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