promoting transparent pricing in the microfinance … · cambodia: prakas on the calculation of...

Pricing Disclosure and Truth-in-Lending Policy: International Examples and Standards

October 2011

Promoting Transparent Pricing in the Microfinance Industry

What can we learn from truth-in-lending legislation?

• A combination of APR or EIR and TCC

Uniform interest rate calculation for every loan

• 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

Why so much price variation?

• 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

How does transparency affect pricing?

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.

Country Examples 1. Cambodia 2. Bosnia 3. Peru 4. Kenya 5. Malawi 6. Philippines 7. West African Economic and Monetary

Union (WAEMU) 8. Zambia

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Example 1: Cambodia

regulated by Commercial banks, specialized banks,

licensed MFIs

National Bank of Cambodia (NBC)

Example 1: Cambodia

• Must be disclosed • Charging flat interest rates prohibited • Calculation of compounding interest

rates required

Prices

• Information about prices must be published on MFI websites

Pricing Information

Cambodia: Prakas on the Calculation of Interest Rate on Microfinance Loans

Mandates the use of declining balance interest rates

Cambodia: Recommendations Require disclosure of additional information • Fees • Insurance • Security deposit requirements • All other charges

Require MFIs to disclosure effective rates

• Establish an official formula

Example 2: Bosnia

regulated by

Commercial Banks and MCOs

(Non-profit microcredit foundations, MCFs & for-

profit microcredit companies, MCCs)

Banking Agency of the Federation of Bosnia and Herzegovina (FBA) and Banking Agency of the Republika Srpska (BARS)

Example 2: Bosnia

• Compounding calculations required • Must be included on loan contract and

repayment schedule

Prices

• Prices by product must be reported to regulators

Reporting

• Information about prices must be published on MFI website

Pricing Information

Bosnia: Loan Document Transparency

APR and EIR

Bosnia’s Center for Financial and Credit Counseling

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Partners Leading MFIs, IFC, EFSE, DFID

Structure

Center that provides national credit information helpline, monthly mobile financial education program that travels to cities, Mediation services for over-indebted clients, One-on-one financial and credit counseling

Objective Address issues of over-indebtedness, provide financial education and counseling, and address the problems of lack of transparency in the BiH financial sector

Bosnia: Recommendations Make pricing data reported to regulators publicly available

Financial education about effective interest rates

• Use of standardized repayment schedules • Disclosure of information via website

Enforcement of disclosure requirements

Example 3: Peru

regulated by

Commercial banks, municipal savings and credit banks (CMACs), rural savings

and credit banks (CRACs), and entities for

development of small and micro enterprises

(EDPYMEs)

Superintendency of Banking and Insurance (SBS)

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

Peru: Decrease in Prices of Consumer Credit After Mandatory Disclosure

Peru’s Financial Education Program for Secondary Students

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Partners Superintendency of Banking, Insurance Companies and Private Pension Funds of Peru (SBS) and the Ministry of Education

Structure National training of trainers program for secondary school teachers

Objective Provide secondary school students with basic financial education tools

Outreach Currently reaching 200,000+ students via 1175+ teachers and a long-term goal of 100% coverage of all Peruvian students

Client Financial Educational Materials

The SBS (Central Bank of Peru) produces pamphlets about transparency in financial services sector and rights of consumers of credit

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Peru: Recommendations

Study causes of decline in pricing after mandatory disclosure to inform future policy

Standardized disclosure format such as loan documentation and website content

Example 4: Kenya

regulated by Deposit-taking

MFIs Central Bank of

Kenya (CBK)

regulated by Savings and Credit

Cooperatives (SACCOs)

SACCO Societies Regulatory Authority (SASRA)

Example 4: Kenya

• Standard disclosure regime in phases: TCC and/or Repayment Schedules and then APR

• Standard measure in loan contract • Standard measure submitted to CBK for publication • Financial education program • Dispute resolution mechanisms

Consumer Information Project: A CBK and FSD Kenya Collaboration

Kenya: Financial Education Themes in Kenya according to FSD Survey of Consumers

Recurring theme: choosing

between credit products and

providers

Kenya: Current Pricing Disclosure by Banks

FSD-CBK Initiative aims to

further elaborate how these rates are

determined

FSD-CBK Initiative aims to better

distinguish between

mainstream lenders and

microlenders

Financial Education Partnership for Kenya

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Partners FSD Kenya, Ministries of Finance, Cooperatives, Education, Youth & Sports, etc.

