Trends Observed in Malawi Data Collection
by Paul Kuwornu
MFTransparency recently launched the Transparent Pricing Initiative in Malawi. The Initiative has received strong support from the Malawian microfinance industry from the start, which has continued into the data collection phase. I want to share with you some of the trends we’ve observed so far regarding pricing practices, group lending and repayment schedules in the Malawian microfinance industry.
Nearly all the microfinance institutions (MFIs) we visited in Malawi use the flat interest rate method in pricing their loan products. There is only one exception, where an MFI uses the declining balance method. Although the flat interest rate method is not supported by any theoretical underpinnings, it is widely used in microfinance. Using the flat rate method charges clients nearly twice what would have been charged using the declining rate method. Interestingly, the one MFI in Malawi that charges the declining rate has no donor support and depends heavily on interest income.
We have also observed that none of the MFIs we visited communicate effective interest rates (EIRs) to their clients; only the nominal rates are reported. This is an area we plan to address through the Transparent Pricing Initiative in Malawi, hopefully encouraging MFIs to use EIR as a standard way of communicating pricing so that clients can compare between the different products available to them.
Most MFIs we met with indicated to us that their loan pricing is not based on cost analysis of delivering each different product. None of the MFIs were able to say whether their individual loan products are profitable as standalones. They only judge their sustainability on the gains on their overall portfolio. Hopefully our training, educational materials and ultimately the published dataset will help MFIs in Malawi begin to focus on pricing at the product level.
The group lending methodology is widely used in Malawi. This is helpful for the poor who are unable to provide their own collateral to secure loans on an individual basis. Theoretically, we expect group loans to be less risky than individual loans. In the 2010 Micro-Finance Sector Assessment, the Malawi Ministry of Finance reports that about 17% of MFIs report a Portfolio at Risk (PAR) above 15%. With group lending being prevalent in Malawi, this seems like a lot. Could this be the case of adverse self-selection where “bad” clients group themselves together and take loans? Clearly, there is much to be studied about group lending methodology and PAR in Malawi and further investigations are worth the efforts. This is not a core component of the Transparent Pricing Initiative in Malawi, but it is a topic we will touch on in the webinar when we launch the product pricing data for Malawi.
Another trend we’ve noticed in the Malawian microfinance industry is that repayment schedules are not standardized. In some cases, institutions provide repayment schedules at the group level so that individuals who take loans within the group have no repayment schedules for their respective loans. In other cases, institutions do not have one document that provides the information that an “ideal” repayment schedule is supposed to provide. Two or three documents would have to be combined in order to glean the needed information, such as the interest rate and fees charged, the duration of the loan, the periodic repayment amounts and due dates, etc. We will focus on the topic of repayment schedules and other ways of communicating prices to clients in a clear, transparent way in meetings with different stakeholders over the course of the Transparent Pricing Initiative in Malawi.
These are some of the issues that MFTransparency will be addressing both directly and indirectly in the Transparent Pricing Initiative in Malawi. For example, we plan to partner with the stakeholders of the Malawian microfinance industry to come up with a standardized repayment schedule for all MFIs to use that will clearly inform clients about loan terms and conditions. MFTransparency is counting on the cooperation of the stakeholders in the industry to bring about much desired changes such as this. Let’s keep our eyes on the evolution of transparency in the Malawian microfinance industry.