Responsible Pricing: The State of the Practice
by Jordan Filko
Yesterday the Smart Campaign published the paper “Responsible Pricing: The State of the Practice,” co-authored by MFTransparency Vice President Alexandra Fiorillo. We are proud to have contributed our research and guidance to the content of this paper, which outlines the progress of the microfinance industry toward transparent and responsible pricing.
As the challenge of defining responsible pricing in microfinance continues to draw media attention (see recent New York Times article), this paper is aptly timed as a review of where we are on this issue and what the industry can do to further its progress. The Smart Campaign has provided guidance through its newly redefined Principle #2:
“Transparent and Responsible Pricing: The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) will be transparent and will be adequately disclosed in a form understandable to clients. Responsible pricing means that pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for financial institutions.”
Through the Global Transparent Pricing Initiative, MFTransparency’s work embodies all aspects of this principle. This paper highlights some of the most important messages to come from our work to help guide other responsible pricing initiatives:
- Pricing and the cost structures that determine it vary widely from one country to the next. It makes sense to judge institutions in their country setting and against their competitors.
- Small loans require higher—and sometimes surprisingly much higher – interest rates and fees. This argues against interest rate or price caps, which penalize institutions attempting to reach harder-to-serve clients such as poorer people.
- Analysis of individual providers should account for factors such as outreach to (more costly) rural areas, provision of non-financial services, high profits or inefficiency. All of these factors contribute to a final determination of whether pricing is responsible.
The paper goes on to evaluate different methods that governments and other industry stakeholders have used to implement transparent and responsible pricing, including:
- Interest rate caps
- Margin caps
- Return on equity policies
- Comparative transparency
- Promoting competition
Each of these methods is defined and assessed in terms of strengths and weaknesses, using specific examples.
The paper concludes with recommendations for actions that the microfinance industry can take to further the practice of transparent and responsible pricing. These suggestions, as well as the in-depth analysis supported by MFTransparency data and materials throughout the paper, are not to be missed. We invite everyone to read the paper and leave comments and feedback in the space below to continue this important conversation.