Bosnia Pricing Transparency Data

How do we determine a “transparent price”?

Borrowers are often charged a complicated combination of interest and fees.  The Annual Percentage Rate (APR) is the means used in the US to combine all of the costs the client pays and convert it into simple, declining balance interest rate.  This allows stakeholders to easily compare the prices of different loan products.

Outside of the US, the more common means to calculate transparent prices is the Effective Interest Rate (EIR).  APR and EIR share the core approach of determining the interest rate for the payment frequency — say a month, or a week — but differ in the way they convert that monthly interest rate into an annualized rate.

For a monthly interest rate of 1%, the APR does a simple conversion by multiplying by 12, giving 12%.  The EIR is more precise in financial terms, taking into consideration the affects of compounding.  For an interest rate of 1% per month, the EIR gives an annual rate of 12.7%. The EIR is the European Union standard and is also used in a large number of countries around the world.

All Bosnian MFIs Submit Pricing Data!

Here are some points to consider as you review the Bosnia and Herzegovina data.

1. Price Curve: Smaller loans have higher prices – Loans of under KM1,000 in Bosnia have an average APR of over 30%, while those of KM8,000 or more have an average APR of under 20%. This fits with the reality that costs of loans – expressed as a proportion of the loan amount –  increase as the loan size decreases, and therefore the price charged to cover those costs must increase as well. Notable when compared to data from other countries is that the Bosnia curve is relatively shallow. In viewing our PowerPoint presentations on this website, you will see steeper curves in other countries. What theories do you have for the flatter curve in BiH?

2. There is a wide range of APR prices at the same loan size – At every loan size of the graph there is a range of 20 percentage points or more in the prices charged by different lending institutions. This is true even when lenders are offering similar products in the same locations. What factors do you think could most explain these broad prices? Product use, e.g., business, housing, consumer usage? Product quality differences? Geographic differences between products? Lack of transparent pricing?  What impact do you think transparent, comparable pricing data will have on the range of product prices in the future?

3. There is an even broader range in quoted prices
– Lenders in Bosnia, like in most other countries we have visited, employ a wide range of pricing methods, making it difficult for clients to compare similar loan products. For example, a client looking for a working capital loan of KM3,000 will receive interest rate quotes ranging from 1.1% (per month) to 25.35% (per year) with fees ranging from 0% to 5%. The actual APRs on these loans bear little resemblance to the quoted rates. Other than APRs, what other ways do you think pricing can be made less confusing for clients when comparing products?

4. APR per product provides better information on prices than Total Portfolio Yield – Before the MFT data became available, providing product-specific pricing, the microfinance industry used Total Portfolio Yield information to estimate price. Since the Portfolio Yield is an average of all the different interest rates charged by a lender, it can tell virtually nothing about the price of any one product. What do you find when you compare the product prices in any one institution in the data?  Are product prices similar, or do MFIs price their products very differently?

How we collected the data

MFTransparency collects data country-by-country. In each country where we facilitate the transition to transparent pricing, we follow a systematic process, and our process in BiH provides a good example for understanding our procedure.

The MFTransparency team visited Bosnia and Herzegovina in April 2009 to conduct training and data collection for the Transparent Pricing Initiative. Thirty-two people, representing fifteen financial institutions and five industry bodies participated in a full-day workshop that addressed the importance of pricing transparency, the need for standardized and transparent reporting of APRs and/or EIRs, instruction on the MFT data collection tool, and training on how to correctly and appropriately calculate APR and EIR.

In the following days, MFTransparency met individually with many financial institutions to assist with the data collection process. Within two weeks of the workshop, nearly all the MFIs had submitted completed data tools together with electronic copies of sample repayment schedules. The remaining data came in the following weeks resulting in 100% of the AMFI network membership participating in the study.

Once data was complete, the MFT team reviewed, verified, and did statistical cross-checking of the data. If any data seemed inconsistent or if MFTransparency noticed potential mistakes in the data, we sent requests for clarification to the financial institution.