Azerbaizan takes lead to showcase transparency in microfinance

By Naagesh Naaraayana

Microfinance Focus, Oct. 1, 2009: With the negative media coverage in recent months, there is a collective need for transparency in microfinance sector. While some reports pointed out the high interest rates and the use of confusing product pricing, others have gone a step ahead to depict the microfinance institutions (MFIs) as no less than moneylenders.
Essentially, a regulatory framework to enforce transparent loan pricing by microfinance institutions is required in all countries. Barring the United States, which has the Truth in Lending Act of 1968 which stipulates lenders to disclose the annual percentage rate (APR) to their borrowers for all products, many countries, especially those in South Asia, where the microfinance took its birth with Muhammad Yunus’s initiative in 1973, lack similar legislation. Transparency also restores consumer protection in the microfinance industry.
According to MicroFinance Transparency, a global NGO founded in 2008 to vouch the need for transparency, “A quoted interest rate of 3% per month can result in an APR between 36% and 96% and beyond”. It also calls for setting up an industry standard for cost calculation that will allow for easier product comparison.
Currently, assessment of product pricing in microfinance is based on the ‘average portfolio yield’. This process produces one weighted average interest rate per MFI as opposed to interest rates for each individual product, according to MFTansparency. The difference in APRs charged by these institutions vary individually as they are based on criteria like loan size, client characteristics, and location of the MFI.
“A quoted interest rate of 3% per month can result in an APR between 36% and 96% and beyond” says MFTransparency, highlighting the need to establish an industry standard for cost calculation that will allow for easier product comparison.

Workshop in Azerbaizan

Moving forward in the direction, the Azerbaijani Micro-finance Association (AMFA) has partnered with MFTransparency to organise a training workshop in Baku on Oct. 8, 2009 following the AMFA Investors Fair on oct. 7, 2009. Here, MFTransparency will conduct its pricing project for the first time in Central Asia.

The Azerbaizan workshop will train industry professionals on issues related to pricing transparency and consumer protection and will mark the launch of MFTransparency’s Transparent Pricing Initiative in the Azerbaijani Republic.

During MFTransparency’s Transparent Pricing Initiative, the group will collect data on interest and fees charged on each microfinance loan product in Azerbaijan in order to calculate the accurate, true price (Effective Interest Rate) on those loans. MFTransparency will then post that data for the public to see and learn from on its website (www.mftransparency.org).
“Now is the perfect time to reflect and focus on consumer protection and pricing transparency,” says MFTransparency Vice-President Alexandra Fiorillo.

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