Transparent microfinance pricing in Bosnia and Herzegovina
MFTransparency, in a paper ‘Standardized Loan Documentation in Bosnia and Herzegovina’, states that the policy framework for pricing disclosure in the microfinance markets of these countries provides the industry with numerous mechanisms for facilitating transparent pricing.
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Transparent microfinance pricing in Bosnia and Herzegovina – Microfinance Focus, November 4, 2011:
The microfinance industry in Bosnia and Herzegovina are governed by a policy that specifies calculation and disclosure requirements for effective interest rates on loans and requires that microfinance institutions deliver clear, communicative repayment schedules to their clients. Assessing the effectiveness of these regulations in impacting MFI practices, MFTransparency in a paper ‘Standardized Loan Documentation in Bosnia and Herzegovina’, states that the policy framework for pricing disclosure in the microfinance markets of these countries provides the industry with numerous mechanisms for facilitating transparent pricing.
In December 2006 and March 2007, the governments of the Federation of Bosnia and Herzegovina and Republic of Srpska, respectively instated disclosure policies specifying several new disclosure definitions and requirements for MFIs in the market. The policies include the definition and calculation methodology for EIR along with the disclosure requirements that helps make communication of prices to clients equally important as the calculation and reporting of prices to the regulator. The definition and methodology for calculating and communicating EIRs ensures that prices are standardized and accurately calculated.
The policy outlines that borrowers must receive information on all the charges required of them as well as calculations of their overall cost of borrowing in multiple formats. The provision of a template for the repayment schedule greatly increases the likelihood of MFIs meeting these requirements while simultaneously allowing borrowers to compare loan products easily, even if they don’t necessarily understand how EIR is calculated.
Further, this initial exposure to EIR is an important first step toward improving financial literacy. The Transparent Pricing Initiative in Bosnia revealed that about half of all MFIs in Bosnia use the repayment schedule template provided by the regulator and that these represent the larger institutions in the country, in terms of active borrowers and/or gross outstanding loan portfolio.
MFTransparency believes that this policy for interest rate disclosure is an effective approach that should be considered by microfinance industries internationally. While adapting the specific information disclosed, many microfinance markets could benefit from the requirement of a range of pricing measures to be disclosed in a standardized way. MFTransparency also recommends that governments accompany this type of disclosure policy with training and education for all stakeholder groups. MFI staff should be trained on how to calculate EIRs and what they really mean, and financial literacy programs should be offered to clients to ensure that they understand the information they receive. The value of making information available, like in the Bosnian market, is enhanced significantly when it is accompanied by financial education.