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December 10, 2009

Kudos for Kiva

Posted by David Roodman in Uncategorized Tags: ,

I just noticed that Kiva has revamped its individual loan pages. Here’s a screen shot of a loan page from March 2007 that I dug up (thank you nau.com), for a loan to Galib Asadov, a hairdresser in Azerbaijan:
Kiva old-style loan page

And here’s a new loan page. Notice the How Kiva Works link, the clarity about pre-disbursal, and the up-front display of interest rate and profitability information. “Portfolio Yield” is a bit confusing, though I think I understand the motivation for the term. But I consider this an even bigger stride forward than the one I commended Kiva for in October:
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November 17, 2009

Groundswell on Responsible Lending: Good Words, Uncertain Deeds

Posted by David Roodman in Uncategorized Tags: , ,

CGAP’s ever-thoughtful Kate McKee blogs:

Traveling the Africa and Asia conference circuit over the past month, it’s striking how the issues of responsible finance and client protection are suddenly prominent wherever microfinance providers and financial inclusion policy makers, funders and observers gather….a surprising consensus has emerged around the need for action on multiple fronts, encompassing a range of responses from consumer education and financial capability, to regulation.

So I’ve been putting microfinance leaders…on the spot, asking them to talk about the pressures that make providers cut corners and adopt less than fully-admirable practices.

She goes on to list the pressures they mentioned.

The CFI blog recently reported that the MIX has released its first round of data on what microfinance institutions (MFIs) are doing to protect clients from over-borrowing and other credit dangers. We learn for example that “all MFIs reporting give their clients a chance to ask questions and get information before they sign a contract.” It is encouraging that top-level leaders at so many MFIs are thinking about these issues. No doubt the survey and the related Smart Campaign are conceived to prod those leaders to emphasize these priorities even more as managers. So these efforts deserve applause.

Of course, what happens out in the slums and villages where credit officers work will never line up exactly with official policy. What is actually going on is hard to know, and seems ripe for research. I think it matters a lot for the question of whether microcredit is empowering people.

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October 27, 2009

More Reflections on Transparency (not about Kiva)

Posted by David Roodman in Uncategorized Tags:

In July, I blogged about MFTransparency, which Chuck Waterfield founded to “combat…confusing and predatory pricing” in microfinance. The core idea is to express the various charges and fees in a single number, what I have been calling the Annual Percentage Rate (APR) and MFTransparency says is the Effective Interest Rate (EIR). (Read the Wikipedia entry to become more confused.) MFTransparency has just released its first data sets, for Cambodia and Bosnia & Herzegovina. One visit helps you understand why the data were so long in coming: it was clearly a big job. MFTransparency got good data and has presented it well.

Two old thoughts, then one new:

  • Are there moves to bring these effective interest rates to borrowers’ eyes so they can spot predatory pricing? Or are mostly people like you and me seeing them?
  • Has thought been put into whether EIRs are the most effective way to convey costs to borrowers? The study by Marianne Bertrand and Adair Morse makes me doubt they are. They found that quoting an APR of 400% had less impact on payday loan takers in the United States than telling them that borrowing $300 repeatedly, two weeks at a time, for 3 months would cost $270 in fees.

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August 5, 2009

My Brain Made Me Do It (Again)

Posted by David Roodman in Uncategorized Tags: , , , ,

Piggy bank from cover of Mike Dixon, ippr, Rethinking Financial CapabilityA month ago I blogged some reflections on transparency. Transparency is the motherhood and apple pie of microfinance, I wrote, if not in those words. Microfinance institutions (MFIs) should make it easy for clients to understand the full costs of services, not hide fees in fine print or no print at all. And they shouldn’t introduce charges through the back door such as by overcharging for life insurance bundled with loans. But accepting the necessity for transparency, I wondered about the means. Are annualized percentage rates (APRs) the best way to summarize expenses? There, my reflections stopped.

Writing about this for the book just now forced me to push the analysis farther. I realized that transparency is in a way a distorting metaphor for disclosure. After all, pages of fine print are “transparent”: all the information is right there. Accepting that MFIs should give clients a clear window onto costs, there remains the question of how to describe those costs. The window must be framed. One of the most important ongoing developments in economics is the subfield called behavioral economics. The famous duo of Daniel Kahneman and Amos Tversky demonstrated through experiments that how information is presented (framed) often matters at least as much as the information itself for how human beings act. I’ll show you an example below.
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July 7, 2009

Reflections on Transparency

Posted by David Roodman in Uncategorized Tags: ,

The controversial Compartamos IPO in 2007 provoked Chuck Waterfield into founding the MFTransparency initiative to fight practices that obscure the full costs of loans.

It appears that many MFIs impose subtle fees that effectively raise interest rates. Some charge one-time loan origination fees. Some require borrowers to deposit a percentage of each loan amount with the MFI in a savings account that pays interest at a rate lower than that on the loan. Some overcharge for credit-life insurance bundled with the loan. Another criticized practice is to charge interest on the full loan amount even as the outstanding balance declines over the repayment cycle. Such “flat-rate” interest effectively doubles the interest rate compared to “declining-balance” interest since the average balance over the cycle is half the starting amount. Also, MFIs may also prefer to quote their rates on a monthly basis, hoping to exploit borrowers’ ignorance of how a seemingly modest 6 percent per month compounds into 100 percent per year.

If MFTransparency helps poor people understand what they are paying for credit, then it is a great thing. In Dhaka, Stuart Rutherford introduced me to a client of his SafeSave microfinance project who lived in the slum around the corner from a SafeSave branch. He took pride in showing me the rules for the woman’s loan and savings accounts: in plain Bengali, on a single sheet of paper folded into her passbook. She could not read it but she and Rutherford took further pride in showing me that her school-age son could. Implicit in SafeSave’s transparency was a criticism of business-as-usual microfinance in Bangladesh.

But in writing about transparency today for the book, I found myself scratching my head about a few things:
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