Pricing Transparency and Performance in the Microfinance Industry: Truth-in-Lending, Profitability, Scale, and Funding

This paper conducts a literature review, interviews with microfinance fund managers, and a quantitative analysis to analyze three questions facing MFI managers regarding their pricing transparency: profitability, scale, and funding. It takes into consideration financial data from 228 MFIs across 17 countries to perform the analysis. The paper plots several graphs: ‘transparency index vs. annual percentage rate, ‘transparency index vs. return on equity (RoE), and ‘transparency index vs. number of clients for individual countries as well as the overall sample to understand the effects of transparency on profitability and scale. The paper makes the following observations:

• Higher pricing transparency does not entail lower profitability in the sample examined;
• In some cases, an upward trend line shows higher transparency connected to higher profitability;
• Data suggests that transparency is either neutral or beneficial to profitability;
• No clear relationship is observed between transparency and number of clients in the sample. This suggests that transparency does not negatively impact scale;
• All interviewees said that high social performance indicators, pricing transparency being a key measure, are becoming increasingly important in their funding decisions, and the largest funders in the microfinance industry want to see more pricing transparency.