This discussion paper examines the full range of approaches to responsible pricing of loans, from promoting competition, to return on equity limitations, to interest rate caps, to comparative transparency.In December 2009, The Smart Campaign amended its Client Protection Principle, “Transparent Pricing” to become “Transparent and Responsible Pricing.” The principle states that pricing should be “both affordable to clients and sustainable for financial institutions.” This formulation emphasizes that low prices are good for clients, while allowing for the practical realities entailed in the provision of small loans and low-value savings accounts. In amending the principle, the Campaign affirms the importance of responsible pricing while recognizing that the current state of the practice does not now provide clear guidance or standards to define it.
In order to move in the direction of clearer guidance, the Campaign prepared this discussion paper. It examines the full range of approaches to responsible pricing of loans, from promoting competition, to return on equity limitations, to interest rate caps, to comparative transparency. These approaches are discussed in the context of the cost curves developed by MicroFinance Transparency, which plot detailed information on pricing, terms and conditions among all the (participating) lenders in a country. Among the most important messages to emerge from the Microfinance Transparency data are:
- Pricing and the cost structures that determine it vary widely from one country to the next. It makes sense to judge institutions in their country setting and against their competitors.
- Small loans require higher—and sometimes surprisingly much higher – interest rates and fees. This argues against interest rate or price caps, which penalize institutions attempting to reach harder-to-serve clients such as poorer people.
- Analysis of individual providers should account for factors such as outreach to (more costly) rural areas, provision of non-financial services, high profits or inefficiency. All of these factors contribute to a final determination of whether pricing is responsible.
The assessment tools developed by The Smart Campaign use the comparative transparency approach, as shown in the on-site assessment guide developed through the Beyond Codes project and available on the Campaign website, “Conducting Client Protection Assessments: A Guide.” This is also the approach advanced by MicroFinance Transparency. While conceptually similar, in that both approaches evaluate pricing in a country context and through comparisons between similar products offered by multiple institutions, the Assessment Guide and Microfinance Transparency tackle different aspects of the challenge.
Based on analysis of the current state of the practice, the Smart Campaign endorses a continued focus on comparative transparency at a country level. This ongoing work will deepen the industry’s understanding of pricing through data analysis and discussion, and it is hoped that it will eventually enable development of consensus guidelines. In the mean time comparative transparency can serve to exert pressure on organizations to price responsibly because observers will use the data to apply their own standards.
The Campaign plans to develop and/or support tools, in concert with other industry players, notably MicroFinance Transparency, to promote comparative transparency over the coming months. In the longer term, it is also important that the industry make it a priority to learn more about affordability by studying clients. It should also educate investors, clients, and regulators about the factors that contribute to sustainability.