At MYC4, the loan products are at the core of our engagements with both new and existing providers. One key reason that products are critical on the MYC4 platform, is that they spell out how revenue generated from each loan is to be distributed. A provider must be satisfied that the revenue offered through the product is sufficient to make business sense to the institution; while at the same time offering decent returns to the investors/ lenders; and still provide competitively fair priced capital to the borrower. The products also define eligibility criteria, risk assessment methodology and other features.
Agreeing on the product pricing is usually a bargaining process that has several give and takes. Three factors that slightly complicate product pricing are:
- Most Microfinance Institutions price their loans on flat rate basis, while on MYC4 the loans are priced on reducing balance basis. There is also a slight twist on the reducing balance computation, in that MYC4 utilises effective interest rate (compounding effect), while the industry standard on reducing balance computation utilizes simple/ nominal interest. The effect of this is that the interest rate and APR appear higher on MYC4. We are in process of harmonizing the computation methodology.
- The concept of APR is not well entrenched in the financial system in Africa; yet APR is crucial in ensuring transparency in lending. It is not unusual to find that top management of an MFI have limited or no idea about APR. It is thus a task to agree on the appropriate APR, given that MFIs mostly focus on the interest element of pricing.
- Generally speaking, the higher the loan amounts the lower the interest rate should be. This is because the cost per unit is lower on the larger loans (the assumption being that the same effort is used to produce a large as is used on a small loan). However, on MYC4, the larger loans need to offer higher returns to investors in order to attract sufficient capital – thus the larger loans will have higher interest rates. The providers are thus forced to forego part of their mark-up on the larger loans in order to offer fair priced capital to borrowers.
So what exactly is a product? According to Phillip Kotler (a marketing guru), all firms are in the business of satisfying customer needs, and they do this through a product. He defines a product as “anything that can be offered to satisfy a need or want”. Thus we can say that in the financial sector, a product is any offering or proposed solution that has distinct characteristics.
The essential characteristics of a loan product are highlighted here below. The product features on MYC4 are essentially developed by the providers, with MYC4 largely providing an advisory role.
- Loan amount range: This is essential as different loan products are targeted at different market segments from micro enterprises to small and medium enterprises. The trend on MYC4 is that lower loan amount ranges fund at lower interest rates, because they are easily fully funded by auto-bids from the more socially inclined investors. Larger loans, on the other hand, require crowd-pooling of more investors per loan, and often attract the more commercially oriented investors.
- Pricing: The pricing component has two elements; the upfront fees (referred to as closing fees on MYC4) and interest (referred to as repayment fees on MYC4). The upfront fees are spread over the duration of the loan so as to arrive at one comparative annual percentage figure, the APR. The total cost of loan to the borrower is the sum of interest income due to investors, MYC4 and the provider mark-up.
- Loan repayment period: We have flexible and fair repayment terms on MYC4. We recognize that revenue generation patterns may differ; we thus allow a grace period where necessary, and have repayment periods of upto 36 months.
- Loan terms and conditions: Different loan products have set eligibility criteria, risk assessment criteria, collateral requirements among others. On MYC4, the bidding period is also an essential feature (large loans generally require more days to fundraise).
- Other features such as insurance and forced savings: Most loans on MYC4 are insured against death and permanent disability of the key person (thus shielding the deceased estate from legal tussles to recover borrowed fund). Most MFIs that offer group lending require borrowers to save a certain portion so as to access funds (this forced savings add to the cost of borrowing, thus a loan with forced savings has a higher APR).
All in all the loans on MYC4 are priced such that the total cost is the same as what the borrowers were paying on the MFIs other loans, or less; but never higher. MYC4 never seeks to cannibalize the market or the provider’s other products; but through use of APR and transparent pricing aims at engaging providers towards lower costs to borrowers. In certain markets, borrowers prefer waiting for longer to receive a MYC4 loan than receive an instant loan from the provider’s other products: the attraction being lower interest rate and reducing balance methodology (which means they only pay interest for the period the loan was outstanding).
