Calculating Transparent Pricing Tool – v2.2
MFTransparency’s very popular “Calculating Transparent Prices” Tool is an Excel-based tool that can be used to analyze the cost of a particular loan product. This tool helps the users understand how various factors influence the total cost of a loan. It also enables cost comparisons between loans with different fee structures. The software is multi-lingual and may be configured on the opening screen.
The three main components of the Calculating Transparent Prices Tool are:
- APR Calculator, Simple Approach: This page serves as a good starting point to learn the basics of pricing factors. By inputting some commonly-used pricing factors, the software shows the APR at several different levels. The APR is the “Annual Percentage Rate”, US standard for transparent pricing. It is the most commonly quoted price in microfinance because it is close to the “portfolio yield” for the product.
APR / EIR Calculator, Advanced Approach: This next section (pictured below) offers many more input options. It also calculates both the APR and the EIR. The EIR, or “Effective Interest Rate” is the approach used in most countries outside of the US that have legislation on transparent pricing, such as the European Union, Mexico, Peru, and Bosnia. The Advanced sheets also have a manual-input option, including an advanced calendar function allowing the user to put in the exact repayment schedule (precise dates and precise amounts), allowing the user to calculate the exact price of the loan.- Cost Structure Data sheet: The final section of the tool provides several worksheets to help understand the challenge of keeping costs low for micro-loans. It allows the user to enter estimated delivery and maintenance costs for a specified range of loan amounts. This data is used to produce graphs and calculate a breakeven point.
“Our clients, who are the poor people that we’re working for, need to understand what they are paying for. This is a matter of trust. If we lose that it would mean that microfinance would miss its point, and I think that would be the end of microfinance in the way we want it to be.”
Christian M. X. Loupéda, Director – Credit with Education, Freedom from Hunger
Christian M. X. Loupéda, Director – Credit with Education, Freedom from Hunger
Thanks for the pricing tool. Excellent effort . Will go a long way in better pricing of loan products
Thank you Chuck and MFT Team! I am remembering the MIcrofin´s course in Antigua when you was presenting the first version in English!
a very good tool for the purpose
I am very much grateful for this MFT- Tool because it is actually happen. Thanks Almighty God bless you all.
Thanks, I’m going to check, I’m sure will be very helpful … Greetings from Peru
Why does this transparency tool have to be so intransparent and overly complicated? It is really not that hard:
1) Establish the required cash flow profile from the perspective of the borrower. In order to get 1,000, I have to pay you back how much and when?
2) Take the internal rate of return for the period increment with Excel functions =IRR() or =RATE().
3) Correctly annualize the period effective rate by going (1+period rate)^(periods per year) – 1.
Finito!
Hello Joachim,
I’m the developer of the intransparent, complicated tool.
I find that most people don’t know the concepts and formulas. I used to say “Create a cash flow and use IRR” but most people haven’t done that. I developed versions of this that do the work for them, and they are grateful.
I don’t believe the tool is intransparent. I show the process and the formulas, step-by-step on the RepSchedule pages. I hope people do go and study and learn from those formulas. Do go take a look, and you’ll see that I lay out the very steps of the formula you describe in your comment.
I provide a variety of input cells to reflect the way prices are charged. I use that to generate the cash flow. This saves a great deal of time over trying to construct such a cash flow manually, as your comment suggests they do.
I also use the XIRR function, rather than the IRR function you propose. IRR assumes exactly equal payment periods, and this is not always the case with loans.
Finally, the software is free of charge. Criticism may be more valid if we were selling something that does a process that could be done simply without that product. Neither point is true in this case.
Regards,
Chuck Waterfield
CEO, MFTransparency.org
Dear Chuck and MF Transparency Team,
I apologize for my post of 10 Jan being a bit radical, maybe. Heat of the moment!
I played with your tool some more and you are right. It is good stuff. Never doubted that. My concern is simply that the more tools we provide, there is always a risk we create more black boxes. When I work with people in the field, I always like to bring it back to the basics that can be explained in a quick Excel exercise.
I wish you good luck and continued success with the Microfinance Transparency campaign. I share your passion about honest disclosure of the cost of microcredit and about bringing it down through technology, efficiency and scale.
Regards,
Joachim Bald