Responsible Pricing Session Objectives Understand principle on Responsible

Responsible Pricing

Session Objectives • Understand principle on Responsible Pricing. • Understanding the standards, indicators and compliance criteria for Responsible Pricing. • Demonstrate the tool.

Responsible Pricing The Principle in Practice: Pricing, terms, and conditions are set in a way that is affordable to clients and sustainable for the financial institution. Consider this: Financial sustainability is required to continue serving clients, but is not an end in itself.

In determining whether an institution is pricing responsibility, the price itself is important but not the only component

What influences pricing?

Responsible Pricing Analysis Includes Expenses Income Profit Financial Expenses Credit Losses Portfolio Yield Operating Expenses Source: Daniel Rozas. Assessing Price Fairness in Microfinance. January 2016

Laying the Groundwork – Import terms to know Operational Self Sufficiency Claims Ratio Annual Percentage Rate Yield on gross portfolio Loan loss rate Operating expense ratio Return on Assets

CPP #4: Adequate standards of Care FI is managed sustainably to provide services in the long term. The FI’s pricing policy is aligned with the interest of clients. The FI's financial ratios do not signal pricing issues. (If outside the ranges, FI must be asked to explain and justify. )

Standard 4. 1 FI is managed sustainably to provide services in the long term. OSS - Trend 120% 118% 113% 115% 110% 105% ✔Covers its cost or reaches break even quickly 116% 103% 102% 101% 100% 95% 90% 2009 2010 2011 2012 2013 2014

Responsible Pricing Analysis Includes Smart Campaign hold management to be accountable by review of internal pricing policies as well as analyzing components of pricing Expenses Income Profit Financial Expenses Credit Losses Portfolio Yield Operating Expenses Source: Daniel Rozas. Assessing Price Fairness in Microfinance. January 2016

Standards 4. 2 and 4. 3 The FI’s pricing policy is aligned with the interest of clients. The FI's financial ratios do not signal pricing issues. (If outside the ranges, FI must be asked to explain and justify. ) ✔ Bo. D monitors performance vs. Policy ✔ Pricing practices are responsible ✔ Affordable interest rate ✔ Reasonable fees ✔Loan Loss Expense Ratio within range ✔ Operating Expense Ratio within range ✔ Return on Assets Ratio within range

Our Analytical Toolkit • Market-based peer benchmarking (APR, Yield) • Expected Performance (ROA, LLER, Claims Ratio, OER) with opportunity for contextualization and valid justification High ROA does not always constitute excessive profit. Reasons why profits would fall in this range that are perfectly consistent with appropriate pricing include (but not limited to): • Profits diverted to external entity that provides services that are important for clients • Profits shared with clients • Early stage institutions • High country risk necessitates an additional cushion to protect against adverse events

Key Messages • Providers should price their products and services in a way that contributes to the long-term financial health of their clients while meeting their own needs for financial sustainability. Affordability is more that just what the client can bear. • The Smart Campaign defines responsible pricing as more than the price – it includes a track record of pro-client financial stewardship and governance • Pricing, profits, efficiency, loan loss expense ratio, claims ratio should be in line with peers or expected performance; if it is not, the FI must be able to justify the reason to the assessor or certifier. • Annualized effective interest rates (APR or EIR) are the only way to truly compare prices. Nominal rates do not reflect the true cost to the client.