Challenge of Understanding Pricing of Microloans
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For decades, the microfinance industry made a rather disciplined effort to ignore prices we were charging on our loan products. That changed with the Compartamos IPO of 2007, where the largest MFI in Latin America made hundreds of millions of dollars in profit while charging prices of over 100%.
This intense discussion provoked as a result of this highlighted to the industry just how confusing pricing of microloans has become. Judging the price of a loan is extremely difficult except in the simplest of cases, and very few micro-loans have prices which are easy to understand.
Using the example of Compartamos in Mexico to explain why there is so much confusion over what true prices really are, this paper gives an overview of the:
- Fundamental aspects of pricing in microfinance that lead to non-transparency
- Explanation of how interest calculations work