Structure Active partnership network

Objective Partnership aims to build a strategy that finds effective ways to improve the nation's knowledge and understanding of personal finances

Outreach National outreach, on-going

Insurance Consumer Education-Kenya (ICE-K)

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Partners Microfinance Opportunities & Association of Kenya Insurers (AKI)

Structure Training of trainers; radio campaign; technical support to organizations

Objective Expand the Kenyan microinsurance market by improving the risk management capacities of low-income people through insurance education

Outreach Project currently in-process so outreach unknown

Kenya: Recommendations Specify and standardize disclosure requirements

• Interest rate terms and calculation methods • Fee purposes, when fees are charged

Require disclosure of both Total Cost of Credit and Annual Percentage Rate

Mobilize FSD-K research in a consumer education program

Example 5: Malawi

regulated by Deposit-taking

MFIs Reserve Bank of

Malawi

regulated by SACCOs Registrar of Cooperatives

regulated by NGOs Ministry of Women, Gender and Youth

Malawi: Legislation

• Disclosure statement displayed on premises of every

microfinance branch in standardized format • Loan contract must state nominal interest rate,

commissions, and fees • Periodic reporting to Reserve Bank of all charges

levied on loan products

Malawi Microfinance Bill of 2010

Malawi: Client Financial Education Programs

• Develop curricula for financial literacy program • Consumer Rights & Code of Conduct for Providers • Develop technical knowledge of all stakeholders

National Financial Education Strategy

• Receive and resolve complaints between service provider and customer

Consumer Education Unit

Malawi: Recommendations

Require disclosure of interest rate details

• Term • Flat vs Declining • Official Formula • Effective rate (including fees)

Technical assistance and support to institutions to facilitate compliance with disclosure requirements

Example 6: Philippines

regulated by Microfinance

Providers Bangko Sentral ng

Pilipinas (BSP)

regulated by Credit Unions Cooperative

Development Authority

regulated by NGO-MFIs No regulatory authority

Philippines: Legislation

• Loan amount, interest and other finance charges must be disclosed

Truth in Lending Act, 1963

• Flat interest rates prohibited • Formula for calculating annual and monthly EIR • EIR to be published on loan contract • Notification of borrowers‘ rights in business premises • Standard Disclosure Statement

BSP Circular 730, 2011

Philippines: BSP Memorandum on EIR Calculation

• Five scenarios to calculate EIR :

Fixed equal amortization

Fixed principal amortization


with grace period

Periodic interest, balloon

payment at maturity


– weekly installments

• Calculations based on discounted cash flow analysis • Excel formula for computation of EIR and MIR (monthly interest rate)

Philippines: EIR Calculation Model A B C D E F G 1 2 3 4 5 6

Loan Amount : 120,000 Monthly Installment: 11,001.60 Contractual Rate 1.50% Other Charges 3.00% No. of installments 12

7 8

Installment period

Gross Loan

Principal Interest Other Charges

Cash Flow O/S Balance

9 120,000 120,000

10 0 3,600 116,400 120,000

11 1 9201.60 1,800 (11,001.60) 110,798.40

12 2 9,339.62 1,661.98 (11,001.60) 101,458.78

13 3 9,479.72 1,521.88 (11,001.60) 91,979.06

14 4 9,621.91 1379.69 (11,001.60) 82,357.15

15 5 9,766.24 1,235.36 (11,001.60) 72,590.91

16 6 9,912.74 1,088.86 (11,001.60) 62,678.17

17 7 10,061.43 940.17 (11,001.60) 52,616.74

18 8 10,212.35 789.25 (11,001.60) 42,404.39

19 9 10,365.53 636.07 (11,001.60) 32,038.86

20 10 10,521.02 480.58 (11,001.60) 21,517.85

21 11 10,678.83 322.77 (11,001.60) 10,839.01

22 12 10,839.01 162.59 (11,001.60) -

23 Total 120,000.00 12,019.19 3,600

Effective Annual lnterest Rate (EIR) = (using Excel lRR Function) = (1+lRR(F10:F22) = 26.71%

