Rural Banks Prepare for Pricing Transparency

In preparation for the Bangko Sentral ng Pilipinas (BSP) regulation on effective interest rate calculations, Ms. Leila Deles of Microfinance Transparency (MFT) showed how this regulation impacts on how interest rates are disclosed to clients and the profitability of microloans.

Ms. Deles set the context of the session by emphasizing that pricing transparency refers to the terms and the condition where financial products are disclosed to clients in a manner that allows both accurate understanding of prices and comparison of different products. She also provided information on the promotion of transparency, data collection, standardization of pricing calculations, and development of educational materials to support this initiative. More importantly, MFT consulted with regulators and policy makers to establish the basis for pricing in the microfinance sector.

She also gave updates on MFT’s transparent pricing initiative in the country by showing the different perspectives about transparency from regulators, investors, and clients. In the same session, Ms. Deles announced that Microfinance Transparency will have their data launch on December 2011.

In the second half of her presentation, Ms. Deles discussed aspects of BSP Circular No. 730 especially on proper disclosure of effective interest rates. Sample calculations were shown including the shift to declining balances without reducing the total cost of the loan to the borrower.

In sum, MF Transparency showcased key pricing strategies such as lowering prices to compete against other players, doing tiered pricing, and managing cost items to cushion a reduction in profits. Furthermore to have transparency in pricing, standardized repayment schedules, standard disclosure forms, and effective communication to customers are keys to successful transition towards a transparent pricing regime.

After the presentation, members of the audience raised their concern about the inability to compare prices across various players in the microfinance industry. In particular, if banks will submit to a more transparent pricing culture, non-regulated entities such as microfinance NGOs must also join in the effort. Some believed that regulation could address this imbalance.