The Case for Contextualizing Microloan Prices
I just returned from a two-week field trip to Argentina to meet up with local financial institutions and provide technical assistance in the data collection process. During this trip I gained some new insights on the importance of contextualizing microloan prices.
I visited very diverse institutions, most of them located around Buenos Aires, but also in Córdoba, Misiones and Salta. During these meetings, the institutions shared insights on key challenges individual microfinance institutions (MFIs) and the sector as a whole are currently facing. While most institutions were excited to join the Argentina Initiative, a few also raised concerns at the impact increased transparency might have on the sector. A concern commonly expressed was the question of how Argentina’s pricing structure would look in comparison to the other three countries included in the Transparent Pricing Initiative in Latin America – Bolivia, Colombia and Ecuador.
At MFTransparency we believe that microloan prices have to be viewed in each unique country context. Even within the same region, each country has a unique environment and cost structure. Factors such as salary levels, cost of telecommunication and infrastructure all affect the pricing structure to a certain extent. Moreover, each country has a distinct regulatory environment. The prices of financial institutions operating in a market like Ecuador and Colombia with a price cap in place are naturally very different from the prices established in a free market environment. It is also important to consider the broader regulatory environment, including aspects governing ownership and financing, as well as overall political stability.
Local microfinance markets have different funding structures which make it further necessary to contextualize microloan prices. MFIs in Argentina are facing serious liquidity challenges that limit growth and outreach to households who demand microfinance services. Perhaps most importantly, the microfinance sector in Argentina is still in a nascent stage compared to the other countries in the Latin America Initiative and additional factors such as the availability of trained loan officers, lack of information on the market and the learning curve play a part. Most MFIs in Argentina emerged in 2000/01 against the backdrop of economic crises, placing the Argentina sector in a very different stage than countries like Bolivia or Peru with some of the most mature microfinance markets in the world.
It is essential that microloan prices in a given country are analyzed in the specific context of that country. Speaking about an average global or regional price for microloan products is misleading and sets unrealistic expectations for countries like Argentina. It causes an imbalance between local microfinance sectors within and across regions and puts pressures on a sector like Argentina that are not constructive in terms of the long term growth of the sector. Even within one local market, we find it important to contextualize prices. In our market pricing curve graphs we use features such as color-coding, bubble size and filtering options to distinguish between prices within the same market based on loan purpose, institution type, product scale, geographic focus and, perhaps most importantly, loan size. It is hard to imagine an “average market price” for any local market, such as Bolivia or Ecuador, and certainly unrealistic to meaningfully determine an average price for an entire region.
While we are very much in favor of contextualizing prices, we also consider pricing transparency indispensable for the healthy development of the microfinance sector, no matter which stage it is in. As the sector in Argentina is still in its early growth phase, this is a critical time to establish a framework for pricing transparency. Promoting transparency early on will avoid many of the issues that more mature markets have experienced due to obscure pricing practices. We applaud the commitment of the Argentine financial institutions that are already participating in this Initiative and encourage the remaining institutions to join this global movement towards client protection and pricing transparency in microfinance.