Microfinance Interest Rate and Transparency

Microfinance Interest Rate and TransparencyInstitute of Microfinance (InM) and Microcredit Regulatory Authority (MRA) jointly organized a two-day seminar titled ‘Microfinance Interest Rate and Transparency’ at PKSF Bhaban, Dhaka during August 11-12, 2009.

Finance Minister Mr. Abul Maal Abdul Muhith graced the seminar as the Chief Guest and Dr Atiur Rahman, Governor of Bangladesh Bank, was Special Guest at the seminar, with Professor Wahiduddin Mahmud, Chairman of InM, presiding over. Professor M. A. Baqui Khalily, Executive Director, InM delivered the welcome speech, while Dr Quazi Mesbahuddin Ahmed, Managing Director, PKSF, Khandakar Mazharul Haque, Executive Vice President, MRA, and Chuck Waterfield, CEO of Microfinance Transparency, US, also spoke.

The Finance Minister especially mentioned that MFIs should maintain transparency about interest rates charged on the borrowers. He, however, mentioned about the multiplicity of challenges in operations and risks that makes the rates of micro loans higher. He emphasized adopting a technology to increase productivity and efficiency in microfinance operations, which in turn will help reduce the rates. The Governor underscored integration of the microcredit programs into macro economic aspects of the country.

Professor Wahiduddin Mahmud, Chairman of InM, said that transparency in pricing issue is essential because the customers have the right to know the exact price of the product. He argued that charging higher price in microfinance compared to that in banking sector is rational as the MFIs have to work with the rural poor in the remote areas which raise their administrative and transport cost.

Professor M A Baqui Khalily said that the MFIs in Bangladesh are doing very well in terms of the number of members, amount of loan disbursed and savings, innovation of products and diversification of operational modalities. Still the activities of the MFIs are questioned because of their way of disclosing the price of the products. He expected that the seminar may work as a gateway to bring in greater transparency in the activities of MFIs Bangladesh.

waterfield2Chuck Waterfield, the designate speaker of the seminar, in his deliberation vividly showed how the MFIs can disclose the price of their product to their customer in the most transparent way by calculating Annual Percentage Rate (APR) and Effective Interest Rate (EIR) of particular loan products by using a suitable software. In the backspace of the seminar, APR and EIR for different microcredit products of Bangladesh was calculated by a team under the supervision of Alexandra Daves Fiorillo, also a member of the US based organization.

In the second day Waterfield presented the actual scenario of pricing in the MFIs. He showed how an apparently complicated calculation of APR and EIR in different interest rate, loan volume, overdue, grace period, installment frequencies and periods, and repayment of loans along with interest before maturity, can be done.

In a two-way way communication environment, the participants most of whom were from the MFIs, asked various questions and provided inputs. They expressed their satisfaction in the efficacy of the software in calculation of APR and EIR of loan products as they became convinced that by the application of such software the prevailing confusion around interest rate and others in microfinance can be removed towards establishing better transparency and accountability.

The Institute for Inclusive Finance and Development (InM) is registered as an independent non-profit institution under the Societies Registration Act 1860.
The Institute works for developing the overall capacity of the financial sector and strengthening the links between the financial and real sectors through undertaking research, training, education, knowledge management and other programmes in priority areas including inclusive finance, microfinance, poverty and development.

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