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The Fog is Lift­ing on Pri­cing – Now We Can Make Wiser Decisions

Published on September 18, 2012

In September 2012 SNS Impact Investing published the following article from MFTransparency CEO Chuck Waterfield. Now that the fog is lift­ing on pri­cing, MFTransparency can now shift into “Phase II” – using our bet­ter under­stand­ing of pri­cing to have all stake­hold­ers make wiser decisions. View the full article here.

The Fog is Lift­ing on Pri­cing – Now We Can Make Wiser Decisions, Chuck Waterfield, 18 September 2012

MicroFin­ance Trans­par­ency (MFT) recently cel­eb­rated its fourth anniversary since we stepped for­ward at the Micro Credit Sum­mit in Bali, in July 2008, pro­pos­ing that the microfin­ance industry address the issue of prices and profits in microfin­ance. We all knew profits in microfin­ance were increas­ing sig­ni­fic­antly, but we had vir­tu­ally no pub­lic under­stand­ing of the true prices we were actu­ally char­ging the poor. And for any busi­ness, profits are far easier to gen­er­ate when nobody knows the true price you are char­ging. Mar­kets need trans­par­ent pri­cing inform­a­tion to work prop­erly.

For the past three years, the industry has worked to address that, and we have made impress­ive pro­gress. For the first time ever, we now have accur­ate, com­par­able pri­cing data for loans going to 50 mil­lion cli­ents, from over 400 insti­tu­tions.

Now that the fog is lift­ing on pri­cing, MFT believes we can now shift into “Phase II” – using our bet­ter under­stand­ing of pri­cing to have all stake­hold­ers make wiser decisions. We see the fol­low­ing pro­gres­sion:

Stage 1 – Absence of Data: We worked for dec­ades with no real data at all on true pri­cing of loans. At best, we would cal­cu­late port­fo­lio yields as an approx­im­a­tion of price. In recent years, insti­tu­tions that had been eval­u­ated by Planet Rat­ing would have pub­lished prices-by-loan-product, but we grew increas­ingly aware that we needed a more con­cer­ted effort to accu­mu­late pri­cing data.

Stage 2 – Data: In 2009, we star­ted to sys­tem­at­ic­ally col­lect data from insti­tu­tions in more than 20 coun­tries. As par­ti­cip­a­tion was vol­un­tary, there were doubts that insti­tu­tions would par­ti­cip­ate. In nearly every coun­try we got over 90% of the mar­ket report­ing. We star­ted to see for the first time, a rich sup­ply of data, but we still had unanswered ques­tions.

Stage 3 – Inform­a­tion: An ana­lyst can have data, but still not have any answers. There is an import­ant next-step of study­ing the data to observe cor­rel­a­tions and start to determ­ine cause-and-effect rela­tion­ships. We star­ted to do so, but there were still more ques­tions than answers. We knew we needed to search for pat­terns.

Stage 4 – Know­ledge: We are cur­rently in the stage of recog­niz­ing pat­terns in the inform­a­tion that enable us to build greater know­ledge about the “why” of microfin­ance pri­cing. We dis­cover inter­est­ing aspects with nearly every new explor­a­tion. We bet­ter under­stand the cost curve and the price curve, we are learn­ing more about “where the curve starts”, and we are begin­ning to explore price pat­terns rel­at­ive to loan term. This new know­ledge is giv­ing us a bet­ter sense of how to invest­ig­ate when a loan product lies “off the curve.”

Stage 5: Wis­dom: And we are advan­cing as well on the cul­min­a­tion of the pro­cess. Our efforts at col­lect­ing data, cre­at­ing inform­a­tion, and expand­ing know­ledge gives us a solid found­a­tion on which all stake­hold­ers can make wiser decisions about respons­ible busi­ness prac­tices. Investors can bet­ter select part­ners with com­pat­ible mis­sions. MFIs can do a bet­ter job at set­ting a fair mar­ket price for their products. Reg­u­lat­ors can detect and under­stand mar­ket imper­fec­tions and imple­ment appro­pri­ate reg­u­la­tions to cor­rect them. And when truth-in-lending is a part of those reg­u­la­tions, cli­ents will have access to reli­able pri­cing inform­a­tion to aid them in their bor­row­ing decisions.

By work­ing together on this import­ant topic, we’ve made sig­ni­fic­ant pro­gress and are now able to make wiser decisions.

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