Effective Monthly lnterest Rate (MIR) (using Excel IRR Function) = IRR(FI0:F22) = 1.99%

Monthly Installment (using Excel PMT Function) = PMT(C3,C5,-Cl)*-1 = 11,001.60

Source: BSP Memorandum No -040

Philippines: Format of Disclosure Statement as required under the Truth in Lending Act

Fees and Insurance

EIR

Conditional

charges

Philippines: Amortization Schedule with Disclosure Statement

Philippines: Recommendations

Education to enhance effectiveness of policy

• Client financial education • Staff training

Example 7: West African Economic and Monetary Union (WAEMU)

(Senegal, Togo, Benin, Niger, Mali, Guinea Bissau, Cote d’Ivoire, Burkina)

regulated by Decentralized

Financial Systems

Central Bank of West African States and the Ministry of

Finance

WAEMU: Legislation

• *EIR calculation but components are disputed • Adopted by every country in the Union • Price cap of 27% per annum applied to all non-bank institutions

or individuals who give loans

Standardized Pricing Formula*

• Starting in 2008, Article 60 of “New Microfinance Law” is being enacted in WAEMU countries one by one

Decentralized financial systems must be transparent in the pricing of financial services

WAEMU: Recommendations

Clarity around official rate

Evaluation of effectiveness of price cap • Range in maximum prices allowed, depending on country,

institution type, product type, etc. • Update maximums to reflect current market rates

Consistent enforcement of regulatory framework

Example 8: Zambia

regulated by

Deposit taking MFIs and Non-deposit taking MFIs with capital requirement

> ZMK 25 million

Bank of Zambia

regulated by Non-deposit taking MFIs with capital requirement

< ZMK 25 million

Cooperative Societies Act and the Money

Lenders Act

Zambia: Legislation

• Cost of borrowing to include interest, some fees and charges

• Formula for calculating EIR • Lists contents of Disclosure Statement • MFIs to submit interest rates and charges to

Bank of Zambia for publication in newspapers

Banking and Financial Services Regulations, 1995 and 2006

Zambia: Banking and Financial Services Act, 1995 &2006

Contents of Disclosure Statement

APR Formula provided by regulation

Total Cost of Borrowing and

list of all charges to be disclosed

on the statement

Zambia: Cost of borrowing for MFIs

Reports Annual

Interest Rate by institution

Source: Bank of Zambia

Zambia: Recommendations

Require disclosure of all fees

Provide training to MFI staff on disclosure requirements

Develop client education program

Summary Official Pricing

Formula

Flat Interest

Rates Banned

APR/EIR on Repayment

Schedule

Fees Disclosed

Standards for

Loan Docs

Report Prices to

Regulators

Pricing published

on website

Client Financial Education Program

Cambodia X X X

Bosnia X X X X X X

Peru X X X X X

Kenya X X X

Malawi X X X

Philippines X X X X X

WAEMU X

Zambia X X X X

Standards of Reporting

Regulator

Consumer

Financial Institutions

Standardized Repayment Schedule

Cash flow: The principle, interest, penalty and total balance are also specified throughout the loan term

Grace period: The length of the grace period, payments due during the period and interest calculations during the period are shown

Product name: The loan product name is specified

Interest rate: The interest rate is included and both the term and calculation method are specified

Fees and Commissions: All fee names, amounts, purposes and dates paid are specified

Installment info: The repayment frequency, total number of installments, installment amount by principle and interest and every installment date are listed

Institution contact info: If the borrower needs to speak with the loan provider they have their address and phone number

