In a recent posting entitled ‘More transparency, please!’ on the CGAP Microfinance Blog [1] by Mr Christoph Kneiding, a Market Intelligence Officer for CGAP, attention is drawn to the important issue of transparent pricing for microlending products. Whilst jurisdictions such as the United States have legislation such as the Truth in Lending Act of 1968 which obliges lenders to disclose the annual percentage rate (APR) to prospective borrowers for all products, many countries – particularly those with a significant MFI community – do not have a regulatory framework under which transparent loan pricing can be effectively supervised and enforced.
The blog notes that CGAP has decided to support the development of MFTransparency [2], a global initiative for fair and transparent pricing in the microfinance industry. According to its website, MFTransparency aims to be ‘the venue for the Microfinance industry to publicly demonstrate its commitment to pricing transparency, integrity and poverty alleviation’. By collecting original loan contracts from MFIs actual total costs of loan products can be calculated, rather than nominal prices often quoted to clients. Such a system is intended to promote transparency and allow for a meaningful comparison between different product offers. The goal is for market participants and clients within the microfinance industry to be able to operate in ‘healthy free market conditions where consumers and other stakeholders can make informed decisions’.
Mr Kneiding adds that one of the advantages of the MFTransparency initiative is to encourage a fuller understanding of how individual products are priced. Currently, researchers rely on the ‘average portfolio yield’ per institution as a proxy for interest rates. This process only produces one weighted average insterest rate per MFI as opposed to interest rates for each individual product. At the moment, MFTransparency is being used in three countries, according to the blog. It is anticipated that market participants will soon be able to explain differences in APRs based on criteria like loan size, client characteristics, and location of the MFI.
Pricing transparency and consumer protection in the microfinance industry are not new issues although they have received an increased focus in light of the current financial crisis. Previous Microcapital.Org publications [3] – [7] on these issues have been set out in the Bibliography section below.
By Chinq Yee Chong, Research Assistant
Bibliography
[1] CGAP Microfinance Blog entitled ‘More transparency, please!’: http://microfinance.cgap.org/2009/09/29/more-transparency-please/
[2] MFTransparency: www.mftransparency.org/
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