In 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.
Posts Tagged ‘Regulation’
Bolivia Transparency Part 4: How MFTransparency’s Pricing Data Complements Current Regulation
Friday, June 25th, 2010Bolivia 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.
Ecuadorian Innovations in Regulating Pricing Transparency
Monday, May 17th, 2010As I mentioned in my last blog post, I would like to share some insights on Ecuador’s regulatory framework for the microfinance sector and advances in the area of transparency.
Regulations that Support Transparency in Pricing
Ecuador’s regulatory framework already includes several mechanisms for facilitating transparency in pricing. For instance, financial institutions can only charge interest on the remaining balance of a loan, which effectively outlaws flat interest rates. Moreover, regulated institutions are no longer allowed to charge fees. Both these aspects make loan pricing more transparent, allowing borrowers to better understand what they are paying and to compare between the different products available to them. In all marketing materials, financial institutions are required to specify the nominal and effective annual interest rate, the frequency of interest payments and the loan term (Regulación No. 153 del Directorio del Banco Central del Ecuador). The regulation also establishes that all product documentation has to clearly specify the loan amount, term, payment frequency and the nominal and effective annual interest rate. The formulas to calculate these figures are defined in the regulation as well.
Mobile Banking and the Future of Transparency
Tuesday, March 9th, 2010by 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.
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.
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