Just 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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Posts Tagged ‘Responsible Finance’
New Paper: The Challenge of Understanding Pricing of Micro-loans
Tuesday, August 3rd, 2010Interest 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.
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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