Quick: What’s the Grameen Bank’s Interest Rate?
Recently 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.
David, I see you’re really getting intrigued by the complexities of what initially seems like a simple question: What is the price of the loan?
As you have noted in your article, I’ve spent a considerable amount of time on the topic, and we have put up a lot of resources to help others learn more about pricing. I do hope others get as intrigued as you have in this very important topic.
I will add a couple of comments to your article:
1) It is difficult getting accurate data to calculate prices, unless you go right to the root source with specific questions. Information on websites can be outdated or inaccurate. We have not yet calculated Grameen’s exact price, but we do know that they, like nearly every other MFI in Bangladesh, charged flat interest for the past ten years or so. Then last year they changed to declining balance, the only large MFI in Bangladesh to do so. Their website says 16%, but I cannot confirm that. I do believe this is admirable of Grameen—to take the lead in shifting to a more transparent price when that price is sometimes considered higher than the competitions less-transparent price.
2) And if they say 16%, why is their portfolio yield higher? And why do your calculations come out even higher? It’s all a matter of definitions, as you can see from our MFT materials. First, 16% declining balance interest rate can generate a portfolio yield of 20% if there are other sources of income, such as fees. And if compulsory savings are included, the APR can rise even higher, as you calculated. What components go into the true price—interest? interest and fees? interest, fees, and savings? When regulators pass truth-in-lending laws, they make decisions about those points.
3) Finally, there really is no one single price for an MFI or for one of its products. Prices can vary even on a client-by-client level. Fees influence different borrowers in different ways, eg, a 2% up-front fee on a 6-month loan is twice as expensive as a 2% up-front fee on a 12-month loan. Grace periods also affect APRs when fees or flat interest are involved. What we do at MFTransparency is calculate the precise price from a range of loan samples provided by the MFI. The prices are rarely identical for all borrowers in the sample, but we analyze the differences and determine why they vary.
Thanks for raising this important issue, and also for referencing our material. We have more educational material and pricing information going up on our website each week.
Promoting Transparent Pricing in Microfinance