Chuck Waterfield – Why We Need to be Honest about the Prices We Charge the Poor
It is the inspirational enthusiasm and optimism of such events as the Month of Microfinance that have kept me involved in microfinance for over 25 years now. When I accepted a job in Haiti in 1985 to experiment with making microloans, I had no idea that my career would be so destined and that microfinance would become so significant and well known.
On the whole, I’ve been very comfortable and proud of what we have done. The original vision of providing a fair alternative for the poor to help them expand their microenterprise and increase their income is what drew me to development work and microfinance. We strove to be “businesses for the poor”, an alternative to the businesses called “moneylenders”, but decades later we still struggle to define exactly what makes microfinance different from moneylending. My current job is focused on studying this question.
April 2012 is the “Month of Microfinance”, I am writing my contribution on April 20, and today happens to mark the five-year anniversary of when Banco Compartamos, in Mexico, did a public offering of shares on the Mexican stock market. Most of you will know about this historic event, as it has been much discussed and debated in the five years since. Two non-profits (Compartamos-NGO and ACCION), one development bank (IFC), and 18 private shareholders (mostly Compartamos board and staff) had invested a total of $6M six years earlier. The day of the IPO, their US$6 million investment became worth over US$2 billion – a 350-to-1 return on investment, and most of that investment was originally donor money, not private money.
Six months prior to the IPO, in October 2006, the media had been full of news about microfinance, reporting that Grameen Bank and Dr. Yunus were awarded the Nobel Peace Prize. Now the media was reporting that an MFI in Mexico, with 98% female clients, was charging over 100% APR interest, had made over 50% ROE profits for six years in a row, and the owners had now cashed out hundreds of millions of dollars. The world started asking us what was going on. Five years later, I believe the IPO had more impact on microfinance than the Nobel Peace Prize.
To me, a clear part of the equation was that businesses generate profits through the prices they set. Prices in microfinance had been historically set at “cost-plus”, to try and cover costs and maybe generate some profit. Compartamos charged prices that generated extremely high profits. And Compartamos, like the vast majority of MFIs in the world, was not communicating true prices to any of the stakeholders, particularly the clients. Compartamos would advertise prices as “4% a month” which already sound rather high. The true prices (using the APR formula used in the US Truth-in-Lending legislation) were 129% when the security deposit was included in the calculation. You can read my article explaining how the price was communicated and how the true price is calculated here:
When consumers don’t know the true price of the product they are buying, the market doesn’t work. Lenders can manipulate prices to attract consumers. In many countries, Truth-in-Lending regulation comes into place to obligate lenders to be transparent on prices. But the vast majority of microfinance is in environments where transparent pricing is not obligated. To correct this situation, the industry agreed to mobilize for “self-regulation” on pricing, and my organization, MicroFinance Transparency, was born in 2008. We have since worked in 27 countries with a very high degree of voluntary participation. Whereas just a few years ago, none of us knew the true prices we were charging, we now have public knowledge of prices of loans going to over 50 million clients around the world. That’s important information, and that information is now helping the industry understand prices better and use that better understanding to make better decisions. Pricing transparency is an important example that the original values and vision of the microfinance industry are still strong. Do visit MFTransparency to learn more about pricing.
CEO, MicroFinance Transparency
20 April 2012