Philippine Regulation on Pricing Transparency

• Prescribed uniform method of computing interest based onoutstanding balance of a loan at the beginning of an interest period and that interest on installment are calculated on the outstanding balance at the beginning of each installment period
• Such method of computing interest must be consistently reflected in loan-related documents and marketing materials
• A simplified Disclosure Statement format, which contains the following minimum information– Total amount to be financed; Finance charges; Net proceeds of the loan; and Percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate or an EIR.

The above circular covers all loan products, including small and micro-loans.  Furthermore, BSP also issued a Memorandum showing examples of effective interest rate calculation models (Memorandum no. 40)

Initially, the policies were said to cover only banks, which is the legal entity covered by BSP.  This presented some complications for the microfinance industry, since non-government organizations and cooperatives would not be subject to the same standards.  In this regard, the Securities and Exchange Commission (SEC), which covers MFI-NGOs, released a similar Memorandum Circular (No. 07, dated 15 September 2011) directing all lending and financing companies to adopt BSP Circular No. 730.  Likewise, the Insurance Commission published Circular Letter No. 31-2011 on 5 October 2011 prescribing rules and regulations on loans and receivables addressed to all insurance/reinsurance companies and mutual benefit associations.   The Cooperative Development Authority is expected to follow suit soon. BSP is expected to come out with guidelines on sanctions and penalties for non-compliance for both banks and non-banks.  These developments will facilitate a level playing field among various credit granting institutions.

Simultaneous implementation across different credit-granting authorities is expected by July 2012, giving MFIs twelve (12) months to prepare from date of issuance of the Circular.  Most likely, this means changing the prices they communicate to clients to a higher figure (from 2.5% per month, flat interest rate to 150% EIR).  Such transition must be supported with appropriate financial education to properly explain to borrowers (and greater public) what these “new prices” mean.    No doubt, a lot of work has to be done, not only among microfinance practitioners, but also among networks, funders and other support institutions.

While the new regulation presents the industry with several challenges, stakeholders also recognize that it is a necessary step to move Philippine microfinance in the right direction.  Working together, greater transparency will be able to “facilitate healthy competition, intensify consumer protection and promote financial inclusion towards a more robust financial system catering to the needs of every Filipino.”[1]

by Laila Q. Deles

[1] BSP Presentation on Updated Rules Implementing the Truth in Lending Act to Facilitate Pricing Transparency