Responsible Pricing, Profits and Self-Regulation in Microfinance: Views from the Smart Campaign
Editor’s note: This post was written in response to a debate at the recent 17th Microcredit Summit in Mexico that touched upon the Smart Campaign and similar initiatives. Click on the link above to read NextBillion’s coverage of that debate, and click here for a videotaped discussion of these initiatives, including their goals and challenges.
As the Smart Campaign gathers momentum and more MFIs become certified – 23 to date, with dozens more in the assessment pipeline – it has sparked conversation among practitioners (and skeptics) on a range of hot topics, including responsible pricing, profits and the value of self-regulation. These are questions that should remain paramount whenever the welfare of the poor and efforts to protect them are at stake, and the debate offers a welcome opportunity for hearing all sides. The Smart Campaign would like to clarify our perspective on these three issues.
First, we would like to make sure readers understand how the Campaign assesses whether an MFI is engaging in responsible pricing. During their certification visit, the independent certifiers construct a view of the national market utilizing data culled from sources such as MFTransparency, the certifiers’ own database, and the Microfinance Information eXchange (MIX). The prices of the certification candidate are compared with the prices of its peers in its market. If an institution’s prices are in line with its market peers, its prices are considered responsible.
This market-based, peer-comparison approach is based on the recognition that pricing varies with the cost factors in a given market (e.g., salary levels), the size and type of loans, and other context factors such as institutional type, taxes, etc. It also recognizes that there is no alternative method or standard for judging responsible pricing that enjoys industry-wide consensus.
Is the formula perfect? No. Given contextual issues and the variety of factors influencing pricing, responsible pricing has been one of the most challenging principles the Campaign’s developers have faced.
Over the coming months, the Smart Campaign plans to commission additional research on pricing as part of the input into version 2.0 of the client protection certification standards. This research will look particularly at how prices have evolved over time, especially in high-priced markets – Mexico among them – to understand the driving factors. It will ask whether competition is working effectively to drive prices down and will consider the role of market leaders in setting or reducing pricing levels. This research may lead to recommendations for updates to these standards as we develop version 2.0.
Second, we’d like to explain our perspective on MFIs’ profits. While the amount of profits falls outside the scope of the Smart Campaign’s mandate to address client-facing issues, we fully appreciate the issue’s importance and inherent volatility. Profit levels are de-facto taken into consideration when analyzing the overall pricing of an MFI. Yet surely the most relevant questions concern not the amount of profits, but how profits are used, and how they benefit clients. These are the questions of greatest interest for the working poor.
In many cases, an MFI’s profits are reinvested in the institution for the benefit of existing and future clients, in the form of both product improvements and extension of the client base. Compartamos Banco is a good example. This year, it is reinvesting 60 percent of its 2013 net income as retained earnings into the company. It would be interesting to know more about how this translates into benefits for their customers, and it would be a potentially valuable research question to explore whether and how other companies retain earnings in a similar way.
On the third topic, it is a misnomer to equate the Smart Campaign with self-regulation. Rather, the Campaign is about increasing the industry’s ability to operate responsibly through raising awareness and commitment, providing tools and training, and enabling institutions to demonstrate results. Certification is the culmination of that process, allowing an institution to affirm publically (and with third-party verification) that it applies the Client Protection Principles in its operations. Certification may resemble self-regulation in some ways, but the fact that it is voluntary and lacks enforcement or sanctioning power are fundamental differences.
The only country where we are aware of genuine self-regulation in microfinance is India, where the association MFIN (the Microfinance Institutions Network) has been recognized as a Self-Regulatory Organization by the Reserve Bank of India. We are excited to see this experiment in self-regulation, and stand behind MFIN in its efforts to put the capacity in place to carry out this very challenging role.
Most countries where the Campaign works have either weak or non-existent financial consumer-protection regulations, or regulatory frameworks that do not reach many of the providers of financial services at the base of the pyramid. Moreover, in those cases where strong or effective regulations do exist, supervisory capacity often remains limited. But regulation is critical, and more and more, the Campaign is seeking to work closely with regulators.
Ultimately, the Smart Campaign’s objective is to make a substantive change in a world in which effective client protection remains nascent, particularly for customers at the base of the pyramid. And we welcome the development of better consumer-protection regulation. The Campaign has much to offer regulators in the way of tools that could help them get there.
Isabelle Barrès is the director of the Smart Campaign.