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What Does the Data Tell Us? (Part 2)

Published on February 15, 2010

by Jessica Haeussler

In my last post, I examined data for Russia, Mexico and India, three large microfinance markets in different regions. We looked at the correlation between portfolio yield and loan size and discussed interest rates and profitability for MFIs with different focuses in terms of rural/urban populations and share of female clients. Comparing these markets, we observed a much broader range of yields in the Russian and Mexican market as compared to the Indian market.

How about operating expenses? It may be interesting to note that operating expenses are particularly high in Mexico, given that the cost of transportation, communication as well as salaries are higher than in many other countries and among the highest in Latin America. This is reflected in the median operating expense ratio reported by the MIX, which is 61.45% in Mexico, 16.21% in Russia and 11.12% in India. Looking at the median for only those MFIs with an ROA > 0 (sustainable), the median for the Mexican market is 48%, while it is 15% for Russia and 11% for India. From these numbers we can conclude that the median operating expense ratio for Mexican MFIs in considerably higher than for Indian MFIs, which could explain the higher market curve (yield) for Mexico. We might expect Mexican MFIs to be less profitable due to their higher operating costs, yet the analysis suggests pretty high ROEs. Could this be the result of an opaque pricing environment? What other factors could explain these findings? Will enhanced pricing transparency have an impact on this, as it promotes healthy consumer choice and competition among institutions?


How is the impact of consumer protection policies, particularly pricing transparency, reflected in these analyses? In Mexico, for example, regulated institutions are required to disclose the EIR of their loan products (called CAT in Mexico), however institutions can get a legal exemption fairly easily, while there is also evidence that clients do not understand the concept of the CAT and therefore don’t base their financial decisions on a comparison between the CATs of competing loan offers. Also, a large number of MFIs in Mexico are not regulated and don’t disclose effective interest rates. In India, pricing transparency efforts seem to be relatively stronger, and the most important networks and The Reserve Bank of India have established standards of consumer protection and pricing transparency for their member institutions. As we have seen, the range of yields made in the Indian market is much smaller than, for instance, in the Mexican market, despite even smaller average loan sizes.

How will the data collected by MFTransparency allow us to draw an informed conclusion? In this analysis we looked at real portfolio yield as a proxy for interest rates. As portfolio yield provides an average of the different prices charged on all of the lender’s products, it is not a useful indicator where MFIs offer a range of different products. MFTransparency’s country-level data allows us to compare the actual APRs and EIRs, so we don’t have to rely on total portfolio yield as a proxy. It allows us to compare the prices of all products offered in a given market, not just the average price of the range of products an MFI provides. The graphs presented in this post also don’t distinguish between different product uses, so we may be comparing apples with mangos. The interactive graphs on MFTransparency’s website allow us to analyze country-level data and distinguish between different purposes, such as business, consumer, education, housing and emergency loans, which have very different characteristics and therefore different prices. Our country surveys and the range of educational materials our team develops, will allow us to accurately interpret the data we collect in each country and take into account the unique characteristics of each microfinance sector worldwide as well as possible explanations for differences in loan prices, profitability and the shape of market curves.

What conclusions do you draw from this analysis?

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  1. jbauchet1 says:

    Your mention of CAT in Mexico is interesting. In South Africa, interest rate disclosure is mandated by law, there exists a national debate about interest rate ceilings, and the Microfinance regulatory council (MFRC) is very aggressive on recording complaints from microfinance clients about interest rates abuse (among other things). Yet, lenders set interest rates very high (in 2004, a leading MF lender charged 11.75% per MONTH, although the lender believed in pricing transparency and did not change any origination fee or other hidden fee). This example needs to be taken cautiously, since an interest rate ceiling has since been imposed; I don't know how much that lender charges now.

    Transparency by itself also does not necessarily mean that prices go down. Probably financial literacy is a problem (it is lacking worldwide). Borrowers are also sensitive to many cues other than interest rates (see Financial Access Initiative director Dean Karlan's paper titled "What's Advertising Content Worth?" for a study of microfinance borrowers in South Africa: for example, showing a picture of an attractive woman on a flyer increased loan demand by as much as a 25% reduction in the interest rate).

  2. jessica-mft says:

    Thanks for your comment! Your example from South Africa is very interesting. We believe pricing transparency is the foundation for healthy free market conditions and informed consumer choice. I agree that there may be other, complementary factors that are necessary to promote the informed decision-making of microfinance clients. One of these factors is certainly financial literacy, as you mentioned. Disclosure of effective interest rates alone may not always be sufficient, as the figure may not be meaningful to clients where financial literacy is a general problem. Similarly to the outcomes of the study you mentioned, in Mexico, where I’m currently based, some industry stakeholders told me clients tend to base their financial decisions on the marketing appeal rather than the CAT, in case the figure is disclosed. Over here, it is generally argued that the reason for this behavior is a lack of financial education and that clients don’t always use comparison tools like the CAT (if available) where they don’t understand the concept. At MFTransparency we take this aspect very seriously and we have defined the development of educational materials for the consumer level as an important priority for 2010-2011. You also mentioned the threat of interest rate ceilings and the adverse effect on access to finance. If policy makers realize that disclosure of APR/EIR coupled with client education promotes healthy market developments, undesirable intervention can be prevented.
    What’s your perspective on this? Do you agree with this approach? Do you have additional ideas what else might work?

  3. With loans even though the main objective of taking the loan may have been achieved chances are that between the loan and all the other financial obligations you already have then what is left over is never enough.

  4. Great article with loads of information. And great example with South Africa.