Earlier this year MFTransparency.org, an international non-governmental organization committed to pricing transparency, launched its Transparent Pricing Initiative in Latin America. The data collected in Ecuador will be presented during a conference in Quito on November 30th.
Awaiting this event, let us look at the laws and regulations currently in effect in Ecuador. Compared to other countries in the region, Ecuador’s Central Bank developed a strong regulatory framework concerning microfinance policies and pricing (source):
- Financial institutions can only charge declining balance interest rates. Contrary to a flat interest rate, where the interest is calculated on the principal amount of the loan, Ecuadorian Microfinance Institutions (MFIs) can only charge interest on the outstanding balance of a loan.
- Financial institutions are required to specify in all marketing materials the nominal and effective annual interest rate, the frequency of interest payments and the loan term.
- All product documentation has to clearly specify the loan amount, term, payment frequency and the nominal and effective annual interest rate.
These regulations should make it easier for clients to compare prices of products and services offered by different MFIs.
Since 2007 Ecuador’s Central Bank put a cap on the interest rates financial institutions are allowed to charge their clients. The Central Bank divided the microcredit products in three groups depending on loan size:
|Microcredit group||Loan size||Max. interest rate|
|Microcrédito de subsistencia||< $600||30.50%|
|Microcrédito de acumulación simple||between $600 and $8,500||27.50%|
|Microcrédito de acumulación ampliada||> $8,500||25.50%|
|(Banco Central del Ecuador – Boletin Semanal Tasas-Interes, 28/10/2010-3/11/2010)|
The maximum rates are determined on a monthly basis and have been steadily decreasing over the last few years. The caps include all costs to the borrower, except for insurance costs, tax and the effect of compulsory savings.
What are the implications of these regulations? How do Kiva field partners in Ecuador put these regulations into practice? Do these interest rate caps, as is often claimed by their opponents, force micro lenders to increase the loan amounts offered to their clients? I am sure that, while working and traveling throughout Ecuador as a Kiva Fellow during the next three months, these “hot topics” will come up in conversations and I am looking forward to sharing my experiences with you on the Kiva Fellows Blog.
Posted by Ellen Willems, KF13, Roaming Kiva Fellow Ecuador – Currently working at Fundación ESPOIR‘s headquarters in Quito.
If you are interested in learning more about microfinance and see Kiva field partners in action check out the Kiva Fellows Program here!