+

Responsible Pricing + Transparency + Financial Literacy

= Protected Consumer

+Today’s Session

An introduction to some ideas behind responsible pricing (10 min)

A structured dialogue w/ the stakeholders: The Central Bank, financial services providers, investors & AMFA, the MF association

Questions to panel focus on responsible pricing, financial literacy and transparency challenges in microfinance (70 min)

Audience questions for panelists (approx. 20 min)

+What Constitutes Responsible Pricing?

I shall not today attempt to further define the kinds of material; but I know it when I see it.

US Supreme Court Justice Potter Stewart(1964 case on obscenity vs. art)

+Characteristics of Responsible Pricing? Consumer can repay w/o undue hardship (Malaysia standard look to net income;

Ghana research on OI; South Africa & Australia have laws on responsible lending)

Consumer knows real impact of cost on lifestyle, b/c pricing and terms of agreement are easy to understand and known in advance (EAC financial literacy project ex. sample contract, questions to ask a loan officer, and how to do a household budget)

Transparent, regular communications with a fairly financially literate client (ex. US statement to consumer re: effect of only make minimum payment years to repay small amounts)

Non-misleading marketing materials that does not exploit consumer’s fears, impulsiveness etc.

Provider can cover its own costs + if activities are not profitable, it is of no use to the consumer

+What do industry authorities have to say responsible pricing? Smart Campaign favors efficiency indicators that are comparable with

peers (Smart also added the ‘responsible pricing’ language in 2010 – used to just be transparent pricing); pricing = market based; non-discrim.; fees =reasonable

Dr. Yunus favors a traffic light system: Green = 10% or less higher than cost of funds, Yellow = 10-15% higher Red = greater than 15% (Classified as a moneylender per Dr. Y)

Microfinance Transparency: Just be clear about it = NO FLAT IR, no product bundling, let clients know that cost of obligatory savings impacts price. Usually more effective when majority of MFIs participate. In line with Yunus.

Could be more effective if results disseminated to consumers. EFSE slide rule: Loan calculator similar to MFT

+Consumers International on Responsible Lending Specific to pricing: When market fails to keep rates at a reasonable level, regulators

may consider the rate caps. Other fees should meet a ‘reasonableness test’.

Tying should be banned: The consumer should always have the right to buy ancillary products from alternative providers

Lenders should assess a borrower’s ability to repay and the suitability of the product based on the consumers’ needs. Credit should be denied if deemed unaffordable.

Client ability to repay assessment should be based on a method; such as Loan To Value or Debt To Income; leaving a buffer to deal with unexpected costs.

Transparent pricing allows for consumers to comparison shop. Regulators can assist consumers by requiring standard pricing practices.

+Short Survey of Azerbaijani MF Providers on Pricing/Transparency: 4 Responses (thanks to you!) stated that the cost

of fund$ is the most important element/indicator of product pricing

Other highly ranked factors: Difficulty to find skilled HR, market forces/competition, regulatory compliance costs, and the inherent challenges to serving the MF client base

Of less importance: Infrastructure challenges, shareholder/investor pressure for ROI, costs of compliance w/ codes of conduct

+Other interesting points from Survey: 2 of 4 participated in the ‘09 MFTransparency survey on

pricing and as a result …? One survey respondent did not participate in the ‘09 MFT

survey but did lower prices in stages over last 3 years Why doesn’t the MFTransparency survey result in reduced

prices in every market? Did not have full market participation (only 10 in

Azerbaijan participated) Information doesn’t reach the average consumer. AMFA

survey of financial literacy indicates consumer gets financial info from TV, newspapers & magazines (91%).

+Survey results continued Not part of today’s discussion, but self-reported

client overlap of up to 35% of clients borrowing from multiple MFIs (AMFA also has done in-depth study on this in 3 regions)

One MFI response – doesn’t matter how many loans they have, because it is capacity to repay that matters

Yes and no. Has the ‘why?’ been analyzed from the client perspective? There is a correlation between multiple loans and OI or client insolvency.

Exact causes of mass defaults may be multiple, (nobody predicted Bosnian/Indian/Bolivian etc. crises but end result is the same: Very bad for your clients and your business.

+Who are the Discussion Drivers on Pricing? Investors/Lenders Taking into account country risk factors etc. can

interest rates be lowered, tenures of investments increased? Can this be contingent on lower interest rates to microborrowers?

Market/competitors/Market leaders – If you lead, they follow. Financial services regulator: Can compliance costs be lowered for

providers – automation of some procedures? Anything AMFA can do to assist or a consumer organization (e.g. market monitoring, secret shopping?)

Missing Voice: Who speaks for and disseminates information and is trusted by the consumer in this market? (AMFA study 35% do not trust insurance Companies. And only 4.4% were satisfied with financial services used in past 5 years). Consumer organizations can be great partners; particularly on financial literacy and ADR. If you provide quality financial services; you are a natural ally of Cos.

+Financial Literacy Essential Part of Consumer protection AMFA financial literacy survey reveals adults have very low literacy levels:

45% gave wrong answers on basic math questions; 70% no records/budgeting; 52% run out of money before next paycheck

Bank of Azerbaijan has the right idea. It started programs in schools. Financial literacy programs tend to be ad hoc. Consumer organizations are

best positioned to offer financial education, but budgets are tight. Consumers interested when they have a problem only – financial counseling centers in Kenya and Tanzania (only Tanzania still functioning)

Where are some educational games/teaching materials? www.consumersinternational.org; www.practicalmoneyskills.com Quite a lot available online but people won’t teach themselves. How much spare

time does the average adult have? Use existing infrastructure (Where do people congregate? Church/Mosque) Is Ad hoc better than nothing? And, with financial counseling centers,

usually end up doing dispute resolution, too. Providers can contribute.

+Funding for Financial Literacy Programming Tends to be from the provider side (CitiFoundation,

MasterCard) May be too specific: E.g. IFC on credit bureau

related knowledge Lots of financial literacy assessments - But then

what? Funding from donors is for a limited program;

usually only reaching urban areas (Tanzania project 300 persons counseled face to face; then relied on radio and brochures)

What’s the answer? Combo of schools and established staffed advice/dispute resolution centers

+Let’s hear from our panel of experts … and then Q&A with audience 2-3 questions for each panelist on roles and

responsibilities vis-à-vis responsible pricing, transparency and financial literacy (approx. 15-20 min dialogue with each providers, regulators, investors and the association: Should give perspectives on how to improve/strengthen the sector)

Then, Q&A between the audience and panelists: Tell us your practical experiences.