An interest-ing workshop at Global Microcredit Summit
In only three short years, MFTransparency has become ubiquitous in the industry. This is in part, no doubt, because its CEO Chuck Waterfield is an impressive and engaging speaker. But much more, it’s because transparency in pricing is a concept whose time has most definitely come.
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An interest-ing workshop at Global Microcredit Summit, Microfinance Focus, November 15, 2011
In only three short years, MFTransparency has become ubiquitous in the industry. This is in part, no doubt, because its CEO Chuck Waterfield is an impressive and engaging speaker. And partly because everyone likes a good graph, that clearly shows complex trends and patterns by country. But much more, it’s because Transparency in pricing is a concept whose time has most definitely come. The ‘outing’ of certain MFIs that are little more than organised loansharks, a growing body of literature understanding who microfinance clients are and what they use their loans for, among several other factors has led to a strong appetite for understanding what interest rates in microfinance are, and what they should be.It is, as Chuck told a packed workshop session on day two of the microcredit summit entitled “Is Transparency Enough: What is Fair and Ethical when it comes to Interest Rates in Microfinance?”, a sensitive topic – especially when subjective terms like ‘fair’ and ‘ethical’ are invoked.Subjectivity aside, however, there is a welcome “transition to transparency” going on. “Three years on [from MFT’s foundation], we know a lot more about what we charge, why we charge it, and what we should charge. This is the hard part, because it’s subjective”.
There is fairness and ethics in the zeitgeist, Chuck noted. Six months ago to the day, Los Indignados occupied central Madrid. IN September, the Occupy Wall Street movement took shape. This morning, they were forcibly removed – but Occupy movements have sprung up in cities all over the globe. There is a demand by the so-called 99 per cent, that fairness be a central tenet of the new global financial order they desire. And they want the regulators and politician to take responsibility.
“Responsible behaviour”, Chuck said, “is an obligation in microfinance too”. Why?
1. We work in quite imperfect markets;
2. Our clients are the very poor; and
3. We hold the power: microcredit is not an exchange between equal parties in the way that mainstream finance in the developed world might be; and
4. Irresponsible practice leads to abuse.
Showing a complex Income Distribution Pyramid (included in the workshop paper he wrote), he asked several rhetorical questions, including “How much wealth should be transferred from the poor to the rich?”, “Must each product be sustainable?” Is it ok for the rich to subsidize the poor?” “Or even vice versa?” “Must each individual loan be sustainable?”…and walked the audience through ‘defining a responsible price’.
Pricing for sustainability must of course address the reality of the cost curve, and there is now a body of work demonstrating what this curve looks like in different markets. These tables are in the paper, and don’t bear summary here, but in short, we charge the highest prices on smallest loans. And interest rates as an absolute figure only tell a part of the story. The amount of interest being paid relative to GNI per capita, by country, tells some revealing tales. A close read of this paper may challenge some of your pre-conceptions about what a ‘high’ or a ‘low’ interest rate is.
Chuck’s proposal was a simple one: “Let’s embrace a respectful and serious dialogue on these questions”. MFT has done some great work in ensuring this dialogue continues to develop.