Responsible Finance Forum

The Challenge of Understanding Pricing of Micro-loans

Chuck Waterfield
01 June 2011
Source:  MFTransparancy

For decades, the microfinance industry made a rather disciplined effort to ignore prices we were charging on our loan products. That changed with the Compartamos IPO of 2007, where the largest MFI in Latin America made hundreds of millions of dollars in profit while charging interest rates of over 100%. This provoked intense discussion as the industry tried to understand what true interest rates really are, and as we tried to determine what rate Compartamos was really charging its clients.

Thanks to Compartamos’ transparency on its financial statements, we had access to ten years of financial reports; however, we still had no real idea of what price they were charging. Compartamos publicly claimed its interest rate was approximately 82%, yet even on its own website, the organization stated that its primary loan product had an annual interest rate of 105%, including the 15% government tax. Which of these is the price? Or is it something different? Or is there really no one figure that is the true price? This paper uses the Compartamos example to explain how interest rate calculations work and why there is so much confusion over what true prices really are. We will also see that most MFIs in Mexico use similar pricing systems – Compartamos is not an aberration, but rather more the norm of practice in Mexican microfinance.