Paper

The Challenge of Understanding Pricing of Micro-loans

Promoting transparent pricing of microloans
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This paper uses the example of Compartamos, a Mexican MFI, to explain interest rate calculation and pricing system of microloans.

The IPO of Compartamos, Latin Americas largest MFI in 2007 raised a discussion on true interest rates, and the rates Compartamos charged its clients. The MFI made enormous profits while charging interests of over 100 percent. Most other MFIs in Mexico follow a similar pricing system. The paper uses numerical examples and calculations to illustrate the following aspects of interest rates and loan pricing:

  • Difference between annual percentage rate (APR) and effective interest rate (EIR) methods in microfinance pricing;
  • Pricing calculations using APR;
  • Calculating monthly and annual interest rates;
  • Flat interest rate method used by Compartamos;
  • Clarity on number of weeks in a month;
  • Commission fees and taxes;
  • Impact of compulsory savings on APR;
  • Implication of APR figures for the client.

The paper states that confusion regarding microfinance prices leads to poor consumer choices. This indicates a critical need for transparency and public awareness regarding the true cost of borrowing.

About this Publication

By Waterfield, C.
Published