1. contact@e-mfp.eu www.e-mfp.eu Transparent Pricing for Responsible Pricing Alexandra Fiorillo, Vice President www.mftransparency.org December 1, 2010

2. contact@e-mfp.eu www.e-mfp.eu What is transparent pricing? Examples of constructive transparency regulation How is industry-led self-regulation working? What does this mean for responsible pricing? Agenda

3. contact@e-mfp.eu www.e-mfp.eu What is Transparent Pricing? Transparent pricing means the pricing, terms, and conditions of financial products will be transparent and adequately disclosed in a form understandable to clients.

4. contact@e-mfp.eu www.e-mfp.eu Transparency Must Come First Responsible Pricing Definition & Discussion Implementation Transparent Pricing

5. contact@e-mfp.eu www.e-mfp.eu Combined Approach Responsible Pricing Self Regulated Practice of Transparent Pricing Supportive Government Regulation

6. contact@e-mfp.eu www.e-mfp.eu MIX Market 2009 Kenya Data MFI Name Yield on Gross Loan Portfolio (nominal) Opportunity Kenya KWFT36.43% Kenya ECLOF33.87% Faulu30.29% SMEP29.49% BIMAS27.95% KADET27.08% Micro Africa24.83% K-Rep22.40% PAWDEP20.51% Equity Bank How Do We Define a Transparent Price?

7. contact@e-mfp.eu www.e-mfp.eu How Do We Define a Transparent Price? MIX Market 2009 Kenya Data MFI Name Yield on Gross Loan Portfolio (nominal) Average Loan Balance Per Borrower (USD) Opportunity Kenya36.76%500 KWFT36.43%402 Kenya ECLOF33.87%272 Faulu30.29%387 SMEP29.49% BIMAS27.95%254 KADET27.08%362 Micro Africa24.83%666 K-Rep22.40% PAWDEP20.51%297 Equity Bank18.26%1,143

8. contact@e-mfp.eu www.e-mfp.eu Price Depends on Loan Size… and Other Factors

9. contact@e-mfp.eu www.e-mfp.eu What happens if an MFI has two or more products? Of different sizes? Different purposes? Do they charge the same price on all products? Almost never. Average Portfolio Yield Masks the True Price

10. contact@e-mfp.eu www.e-mfp.eu Portfolio Yield Hides Price Variations

11. contact@e-mfp.eu www.e-mfp.eu APR or EIR Uniform interest rate calculation for every loan Masks true price Not relevant for clients Portfolio Yield is not the measure of price typically required Actual price of the actual product the client purchases All costs to borrow included Transparent pricing means communicating the price from the perspective of the client What Can We Learn From Truth-in-Lending Legislation?

12. contact@e-mfp.eu www.e-mfp.eu Example 1: Cambodia Must be disclosed Charging flat interest rates prohibited Calculation of compounding interest rates required Interest Rates Information about prices must be published on MFI websites Pricing Information

13. contact@e-mfp.eu www.e-mfp.eu Example 2: Bosnia Compounding calculations required Must be included on loan contract and repayment schedule Interest Rates Prices by product must be reported to regulators Reporting Information about prices must be published on MFI website Pricing Information

14. contact@e-mfp.eu www.e-mfp.eu Example 3: Peru Interest rates must be disclosed Calculation of compounding interest required Interest Rates Prices by product must be reported to regulator Reporting All fees and insurance charges must be disclosed Information about prices must be published on the MFI website Pricing Information

15. contact@e-mfp.eu www.e-mfp.eu MFTransparency facilitates self-regulation on pricing transparency. Country by country Partner with local networks and stakeholders Publish true prices all at the same time Objective, equal treatment of all MFIs Active in nearly 20 countries Our Approach

16. contact@e-mfp.eu www.e-mfp.eu Wide support for transparent pricing A conducive environment for transparency is the major obstacle For-profit and non-profit institutions Young and mature MFIs Transparency is a value that all stakeholders agree with Broad-based support from a range of industry stakeholders What have we learned?

17. contact@e-mfp.eu www.e-mfp.eu Difficult to define and agree on what is responsible Transparency is easier to agree on because it inherently implies responsibility When prices are transparent different stakeholders can decide for themselves what is responsible Transparency leads to a sense of acting responsibly What have we learned?

18. contact@e-mfp.eu www.e-mfp.eu 2010 Kenya Pricing Data

19. contact@e-mfp.eu www.e-mfp.eu Business loans, 12 month terms

20. contact@e-mfp.eu www.e-mfp.eu Lack of information and transparency  lack of competition MFIs have trouble setting prices based on their competitors’ real rates or market rates This market imperfection leads to wide ranges of prices Lack of competition Why so much price variation?

21. contact@e-mfp.eu www.e-mfp.eu Prices become known MFIs on the high side lower prices, MFIs on the low side raise prices Prices become more uniform, follow the curve We anticipate that the average price in a market will drop. How does transparency affect pricing?

22. contact@e-mfp.eu www.e-mfp.eu Responsible prices = competitive prices Less competition = wider range in prices No transparency = less competition What does this mean for responsible pricing?

23. contact@e-mfp.eu www.e-mfp.eu We need better knowledge and understanding of pricing, and better data to analyze Transparent pricing is a prerequisite for responsible pricing Individual product pricing is essential, and it is attainable if we work together Portfolio yield is far from adequate More competition and better decisions lead to more responsible pricing Transparent pricing leads to more competition and better decisions by all stakeholders Conclusions

24. contact@e-mfp.eu www.e-mfp.eu Promoting Transparent Pricing in the Microfinance Industry