Responsible Pricing + Transparency + Financial Literacy

1. Responsible Pricing + Transparency + Financial Literacy = Protected Consumer

2. Today’s Session • An introduction to some ideas behind responsible pricing (10min) • 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)

3. 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)

4. 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

5. 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. Yunusfavors 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

6. 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.

7. 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

8. 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%).

9. 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.

10. 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.

11. 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.

12. 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

13. 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.