Building the Business Case for Transparency

The popularity of Microfinance as a tool to alleviate poverty has spread rapidly around the world. It has long been highly transparent in some areas, but due to complications of market conditions and lack of regulation, the true price of loan products has never been accurately measured or reported. Over the past several years, much of the blame has been on non-transparent pricing in terms of interest rates charged by certain microfinance institutions (MFIs). When examining the interest rate question, one finds that what an MFI communicates to its borrowers is often radically different than what its interest rate really is, making it impossible for borrowers to make informed decisions, for the greater public to focus on the worst offenders and for the market to work efficiently. But what also comes to light is that those MFIs providing the smallest loans to the poorest and rural clients have the highest operating expenses, and must charge the highest interest rates to remain viable. Regulation that caps interest rates pressures these MFIs to service larger loans in denser areas, oftentimes causing them to retreat from their mission to serve the poor.

The project builds a case for the value of pricing transparency in bettering the welfare of the world's poor. Pricing transparency in microfinance better serves clients' needs, improves borrowers' dignity, and empowers the financially illiterate to make informed decisions regarding their livelihood and financial security. The project uses quantitative and qualitative data to argue that an MFI that puts its clients' wellbeing first by practicing pricing transparency can benefit in the long run from an expanded client base, lower default rates and more funders who are increasingly responsive to social performance metrics. Furthermore, transparency enhances the overall health of the industry, enabling positive competition between institutions and helping to avoid massive defaults that hurt communities at large.

Through analysis of data drawn from Microfinance Information Exchange (MIX) and Microfinance Transparency's Transparency Index, the project shows MFIs that transparency can benefit their double bottom line, as greater transparency does not correlate with lower profitability in the sample. Interviews with a variety of prominent MFI funders supplement the quantitative analysis and reveal that pricing transparency attracts greater capital and better protects clients, allowing them to choose the best services for their needs. The project concludes its research with a tool to provide a visual assurance to MFIs with low transparency that they will not necessarily lose clients or profitability by increasing their transparency.

This Capstone project puts human values and the social mission of microfinance — to serve the most poor — back into central focus for the MFI. The case it builds shows an MFI why adopting this particular consumer protection policy is advantageous to the MFI's bottom line as well as to its mission. This work will be used in efforts to compel MFIs not practicing transparency to adjust their policies. In the long run, such a shift towards transparency both forces usurious pricing out of the market and enables borrowers to better compare and contrast loans, making healthier financial decisions. This significant change enables microfinance to actually fulfill its mission to empower the poor, and serve to increase dignity, health and wellbeing amongst the world’s most impoverished.