Responsible Pricing: The State of the Practice
This draft discussion paper examines the full range of approaches to responsible pricing of loans including promoting competition, return on equity limitations, interest rate caps and comparative transparency. These approaches are discussed in the context of the cost curves developed by MicroFinance Transparency.
In December 2009, The Smart Campaign amended its Client Protection Principle from transparent pricing to transparent and responsible pricing. The principle states that pricing should be affordable to clients and sustainable for financial institutions. Important messages from the MicroFinance Transparency data are:
- Pricing and the cost structures that determine it vary widely from country to country. Institutions should be judged in their country setting and against their competitors;
- Small loans require higher interest rates and fees. This argues against interest rate or price caps, which penalize institutions attempting to reach harder-to-serve clients;
- Analysis of individual providers should account for factors such as outreach to rural areas, provision of non-financial services, high profits and inefficiency.
Based on analysis of the current state of practice, the Smart Campaign endorses a continued focus on comparative transparency at a country level. This would eventually enable development of consensus guidelines.