MICROCAPITAL BRIEF: Chuck Waterfield of MFTransparency Explores Ideas to Make Microfinance Prices More Transparent

Mr Chuck Waterfield, founder and CEO of MFTransparency (MFT), a US-based nongovernmental organization (NGO) that collects and publishes information on microcredit products and pricing, recently contributed to the CGAP (Consultative Group to Assist the Poor) blog to suggest ideas for regulations that could encourage more transparent pricing in microfinance [1]. He points out that most markets in which microfinance institutions (MFIs) operate lack the “Truth-in-Lending” legislation, a US federal law designed to promote informed use of credit by mandatory disclosure of terms and cost of borrowing, thereby enabling them to “mask their prices” and leading to a complex pricing system. This results largely in clients being pulled away from “lower-priced competitors” and being led to “over-consume.” Transparent pricing aims to reconcile this by increasing price competition and promote more informed decision-making by clients.

Mr Waterfield provides ideas for regulations that can be implemented to ensure an increased transparency in pricing. These include: (1) MFIs should be required to report annual interest rates by incorporating all pricing factors, including specific conditions such as compulsory savings and obligatory insurance tied to the loan; and (2) prevent the use of “flat interest” since it has “no bearing at all to any textbook definition of interest and serves only as a means to bring in significantly more income for the MFIs.” Mr Waterfield also provides data to show that usury laws generally end up backfiring in microfinance.

By Nisha Koul, Research Associate

About MFTransparency (MFT): MFTransparency is a US-based nongovernmental organization (NGO) that was launched in July 2008 to provide information on microcredit products and their prices. MFT collects data on the interest and fees charged on microfinance loan products in order to calculate the effective interest rates on those loans. Its intention is to establish the industry standard for pricing disclosure and to facilitate a fair exchange of microfinance products between suppliers and consumers. According to its website, between the time of MFT’s launch and December 2010, 691 industry stakeholders, including microfinance institutions and apex banks currently serving 107 million clients worldwide, have endorsed its efforts. Data from microfinance products in nine countries is available on the MFT website as of August 2011. Sixteen countries are currently participating in the data collection stage.

Sources and Additional Resources:

[1] CGAP Microfinance Blog, “Making Microfinance Prices More Transparent: Ideas for improving regulation,” http://microfinance.cgap.org/2011/08/17/making-microfinance-prices-more-transparent-ideas-for-improving-regulation/#more-2403

MicroCapital.org story, May 3, 2011, “MICROCAPITAL BRIEF: CGAP (Consultative Group to Assist the Poor) Microfinance Blog Examines Role of Transparency in Strengthening the Microfinance Sector,” https://www.microcapital.org/microcapital-brief-cgap-consultative-group-to-assist-the-poor-microfinance-blog-examines-role-of-transparency-in-strengthening-the-microfinance-sector/

MicroCapital.org story, October 22, 2009, “PRESS RELEASE: MicroFinance Transparency Launches True-Cost Pricing Data Website,” https://www.microcapital.org/press-release-microfinance-transparency-launches-true-cost-pricing-data-website/

MicroCapital Universe profile: MFTransparency, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=MFTransparency

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

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