In recent years, a handful of microfinance institutions (MFIs) have come under fire for charging low-income clients extremely high interest rates for their microcredit loans. The 120 percent annual interest rates offered by Mexico’s leading MFI, Compartamos, has produced profits but dubious public benefit, provoking outrage among fellow practitioners.
A new venture hopes separate the lenders from the loan sharks by improving transparency into the terms of microfinance loans.
In July 2008, Chuck Waterfield of Columbia University teamed up with Nobel laureate Mohammed Yunus (pictured) to launch MFTransparency, an initiative dedicated to “providing transperent pricing in the microfinance industry”. While MFIs customarily disclose information on their financing, non-transparent pricing is widespread — interest rates change substantially relative to loan size, making it difficult for clients to understand how much they are actually being charged. Closing fees, savings accounts requirements, interests on savings, and numerous other charges need to be factored into the initially quoted monthly interest rate, leading to a highly confusing pricing situation that provides much room for exploitative money-lending practices.
MFTransparency uses data voluntarily provided by MFIs around the world to publish Annual Percentage Rate (APR) and Effective Interest Rate (EIR) calculations online. It is hoped that this initiative will give MFIs, clients and donors a clearer estimation of market price, and put pressure on institutions currently making large profits by charging their clients extortive interest rates. MFTransparency has recently released data for Cambodia as it progresses through a set of pilot countries.
This project has been applauded by a number of microfinance experts and should bring the industry closer to its initial mandate: providing the unbanked with low-cost access to financial services.
We have some reservations, however, regarding the usefulness of the data in its current form. While the pricing data published online will certainly be extremely valuable to researchers and microfinance experts in terms of providing benchmarks and opportunities for self-evaluation, it seems unlikely that developing-country clients will access these analyses — much less understand them — when deciding whether or not to take a loan with a given institution. Providing truthful data is only the first step to establishing a more transparent environment. Making this data user-friendly and and within reach of clients is important too.
Fortunately, some fixes aren’t hard to imagine. Technical analysis can be simplified into letter-grade evaluations similar to mutual fund ratings. Web-based APR calculators might help. Connecting with community leaders familiar with microcredit and other traditional publicity efforts could help get these tools in the hands of people who can use them. High ranking MFIs should be willing to help spread the word of their positive ratings, perhaps through a certification program similar to other consumer products like lumber or coffee.
MFTransparency could also consider taking its investigative effort one step further and reporting social performance indicators alongside APRs (the example has already been set by MIX Market).
While there is always room for improvement, we like MFTransparency. It’s a strategically sound initiative with great potential to draw a bright line between those who are empowering the poor and those who are exploiting them.
— Julie Biau
— Top image by Michael Foley Photography (cc by/nc/sa)
— Second image by SpreePiX (cc by/nc/sa)