Responsible Pricing – Where there is no will, there is no way

>> Authored by Chuck Waterfield (CEO MFTransparency)

Last week’s blog answered many of the questions MFT has been receiving since our announcement six weeks ago that we are ceasing operations. Many people in the industry hope optimistically that another organization can step in, MFT can pass the baton, and the new organization can carry on, possibly even doing a better job than MFT has done. I wish that were the case. Nothing would make me happier than to see the industry continue – and advance – with transparent pricing.

I don’t see that as possible. In my view, the industry will be taking a step back on (but not completely stopping) transparent pricing. But using what we have learned about pricing, the industry can and must now take a large step forward on the issue of responsible pricing.  Though that seems like a contradiction or an impossibility, my position is: Transparent prices don’t, by themselves, result in responsible pricing; only a commitment to responsible pricing results in responsible pricing.

And my question to the industry is:  Are we willing to make that commitment?


Transparent Pricing – “Suffer if I do, safe if I don’t”

The main dilemma with voluntary pricing transparency can be described as “I potentially suffer if I do publish my prices, and I’m safe if I don’t”.

Governmentally-regulated transparency can motivate widespread participation because if you don’t comply, you get punished.  Our industry-based voluntary transparency currently doesn’t motivate widespread participation because if you don’t comply, there are no serious punishments.

Even after seven years, international networks and funders are mostly tolerating non-participation.  An MFI can decline to provide data to MFTransparency without that decision terminating their relationship.

To some degree, there is also less pressure put on MFIs to submit their data because both investors and international networks are moving toward collecting pricing data as part of their data gathering and due diligence.  That pricing data does not become publicly transparent pricing data, and it also reduces the need to have publicly transparent pricing data.


Transparency rarely leading to responsible prices

Against our hopes, MFT collecting and publishing transparent pricing has not led to wide-spread changes in pricing policies, nor to significant drops in pricing. Some MFIs have changed their prices to be more transparent (and often lower), but most have not. Pricing transparency (when not communicated to the consumer) has not created price competition.

To my knowledge, very few investors and international networks appear to have suspended relations with an MFI whose prices appear to be outside the range of acceptable “responsible prices”.

There is one prominent example of an international network implementing widespread improvement in pricing policies – in the past 1-2 years, FINCA has dramatically changed their pricing in many affiliates, eliminating flat interest, eliminating compulsory deposits, making their price much more transparent, and also lowering their true price.  I know of no other organization that has done anything similar, and I invite and encourage you to contact me if you have.

There is one notable country where prices have become much more transparent and responsible – India, following the 2009 crisis.  The changes in India – eliminating flat interest and compulsory deposits, minimizing fees, and eliminating compulsory insurance – were the result of proactive regulation.  Where country-wide microfinance markets have become more responsible, the evidence points strongly to this being the result of formal regulation rather than industry-based self-regulation.  It seems that unless self-regulation has some teeth, it will find change to be limited in scope.


Leapfrogging Transparent Pricing and Advancing to Responsible Pricing

I see no means to sustain broad-based transparent pricing information, but thanks to having seven years of data, we now know enough about pricing that those in the industry willing to practice responsible pricing can now define and measure responsible pricing and use that information in their decision making:

  • MFIs can evaluate adjust their pricing policies accordingly
  • International networks can make it a requirement of membership
  • Investors and Funders can make it a requirement of financing
  • These decisions can be made organization-by-organization. They don’t require industry-wide cooperation and data gathering. These decisions can be made based on pricing information collected from an MFI and analyzed with objective criteria.

There are two problems with the industry’s current definition of responsible pricing, which solely compares an MFIs prices to current prices “in the market”:

Problem 1: A judgment requires access to true prices in the market (which the industry doesn’t have for most countries)

Problem 2: The definition assumes that prices are set by market forces, not by MFI managers. Our pricing data shows conclusively that in most countries, this is not the case. Price competition from market forces requires consumers to know (and understand) the true prices of the loans for sale in the market. In most cases, neither is true. It is particularly absent on the very smallest micro-loans (the loan size MFTransparency defines as “where the price curve starts”). Thus, most MFIs are not pressured by market forces to lower their prices. Instead, lower prices come from: 1) internal management decisions, 2) pressures to do so from networks or funders associated with the MFI, or 3) government price caps.

MFTransparency has shown conclusively that an MFI does not have a single price, nor does a loan product sold by the MFI have a single price. There is a range of prices that borrowers pay. To determine if an MFI is applying responsible pricing requires looking at that range of prices and evaluating what percentage of clients are paying something in the range of a reasonable price.

Using these learnings, MFT in the process of publishing a methodology and pricing analysis tool that, with 1-2 hours of work, will enable MFIs and other stakeholders to perform this assessment and use the judgment in their decision making.

The data can be collected, and the data can be evaluated and judged without access to non-transparent information from other MFIs in the market.  My hope and my challenge is that we can shift quickly to having the will, as well as having a way.

One Response to “Responsible Pricing – Where there is no will, there is no way

  • This is a fascinating article. Transparency is neccessary but insufficient. I have suggested for some years that the only way to ensure fair pricing is by formal governmental regulation, including the prudent use of interest-rate caps to prevent extortionate interest rates (as practiced in most states in the USA, for example). This article also suggests that this is one effective means to ensure transparency. Alas this is a method unlikely to receive much support from the microfinance community, whom for the most part prefer opaque interest rates which provide the principal source of profit.

    The case of Finca was interesting, and while I cannot take credit for this, it is nice to see that my mini-campaign exposing their APRs of up to 347% is no longer required. I believe Opportunity International are also addressing their interest rates, which I exposed for some time as being exortionate, thanks to the data provided by MFTransparency (see posts below).

    The final fascinating point that Mr Waterfield makes is to challenge the standard rhetoric that competition will drive down interest rates. This blind faith in the magical free market dynamic is simple nonsense, and it is refreshing to see such a learned author confirm this. Competition will only yield benefits if we permit it to. The microfinance sector generally does not, which is a key reason why we observe an utter lack of poverty alleviation as a result of microfinance.

    Finally, this article seems to suggest that voluntary codes of conduct are ineffective. There is an inherrent temptation to not participate, and investors/donors do not necessarily oblige this. Which raises yet another uncomfortable question for SMART Capaign, the sector’s best (albeit feeble) effort at self-regulation. This does not oblige full transparent publication of interest rates, and it’s definition of what constitutes a “fair” interest rate is nebulous to say the least. Smart recently awarded their certification to none other than Banco Compartamos, a by-word for exploitation, but coincidentally co-owned by the same people who own and run Smart: Accion. Indeed, Chuck Waterfield was one of the most vocal critics of the hugely profitable IPOs of Banco Compartamos, and now the sector’s own self-regulatory body has awarded the same institution its star prize!

    This is indeed a “step back” for transprency, and for the sector at large, one which I lament, and I sincerely hope that Mr Waterfield goes on to a new job where he can be equally risruptive within the sector, and promote the actual interests of the poor. There are very few people fighting for their genuine interests, and Mr Waterfield was one of them.

    One question for Mr Waterfield: you criticised Compartamos for profiteering at the expense of the poor for the benefit of a few private individuals, amongst other things while you praise Finca in this article. What do you think of Finca paying their CEO, Rupert Scofield, over $700.000 according to page 13 of the 2013 990 Form (see link below)? You have alluded to interest rates and profitbility crossing a red line and become excessive, does the same apply for salaries? Note that Scofields earns more than even the CEO of Accion!

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