Live blogging: Is transparent pricing in microfinance necessary?

Does it seem like the obvious response to this question should be a “Yes!”? An interesting point made by Sanjay Sinha (M-CRIL), at one of the Conference sessions, was how communication would play a key role in ensuring that increased transparency would not backfire on the MFIs. While it is important to understand what an MFI’s APR is, it is also important to not forget the other side of the equation – operation costs. He painted a scenario in which the same MFI charges 35% in one of the states in North-East India and 25% to its clients in a politically-stable state. A policy-maker, or more likely a politician, who does not understand the implications such political and socio-economic environment has on operational costs, would assume that the MFI is making money off the poor. Perhaps the very reason institutions are reluctant about pricing disclosures – inherent political risks. Sinha had a PAR60 graph for 42 MFIs between 2002 and 2008. Something that was obvious was that the PAR60 shot-up between 2004-05 and 2006-07 – a period of increased political risks for Indian MFIs in the aftermath of the AP Crisis.

The lead presenter for this panel was Chuck Waterfield of MFTransparency, a newly founded initiative for promoting transparent pricing in the microfinance industry. Waterfield’s presentation was detailed, but here follows a short summary.

1. The cost of providing credit is relatively flat for smaller and larger loan sizes. Therefore, if an institution wants to make a profit, it has to increase its interest rates.
2. Non-transparent pricing is common, and perhaps has become a culture in the microfinance sector, because explaining interest rate differentials to clients is a challenge (the larger question to me is of course whether clients understand interest rates – something that CMF is working on).
3. Data from MIX Market for 80 MFIs in EastAsia/Pacific confirms to theory – smaller the loan size, higher the operational costs ratio. In India and Bangladesh, the curves are much flatter i.e. there are no dramatic increases in operational costs for smaller loans.

Speaking of interest rates and micro-borrowers, my colleagues and I ran into the Co-founder of Rang-De – an organization that I have described (mistakenly as I learned) as “the Indian Kiva” to people. One stated difference between the micro-entrepreneurs supported through Kiva and Rang-De is that the latter benefit from the well-intentioned online ‘investors’. Kiva partners (frequently small NGOs and MFIs) do not pass on the reduced cost of funding (investors lend money at 0%) to their borrowers. This struck me as an immediate instance where better and effectively implemented transparency norms could help both clients and investors.