1. Transparent Pricing Progress: How to Understand the Prices We Charge Introduction to SPM Workshop June 2012 Promoting Transparent Pricing in the Microfinance Industry

2. Agenda 1. Introduction to the confusing world of micro-credit pricing 2. To understand microfinance, you need to understand “the curve” 3. Transparent pricing is necessary for the client to make good decisions

3. Which loan would you pick? Zero Interest Loan Interest and Fees And SavingsInterest Only Loan amount:$1,000 Loan term:10 weeks Interest Rate:0%15% “flat”12% “flat”40% decl Upfront fee:5%2%1%0% Security deposit: 0% 20%0%

4. Which loan would you pick? Zero Interest Loan Interest and Fees And SavingsInterest Only Loan amount:$1,000 Loan term:10 weeks Interest Rate:0%15% “flat”12% “flat”40% decl Upfront fee:5%2%1%0% Security deposit: 0% 20%0% TCC$50 $33$42

5. Which loan would you pick? Zero Interest Loan Interest and Fees And SavingsInterest Only Loan amount:$1,000 Loan term:10 weeks Interest Rate:0%15% “flat”12% “flat”40% decl Upfront fee:5%2%1%0% Security deposit: 0% 20%0% APR49%47%49%40% TCC$50 $33$42

6. Which loan would you pick? Zero Interest Loan Interest and Fees And SavingsInterest Only Loan amount:$1,000 Loan term:10 weeks Interest Rate:0%15% “flat”12% “flat”40% decl Upfront fee:5%2%1%0% Security deposit: 0% 20%0% APR49%47%49%40% Transparency Index 03225100 TCC$50 $33$42

7. The Downward Spiral Prices are far from clear, and thus: ◦ Consumers over-consume ◦ Market competition is hindered ◦ Strong temptation from high profits ◦ The poor are harmed ◦ Public image is tarnished ◦ Governments urged to intervene Transparency, and particularly pricing transparency, is a key element to correct this serious problem in the microfinance industry

8. Two common questions without simple answers: 1) What is the “market price” of microcredit? 2) What is a “responsible price” for microcredit?

12. The interesting question: Are institutions “off-of-the- curve” pricing responsibly?

13. Why is there a price curve for micro-loans?

14. Cost Components that Affect Pricing Component Financial Costs10% Loan Loss2% Operating Costs20% Profit3% Total Price35%

15. Realizing that there is a Cost Curve Efficiency123 Operating Cost per Loan $50 Loan Size$500 Operating Cost Ratio10%

16. Realizing that there is a Cost Curve Efficiency123 Operating Cost per Loan $50 Loan Size$500$250 Operating Cost Ratio10%20%

17. Realizing that there is a Cost Curve Efficiency123 Operating Cost per Loan $50 $30 Loan Size$500$250$100 Operating Cost Ratio10%20%30%

18. MFI’s Costs Defining a Responsible Price

19. + MFI’s Choice of Profit MFI’s Costs Defining a Responsible Price

20. = Price Set by the MFI + MFI’s Choice of Profit MFI’s Costs Defining a Responsible Price

21. What Price Can the Poor Afford? = Price Set by the MFI + MFI’s Choice of Profit MFI’s Costs Defining a Responsible Price

22. Total Cost of Credit “ Isn’t Total Cost of Credit sufficient? It’s what clients ask for. They don’t understand abstract percentages!”

23. Which would you buy? $1$2

24. Which would you buy? $1 $2 1 liter3 liters

25. Prices of loans are much harder…. We aren’t buying an item, we are renting money, and we are renting a variable amount of money for a variable amount of time.

26. Which would you buy? Example 2 Loan 1Loan 2 Amount$1,000$1,500 Term12 months18 months Total Cost$179$333

27. Which would you buy? Example 2 Loan 1Loan 2 Amount$1,000$1,500 Term12 months18 months Total Cost$179$333 APR33%28%

28. What is the APR? (Annual Percentage Rate) The APR indicates the cost for you to borrow $1.00 for one year. It is a unit rental cost. An APR of 30% means it would cost you 30 cents to borrow $1.00 and keep the entire $1.00 for one full year. The APR is an essential figure for you to compare the true cost of different loans.

29. You can use our MFT Pricing Calculator to deepen your understanding and to calculate actual prices of loans

30. MFT Pricing Calculation Tool – Advanced Analysis

31. Promoting Transparent Pricing in the Microfinance Industry