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Standardization and Communication of Interest Rates

Published on July 23, 2010

Over the past two years, supporters in the industry have validated our belief that microfinance interest rates are confusing and complicated and that we, as an industry, must improve how we think about and communicate microfinance product prices. At MicroFinance Transparency, our first approach to help demystify microfinance interest rates has been to collect, standardize and disseminate information about prices in select microfinance markets.

We rely on Annual Percentage Rate (APR) and Effective Interest Rate (EIR) formulas and calculations to help standardize interest rates in a given market, and then we publish them on our website to make the information available to a broader audience. We stand behind this approach as an important first step to making interest rates more understandable to the international microfinance community. But, we also believe that improved communication surrounding interest rates is a critical next step. While I was at the Social Performance Task Force annual meeting in Bern, Switzerland earlier this month, I heard some interesting comments about how to better communicate interest rates to clients, donors, investors, the press and public, and other microfinance practitioners.

While many people in the industry seem comfortable with moving towards more standard calculations of microfinance products, there appears to be less consensus on how we can communicate true prices to clients and the rest of the industry. Over the next few blog posts, I plan to highlight some of the good practices we have observed around the world with respect to the communication of transparent and accurate prices. Some of these examples are from our direct experience in various countries when implementing our Transparent Pricing Initiatives. Other examples come from conversations with colleagues and practitioners in the field. Some of the good practices I plan to blog about include:

  1. Standardizing loan repayment schedules, loan contracts and other loan documentation;
  2. Requiring APR or EIRs to be published on loan documentation;
  3. Prohibiting the charging of flat interest rates;
  4. Displaying complete price information, including all additional fees, charges and commissions, in public spaces at the local branch office; and
  5. Including compulsory savings, cash deposits, loan guarantee funds or other upfront or ongoing charges on the loan repayment schedule and loan contract.

As often as possible, I will highlight and explain the practice and share specific examples of its use in real life situations. As I post entries about specific practices in different countries, I hope to hear from some of you about additional practices or standards you have observed. I would love to use this series of blog posts to generate more discussion and share ideas about how we can better serve our clients and improve our industry standards.

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  1. John Hunter says:

    This is important work, keep it up. I strongly support microfinance but I think like all financial products it can be misused. We need to have clear terms for borrowers. As someone supporting microfinance I also want to have a clear idea of interest rates to decide what I want to support. I realize high interests may well still be beneficial to borrowers but I worry about interest rates above 30% (especially if it is not obvious to borrowers) maybe just making things worse (I realize the calculus really needs to be on a case by case basis).

  2. this post is very usefull thx!

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