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Cover Story : The Time for Transparency in Microfinance ` single “market rate” for micro-loans. Given rather “flat” cost structures, the smaller the micro-loan, the higher the interest rate necessary for that MFI to cover the costs of that loan and achieve sustainability. In other words, costs are primarily fixed (not correlated to loan size), and income is entirely variable on loan size. That creates challenges, and that requires prices that vary by loan size for those MFIs choosing to reach financial sustainability. Due to the irony that we very often charge the highest interest rates to the poorest clients, the easiest alternative has been to hide this reality by using non-transparent pricing. Secondly, once some MFIs in a market began nontransparent pricing, it became very difficult for other MFIs in that same market to continue using transparent pricing. To do so, would cause the MFI to advertise what appeared to be the highest price in the market, even though their true price could actually be the lowest. As a result, the vast majority of MFIs practice non-transparent pricing even though many would prefer to do otherwise. When MFIs are operating in a very opaque pricing environment – where nobody knows how the price of one product compares to the price of another product – there is no “market price”. With no market price, nobody really knows the true prices of the products for sale, and comparison of products on the market is extremely difficult. Thus, there exists the opportunity for some MFIs to charge a price that results in very high profit levels, and in recent years, an increasing number of MFIs are doing so. High profits generated off of the poor by charging nontransparent prices creates a bad public image for the microfinance industry and can results in a strong public and political backlash. In fact, the need for responsible, ethical management when selling financial products should be obvious to all – the current global economic crisis affecting all of us is primarily caused by a small number of companies choosing to finance homes in the US through manipulative financial products with deceptive pricing. Short-term profit seeking by a few creates serious problems for all when things go wrong. Microfinance was created to be ethical finance, and we should lead the way in practicing ethical behavior. Two years of intense discussions in the industry have led us to the conclusion that an industry-wide effort towards transparent pricing is essential to the long-term survival of the microfinance industry. We need to practice what formal finance practices in many countries – we need to publish honest prices. This will correct the current market imperfection that impedes efficiency, sound management decisions, and healthy consumer choice, and allows some

companies to make extremely high profits. Sound decision -making – by all stakeholders in microfinance – requires accurate information. As the true price of the product has not been available to us, we find a serious limitation in making sound decisions. We in the industry are determined that that will now change. Thus, one outgrowth of this dialogue has been the establishment of MicroFinance Transparency, a non-profit agency that is addressing pricing transparency through two joint activities. First, MFTransparency will collect product prices on all micro-loan products around the world and report those prices by a common, objective measurement system. Second, MFTransparency will undertake the equally important role of developing and disseminating straightforward educational material to enable microfinance stakeholders at a broad range of levels – from analysts, to donors and investors, to MFI managers, to micro entrepreneurs themselves – to better understand the concept and function of interest rates and product pricing. Since its launch at the Bali Microcredit Summit last year, over 150 people have endorsed the transparency principles of MFTransparency. The full list can be found at our website ( We encourage you to study our principles and, if you are in agreement with our mission, to add your name to our list. MFTransparency has secured initial start-up funding, from Oikocredit, Hope International, DOEN Foundation, Hivos, ICCO, and Oxfam Novib. In addition, data collection has been started in Peru and Bosnia through a pilot testing of the MFTransparency methodology funded by CGAP. The industry needs to act, and we need to act soon. The mainstream public media is already reporting the interest rates typically charged in microfinance, but there is little explanation or understanding of why microfinance interest rates are higher than previously believed, nor why there is significant variation in interest rates among different loan products. What non-transparent pricing has kept hidden for years is no longer hidden – and it should never have been hidden! We should recognize that we actually are at a point where we have the opportunity to correct a serious flaw in the way that we have been practicing microfinance for years. Pricing transparency is essential to building a healthy and vibrant market for microcredit products. It provides a valuable component necessary in free markets and currently absent in microfinance – transparent, open communication about the true cost of products. *****************************************

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Microfinance Focus April issue 2009  

A Global Magazine on Microfinance and Sustainable Development