady subsidies.”
To summarize in my own words, they point out the difficulty of simultaneously meeting 3 goals: commercial sustainability, financial access for the poorest, and reasonable rates (as illustrated by the graphic below). Any one side of the triangle connects two of these goals, but leaves the other behind.
Calculating Interest Rates Using Newton’s Method
Friday, March 5th, 2010by Tim Langeman
In a previous blog post, I described how to use a spreadsheet like Microsoft Excel to calculate interest rates. Again, interest rate calculations are at the core of MFTransparency‘s ability to provide accurate data that can be compared across various products offered by numerous MFIs. In the last post we looked at Excel’s IRR and XIRR functions and concluded that XIRR is more accurate because it takes into account the actual payment dates of the loan and thus allows us to calculate annualized interest rates even with irregular repayment schedules.
But for the more technical among us, I realize that even this may not be sufficient. Today I’m going to demonstrate how to write a computer program that is as accurate as Excel 2007′s XIRR function. This article is likely to be of less broad interest, but it provides transparency into how we will calculate interest rates for future data collection trips; and it may be useful for MFIs that wish to automate interest rate calculations for a larger data set than can be handled with Excel.
Calculating Interest Rates with Excel
Wednesday, February 24th, 2010by Tim Langeman
Chuck Waterfield and Alexandra Fiorillo, MFTransparency‘s CEO and VP respectively, have been doing many presentations about how interest rates can be calculated using our excel tool, but we haven’t yet featured a story on our blog about our data collection process and our corresponding excel tool. Although technical, interest rate calculations are really at the heart of MFTransparency‘s mission and calculating accurate interest rates is vital to providing transparent pricing data. So today, I would like to give you a brief demonstration of the IRR and XIRR Excel functions, as a way to provide background for the techniques we’ve used to automate interest rate calculations on our web site.
For those of you less familiar with excel, this spreadsheet software offers numerous formulas allowing quick and easy calculations within each spreadsheet. As it is particularly geared towards financial use, there are ready made formulas specifically meant for calculating interest rates. The most basic (but still powerful) calculation is the internal rate of return. (more…)
Indian Interest Rate Caps and Transparency
Friday, February 19th, 2010by 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.
The Case for Pricing Transparency
Tuesday, February 9th, 2010We are proud to announce that our very own Jessica Haeussler has an article on pricing transparency published in the most recent MicroBanking Bulletin. Please go here to read it. The MicroBanking Bulletin (MBB) is the “premier benchmarking source for the microfinance industry. The industry commentary, analysis and benchmarks are widely used by investors, donors, MFI managers, and service providers to facilitate greater standardization and a better understanding of developments in the microfinance sector.”
Here is a taste of her article, but please follow this link to see the full text in the Bulletin. You won’t be disappointed:
After decades of innovation and experimentation, microfinance sectors worldwide have achieved impressive successes. The microfinance community has joined efforts to achieve worldwide public recognition of microfinance as an effective and sustainable bottom-up approach to economic empowerment and consumption smoothing. The past years have seen equally strong efforts to provide a business case for microfinance, attract investors and access the global capital markets. As a result, the global microfinance industry has achieved a considerable record of transparency on financial performance. The true price of microcredit products, however, has never been accurately reported. As a double-bottom line industry that emerged to provide a low-cost alternative to the moneylenders, microfinance today is an industry where non-transparent pricing is common. Yet pricing transparency is critical in the market- based economy, as it promotes efficiency, healthy competition, innovation and affordable prices for millions of clients. For financial markets to develop sustainably and prosper, transparency is indispensable.
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