A quick insert:
We worked with group of undergrad students in Tech Monterrey Queretaro campus (a week long seminar), and used Compartamos case analysis in small groups. On one level, worked like a charm for helping understand the interest rate issue, and on 2nd level, made the issue quite clear to those young minds, what they need to look for when they interface with the MF world in Mexico. (Thanks Chuck!).
What we emphasised was that, it is of course essential to have transparent pricing, and legislation; but also what to look for key elements (compulsory savings, timing for repayments, flat rate) to get a broader sense about how MF is trying to camouflage price or not.
On another note, it will be interesting to analyse if transparent pricing improves client performance and loyalty, is there a correlation between the two? From personal experience, we can perhaps say safely, yes there is indeed a correlation, but then, we won't believe it till we have an expensive study/ evaluation done J.
Anuj
From: MicrofinancePractice@yahoogroups.com [mailto:MicrofinancePractice@yahoogroups.com]
Sent: Thursday, October 08, 2015 11:31 AM
To: MicrofinancePractice@yahoogroups.com
Cc: microfinancepractice@yahoogroups.com
Subject: Re: [MFP] Teaching cost of borrowing to borrowers
Hello Howard,
I'm in the wilderness typing on my iPhone, so need to be brief. I've given a lot of thought to these alternative measures, and they all have serious weaknesses when not considering a typical loan with constant payments. The examples you give below don't work when grace periods happen, or when there are irregular no-payment weeks as happens in India and Bangladesh. The examples also don't consider compulsory deposits, and the way they wreak havoc on the true price. All these affect the average balance figure that you're trying to get to.
Another trick Lenders use is messing with the timing, such as using interest paid up front. It isn't just total paid and average balance that affect price. Timing can have a major impact.
I've never found a way for a reasonably accurate price comparison other than generating the APR from the cash flow using dates and amounts. Clients will never be able to calculate this, and it requires legislation to limit the abuse that lenders practice.
A couple of quick rules do work so-so. Declining balance interest is honest, and it gives the true price. Tell clients the more tricks the lender uses, the more cautious to be. Flat interest, fees, and forced savings all distort prices. Second, if two loan products seem nearly identical (same amount, term, grace period, no forced savings, then doing something of a comparison of total amount paid is reasonably close maybe 80% of the time.
I have a bunch of examples in different power points and materials at mftransparency.org. Try searching in the Google search box on the website to narrow your search.
Chuck Waterfield
On Thu, Oct 8, 2015 at 2:15 AM, 'Howard Brady' hbrady@mfiresources.org [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com> wrote:
Hi all,
Last week I was training a group of microfinance practitioners and the concept of transparency and interest rates came up. I immediately thought of MFTransparency (of which I was a founding board member) and the interest rate calculation tool that's been used thousands of times to calculate APR and EIR of products worldwide. But I wondered how these numbers are explained to borrowers. I'm sure that the borrowers can be instructed, "the MFI with the lowest APR or EIR has the lowest borrowing cost", and that's pretty simple and maybe I should leave it at that. (Some borrowers chose to go with a more expensive source of funds because it may prove easier to get, to repay, or maybe they don't want to join a group, etc., but we'll leave that aside for the moment.)
However I was curious if, to perhaps make it more simple for borrowers to understand, if the MFI could tell the client, "If you get this loan and pay it off as scheduled, then get another loan immediately thereafter so as to complete one year of borrowing with us, your interest and fees and other charges will be 75 (pesos) for the 300 (peso) loan." You and me would pull out our calculators and compute the rate of 25%. I was thinking, though, that this doesn't take into account the difference from a "balloon" or "bullet" or "principal paid at the end of term" loan and a declining balance loan where, on average, ½ of the loan is outstanding at any one point in time (I know it's a bit more than that, but for simplicity purposes, let's say it's ½). So the client would need to be instructed about this and be told that they are only going to have access to ½ of the capital, at any one point in time, so it's more like a 150 peso loan. (Which increases the stated rate to 50% in this example). In other words the statement above would need to be revised to say, "If you get this loan and pay it off as scheduled, then get another loan immediately thereafter so as to complete one year of borrowing with us, your interest and fees and other charges will be 75 (pesos) for the 300 (peso) loan. However we're asking you to pay off a portion of the loan amount with each payment so on average you're only able to use 150 (pesos) of the 300 (pesos). You should compare the cost of 75 (pesos) with a 150 (peso) loan with other MFIs to determine the lowest borrowing cost."
So my question(s) to the group is, "Have you seen interest explained in this way to a borrower?" And then feel free to tell me if you think it's a good idea or not to try this out. Private or public critique is welcome.
Thanks for your comments in advance,
-howard
Howard Brady
President & CEO – MFI Resources
MFP Moderator
Posted by: "Malcolm Harper" <malcolm.harper@btinternet.com>
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