The graph above visualizes this for a showcase institution in Bosnia. The blue triangle stands for the portfolio yield reported on MIXMarket, while the red squares indicate the individual APRs for each individual product. What we already knew on an industry level can now be confirmed for the institution level: as loan sizes increase, interest rates are dropping.

Advocates of consumer protection have long been arguing in favor of transparent pricing for microlending products. In the United States, the Truth in Lending Act of 1968 obliges lenders to disclose the annual percentage rate (APR) to prospective borrowers for all products.

Similar provisions exist in most Western economies, and some developing countries. However, in many countries – especially those with a strong presence of microfinance institutions – transparent pricing has not been enforced.

CGAP therefore decided to support the development of MFTransparency, a global initiative for fair and transparent pricing in the microfinance industry. By collecting original loan contracts from MFIs actual total costs of loan products can be calculated, rather than nominal prices often quoted to clients. This allows for  a meaningful comparison between different offers.

What do we gain from this? First and foremost, a better understanding of how individual products are priced. So far, researchers have had to rely on the “average portfolio yield” per institution as a proxy for interest rates. This indicator summed up all income generated from the portfolio, and divided it by the institution’s gross loan portfolio. That process yielded only one weighted average interest rate per institution, but with MFTransparency’s approach, we now have interest rates for each individual product. The graph above visualizes this for a showcase institution in Bosnia. The blue triangle stands for the portfolio yield reported on MIXMarket, while the red squares indicate the individual APRs for each individual product. What we already knew on an industry level can now be confirmed for the institution level: as loan sizes increase, interest rates are dropping.

So far, MFTransparency has been used in three countries, and the data is being analyzed as you read this post. Soon,  we will be able to explain differences in APRs based on criteria like loan size, client characteristics, and location of the MFI. Stay tuned for further updates.