Microfinance Practice: Re: [MFP] MicroFinance Transparency's transition plan

Dear all,

On a sidenote: while all agree transparency is desirable, it seems that our focus is only on the price MFIs charge their customers. I have not seen many investment contracts, but I have the impression that it is rather common for investors to charge an arrangement fee, a commission, etc. besides loan interest on MFIs, without telling MFIs what the real rate is. Should microfinance investors not at least practice what they preach?

Mingyee

   From: "'Meyer, Richard' meyer.19@osu.edu [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
 To: "MicrofinancePractice@yahoogroups.com" <MicrofinancePractice@yahoogroups.com> 
 Sent: Wednesday, March 18, 2015 9:10 PM
 Subject: RE: [MFP] MicroFinance Transparency's transition plan
  
Very interesting and thanks for taking the time to reply.  Dick
  
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]  
  Sent: Wednesday, March 18, 2015 3:28 AM
  To: MFP
  Subject: Re: [MFP] MicroFinance Transparency's transition plan
  
  Hello Dick,
  
We'll be working on some analysis of the data to answer these sorts of questions, but I can tell you that in being part of the dialogue with 600 MFIs over the past 7 years there appears very little inverse correlation of transparency to   legal issues but more the reverse.   There tends to be more transparency in countries where transparency is an obligation (and you need some legal requirements for transparency if you have price caps).  
  
The choice to be transparent is more of an ethical decision when there are no laws demanding transparency.  And then one's preference to be ethical gets fbound together with the reality that one's true prices are two, or three, or four   times higher than what you have been telling the world.  So an MFI can feel "We'd rather not lie, but we really don't want to tell the truth either."   (There are interesting examples of MFIs who charge flat interest on their smallest loans and declining balance   interest on their larger loan balances - it is hard to deny that this is anything but a way to make the price to the poorer clients not look so high.)
  
I would say the biggest factor in the decision to be transparent or not is how big the difference is between what you say your price is and what your price really is.  MFTransparency calculcates that and calls it the Transparency Index   (where 100 is a perfectly transparent price).  And, because those hidden prices tend to be very high prices, there is a secondary correlation between "really high prices" and "reluctance to be transparent".  
  
To see just how messy pricing can become, take a look at the data we collected on Ghana.  This link gives you access to the full report, and I've posted an executive summary right here.  
  
http://www.mftransparency.org/resources/microfinance-pricing-report-ghana/
  
Executive Summary
  ·          The institutional level Pricing Transparency Index ranges widely from 16 down to 99 in Ghana. Twenty-four products showed improvements   in their Transparency Index between 2011 and 2013, while 18 products had less transparent prices.
  ·          Only a small minority of borrowers benefit from loans priced transparently as 2% of them receive loans which Transparency Index is   above 75/100.
  ·          This low level of transparency is explained by pricing practices consisting of multiple price components: 95% of borrowers receive loans which incur   interest calculated using a flat interest method; 95% of borrowers pay fees in addition to the interest rate; 70% of borrowers pay a compulsory insurance fee; and 84% must provide compulsory deposits. The few MFIs with a good Transparency Index use   declining rates and a limited number of fees.
  ·          Microfinance pricing data collected in Ghana shows that the true prices increase on smaller loans. As true prices rise, the interest rate communicated   to the borrower becomes less indicative of the true price and therefore, the corresponding Transparency Index value decreases. Inversely, larger and longer term loans are priced more transparently.
In summary, what I say is that the industry has painted itself into a corner.  Industry strategists advocated that hiding our prices would be a good thing.  So many MFIs started hiding their prices.  The world caught on to what they were   doing, but reversing the process by relying on voluntary participation of MFIs is a very difficult and slow process and will never get universal participation.
  
Chuck
  
On Mar 18, 2015, at 1:24 AM, 'Meyer, Richard'   meyer.19@osu.edu [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
  
  Chuck:  Have you noticed if resistance to transparency has been greater in places where there are interest rate caps, so the MFIs have had to resort to many other types of fees to increase their yields and cover   costs?  Has it also been greater in countries where interest is a bad word or not permitted?  Dick
   
  From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com] 
  Sent: Tuesday, March 17, 2015 6:49 PM
  To: MFP
  Subject: [MFP] MicroFinance Transparency's transition plan
   
  Dear colleagues, 
  We much appreciate the continual support many of you have given to MicroFinance Transparency since we launched in 2008.  We have been inspired by the clear industry-wide commitment to the principles   of transparent pricing.  Thanks to all of us working together, the industry has made impressive progress over these 7 years – transparent pricing on 1,800 loan products sold by 530 MFIs to 52 million clients.  Working together, we all accomplished more than   expected, and to our knowledge we did more than any other industry to voluntarily practice pricing transparency.  
  Yet the MFT board has asked me to communicate their decision that MFT's role in pricing transparency will be ending in a few months.  Despite   the broad desire to practice transparency, the successes we had did not come easily.  Among MFIs, hesitation to participate and decisions to decline participation were common.  The hurdles were many.  For some, there was reluctance to be in the transparent   minority; for others, there was fear of public criticism, the struggle to submit yet one more report to an external agency, and the challenge of understanding the technical nature of the requested information.  
  In our last months, there are three final steps for MFT:
  First, we are revising and documenting our pricing tools and releasing them to the industry so that others may use them.  Our methodology can continue to be built into decision making and reporting   procedures for funders, networks, raters, and analysts.  However, new prices won't be published on the MFTransparency website.  The industry will need to determine if there is any possible new home for any new data collected, or if that data will only be managed   internally by the institutions collecting it.
  Second, we are finishing our work on a new "Balanced Pricing Analysis" and will also make that available for organizations to incorporate into their evaluation and decision-making processes.
  Finally, we are preparing a set of articles and reports that pulls together the rich lessons we have learned from seven years of collecting and studying pricing data. 
  Again, we thank all of you for your support over the past years.  Together we worked towards the organization's mission to be the leader in microfinance product pricing transparency by promoting public   disclosure and education. Although much work remains, we see countless examples of positive change.  We see pricing a major topic of conversation in every conference, where before it was never discussed and rarely understood.  We have frequent examples of   MFIs changing their pricing to make it more transparent.  We have felt a part of the movement to recognize those MFIs committed to the hard decisions necessary to seek a price that balances the needs of their business with the needs of their clients.  We will   continue to work with you, even if not through MFT. 
  Fond regards on behalf of the board and staff of MFTransparency,
   
  Chuck Waterfield
  CEO, MFTransparency