A"er  Transparency,  How  to  Define  Fair  and  Ethical  

Pricing?    

Micro  Credit  Summit  Valladolid  

Chuck  Waterfield  November  2011  

MFTransparency  Launched  at  the  Microcredit  Summit  in  Bali  July  2008  

TransiGon  to  Transparency  •  Now  we  know  more  about  what  prices  we  are  

charging  •  We  know  more  about  why  we  charge  those  prices  •  Now  we  are  moving  forward  to  discussion  of  what  

prices  we  should  charge  (to  support  the  ideals  and  values  of  the  microfinance  industry)  

This  is  the  difficult  part,  the  subjecGve  part.            *  Should  we  do  it?            *  How  should  we  do  it?  

Should  we  discuss  fairness  and  ethics?  

15  May  2011,  Madrid  “Los  Indignados”  

15  May  2011,  Madrid  “Los  Indignados”  

“We are not merchandise in the hands of politicians and bankers”

September  2011  “Occupy  Wall  Street”  

15  November  2011  “Occupy  Wall  Street”  

Responsible  Behavior  is  an  ObligaGon  

1.  Microfinance  take  place  in  quite  imperfect  markets  2.  Our  clients  are  the  very  poor  3.  We  hold  power,  with  power  comes  responsibility  •  Micro-­‐credit  is  not  an  exchange  negoKated  between  

equal  parKes  3.  The  temptaKon  of  large  profits  can  lead  some  to  

irresponsible  pracKce  4.  Irresponsible  pracKce  leads  to  client  abuse  5.  This  repeats  the  paPern  of  the  past  2,000  years.    

Microfinance  was  created  to  be  an  alternaKve  path.  

The  Income  DistribuGon  Pyramid  

Individual  Lending  

Solidarity  Groups  

Village  Banking  

Self-­‐Help  Groups  

Microfinance  is  a  rare  industry  with  nearly  100%  of  clients  at  boPom  of  the  pyramid.  

How  much  weath  should  be  transferred  from  the  poor  to  the  rich?  

How  shall  we  discuss  fairness  and  ethics?  

MFI’s Costs

Defining  a  Responsible  Price  

+ MFI’s Choice of Profit

MFI’s Costs

Defining  a  Responsible  Price  

= Price Set by the MFI

+ MFI’s Choice of Profit

MFI’s Costs

Defining  a  Responsible  Price  

What Price Can the Poor Afford?

= Price Set by the MFI

+ MFI’s Choice of Profit

MFI’s Costs

Defining  a  Responsible  Price  

What Price Can the Poor Afford?

= Price Set by the MFI

+ MFI’s Choice of Profit

MFI’s Costs

Defining  a  Responsible  Price  

Step 3: Factors influencing client ability to pay

Step 2: Analysis or current product-level prices

Step 1: Cost Curve and Choice of Profit Level

Pricing  for  Sustainability  must  address  the  reality  of  the  COST  

curve  

Mexico, Brazil, and Colombia not present

at 100%

Only Mexico, Brazil, Colombia and

Philippines at 5%

GNI/Cap Mexico Brazil Colombia Philippines Azerbaijan5% 50% 60% 55% 60%10% 33% 35% 28% 32% 21%25% 20% 24% 18% 22% 17%50% 19% 12% 16% 14%100% 12% 12%150% 10%200%

Operating  Cost  Ratio,  average  per  county  data

GNI/Cap Ecuador Nepal Bosnia Bolivia Bulgaria Average5% 58%10% 25% 28%25% 15% 13% 15% 25% 16% 18%50% 10% 8% 11% 17% 12% 13%100% 7% 5% 7% 14% 8% 9%150% 13% 7% 10%200% 12% 6% 9%

Operating  Cost  Ratio,  average  per  county  data

Price  curve  follows  cost  curve  

Price  curve  follows  cost  curve  

A  new  way  to  look  at  the  data  

1.  Is  an  MFI  close  to  the  curve  in  its  country  for  costs?    For  porUolio  yield?  

2.  If  not,  why  not?  3.  What  spread  has  the  MFI  selected  between  its  

costs  and  the  price  it  has  chosen?  

Pricing  for  Sustainability    

Pricing  for  Profits  

•  Must  the  insKtuKon  be  sustainable?  

The  InsGtuGon  

A  Deeper  Discussion  of  “Sustainability”  

•  Must  the  insKtuKon  be  sustainable?  

The  InsGtuGon  

•  Must  each  product  be  sustainable?  •  Fair  for  the  rich  to  subsidize  the  poor?  •  Fair  for  the  poor  to  subsidize  the  rich?  

Each  loan  product  

A  Deeper  Discussion  of  “Sustainability”  

•  Must  the  insKtuKon  be  sustainable?  

The  InsGtuGon  

•  Must  each  product  be  sustainable?  •  Fair  for  the  rich  to  subsidize  the  poor?  •  Fair  for  the  poor  to  subsidize  the  rich?  

Each  loan  product  

•  Must  each  individual  loan  be  sustainable?  •  Fair  for  some  clients  to  subsidize  others?  

Each  client  within  a  loan  product  

A  Deeper  Discussion  of  “Sustainability”  

The  Profit/(Loss)  Component  is  the  Choice  of  Management  

Pricing  for  Profits  

Pricing  for  Profits  

Pricing  for  Profits  

Proposal    

Let’s  embrace  a  respecaul  and  serious  dialogue  on  these  issues  

of  prices  and  profits  

What  do  YOU  think?    If  your  MFI  is  new,  and  your  costs  are  therefore  high,  is  it  fair  to  set  a  high  price  and  hide  it  from  your  clients?    

What  do  YOU  think?      If  the  market  is  compeKKve  for  $2000  loans,  is  it  fair  to  make  high  profits  from  $200  loans  to  subsidize  the  $2000  loans?  

What  do  YOU  think?  What  is  the  maximum  ROA  that  is  fair  for  $5000  loans?          A)  2%        B)  5%      C)  10%      D)  20%      E)  no  limit  

What  do  YOU  think?  What  is  the  maximum  ROA  that  is  fair  for  $200  loans?        A)  2%        B)  5%      C)  10%      D)  20%      E)  no  limit  

Gandhi’s  Seven  Deadly  Social  Sins  1.  PoliKcs  without  principle  2.  Wealth  without  work  3.  Commerce  without  morality  4.  Pleasure  without  conscience  5.  EducaKon  without  character  6.  Science  without  humanity  7.  Worship  without  sacrifice  

These  principles  are  the  foundaKon  of  “Responsibility”