How to Increase the Level of Transparency Even More In order to completely adhere to the industry standards for disclosure, this repayment schedule should also include: • Annual Percentage Rate (APR) (or the equivalent rate required by the local regulatory authority) • Security deposit requirement • Total cost of credit

Loan Document Transparency - Uganda

Roles for Regulators and Policymakers

• Learn the distinctions of microfinance product pricing

• Use the resources available on the MFTransparency website

• Attend trainings offered by MFTransparency (webinars and on-site)

Step 1: Increase your knowledge of transparent pricing


• Endorse MFTransparency and the Smart Campaign

• Propose and implement mandatory pricing disclosure legislation

• Advocate broad application to all lenders if under different regulatory bodies

Step 2: Advocate transparent pricing


• Use MFTransparency pricing software to get approximate pricings

• Consult prices posted on MFTransparency website for accurate pricings and market comparison

• Act as a rolemodel by demonstrating your clear commit to responsible microfinance

Step 3: Always know the prices of the products in your market

Financial Education

October 2011


Financial Inclusion & Consumer Education Financial Inclusion seeks to: • Increase financial outreach to under-served and un-

served populations • Improve access at a reasonable cost to these

populations to a range of financial services and products Consumer Protection Efforts and Financial Literacy Initiatives help bring new customers to the market

(Source: Indian School of Microfinance for Women) 55

Consumer Protection? Consumer protection involves the implementation of measures that: prevent irregularities or transactions which have

negative impact on consumers; empower consumers to exercise informed choices

and select value-for-money goods and services; provide fair access to basic goods and services; and open avenues to address consumer interests and

concerns Source: MICROFINANCE INDUSTRY ADVISORY on

Consumer Protection in Microfinance, 11 October 2007, Philippines

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Three Main Consumer Protection Goals

“There are three main consumer protection goals – regardless of whether the consumer is a fruit vendor in Ghana or a home buyer in the U.S.,” says CGAP expert Kate McKee. “Information given to the customer should be transparent: it should be clear what they are getting. Customers should be treated fairly – and should only be sold products and services they can handle. Last but not least, financial services providers should put easy-to-use systems in place for resolving errors or disputes.”

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Consumer/Financial Education Financial education addresses weak financial literacy

by empowering the poor to make wise financial decisions. May teach people how to save more, spend less, borrow prudently, and manage their debt with discipline. (MF Opps)

“Financial literacy has been defined as the ability to process financial information and make informed decisions about personal finances.” (IFMR, India, 2008)

Needed to balance information between consumers and providers of financial services 58

National Financial Education Strategy

Awareness

Comprehension

Behavior Change

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National Financial Education Strategy Target Groups: Consumers Microfinance Service

Providers Donors, Investors &

Funders MF Networks and

Support Organizations Governments, Politicians

Content: General awareness of

financial services Consumer rights & Code

of Conduct for Providers Technical knowledge of

all stakeholders

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Global Financial Education Initiative Partners: Microfinance Opportunities, Citi

Foundation, Freedom From Hunger Structure: Training program focused on: Budgeting,

Debt Management, Savings, Bank Services, & Financial Negotiations, among others

Objective: global program targeted at those just above and below the poverty line in developing countries

Outreach: 300+ trainers in 37 countries; 125,000 client recipients; 6.7 million people have been exposed through radio, print, dance, drama, etc. 61

Changing the Perception of Microinsurance in Brazil

Partner Institutions: CNSeg, the Brazilian Insurance Confederation

Structure: a radio soap opera, a short film, street theatre, and printed graphic material.

Objective: focus on raising awareness and educating low-income potential insurance consumers, be they individuals or commercial enterprises, in the formal or informal economy.

Outreach: goal is a significant portion of the nearly 30 million low income people in Brazil

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Uganda’s Consumer Education Programme

Partners: FSDU, AMFIU, CDFU, Ministry of Finance Structure: mass market communication of broad

messages across the country; posters, leaflets and flyers, radio call-ins, radio spots, and flipcharts; newspaper inserts, called Money World magazine; Training of Trainers for MFIs; theatre performances

Objective: disseminate messages about knowledge of consumer rights and responsibilities, and types of financial institution and product

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