The Fog is Lift­ing on Pri­cing – Now We Can Make Wiser Decisions

The Fog is Lift­ing on Pri­cing – Now We Can Make Wiser Decisions, Chuck Waterfield, 18 September 2012

MicroFin­ance Trans­par­ency (MFT) recently cel­eb­rated its fourth anniversary since we stepped for­ward at the Micro Credit Sum­mit in Bali, in July 2008, pro­pos­ing that the microfin­ance industry address the issue of prices and profits in microfin­ance. We all knew profits in microfin­ance were increas­ing sig­ni­fic­antly, but we had vir­tu­ally no pub­lic under­stand­ing of the true prices we were actu­ally char­ging the poor. And for any busi­ness, profits are far easier to gen­er­ate when nobody knows the true price you are char­ging. Mar­kets need trans­par­ent pri­cing inform­a­tion to work prop­erly.

For the past three years, the industry has worked to address that, and we have made impress­ive pro­gress. For the first time ever, we now have accur­ate, com­par­able pri­cing data for loans going to 50 mil­lion cli­ents, from over 400 insti­tu­tions.

Now that the fog is lift­ing on pri­cing, MFT believes we can now shift into “Phase II” – using our bet­ter under­stand­ing of pri­cing to have all stake­hold­ers make wiser decisions. We see the fol­low­ing pro­gres­sion:

Stage 1 – Absence of Data: We worked for dec­ades with no real data at all on true pri­cing of loans. At best, we would cal­cu­late port­fo­lio yields as an approx­im­a­tion of price. In recent years, insti­tu­tions that had been eval­u­ated by Planet Rat­ing would have pub­lished prices-by-loan-product, but we grew increas­ingly aware that we needed a more con­cer­ted effort to accu­mu­late pri­cing data.

Stage 2 – Data: In 2009, we star­ted to sys­tem­at­ic­ally col­lect data from insti­tu­tions in more than 20 coun­tries. As par­ti­cip­a­tion was vol­un­tary, there were doubts that insti­tu­tions would par­ti­cip­ate. In nearly every coun­try we got over 90% of the mar­ket report­ing. We star­ted to see for the first time, a rich sup­ply of data, but we still had unanswered ques­tions.

Stage 3 – Inform­a­tion: An ana­lyst can have data, but still not have any answers. There is an import­ant next-step of study­ing the data to observe cor­rel­a­tions and start to determ­ine cause-and-effect rela­tion­ships. We star­ted to do so, but there were still more ques­tions than answers. We knew we needed to search for pat­terns.

Stage 4 – Know­ledge: We are cur­rently in the stage of recog­niz­ing pat­terns in the inform­a­tion that enable us to build greater know­ledge about the “why” of microfin­ance pri­cing. We dis­cover inter­est­ing aspects with nearly every new explor­a­tion. We bet­ter under­stand the cost curve and the price curve, we are learn­ing more about “where the curve starts”, and we are begin­ning to explore price pat­terns rel­at­ive to loan term. This new know­ledge is giv­ing us a bet­ter sense of how to invest­ig­ate when a loan product lies “off the curve.”

Stage 5: Wis­dom: And we are advan­cing as well on the cul­min­a­tion of the pro­cess. Our efforts at col­lect­ing data, cre­at­ing inform­a­tion, and expand­ing know­ledge gives us a solid found­a­tion on which all stake­hold­ers can make wiser decisions about respons­ible busi­ness prac­tices. Investors can bet­ter select part­ners with com­pat­ible mis­sions. MFIs can do a bet­ter job at set­ting a fair mar­ket price for their products. Reg­u­lat­ors can detect and under­stand mar­ket imper­fec­tions and imple­ment appro­pri­ate reg­u­la­tions to cor­rect them. And when truth-in-lending is a part of those reg­u­la­tions, cli­ents will have access to reli­able pri­cing inform­a­tion to aid them in their bor­row­ing decisions.

By work­ing together on this import­ant topic, we’ve made sig­ni­fic­ant pro­gress and are now able to make wiser decisions.