To gain a higher degree of transparancy the concept of the Annual Percentage Rate (APR) has been introduced to Palestinian Authorities.
“Markets literally cannot work properly if nobody knows the price” says Chuck Waterfield, MFMR’s expert for transparency in loan pricing, who was invited by the GIZ to bring in his experience for the PMA’s reform plans in the field of financial consumer protection. For this end, he introduced the concept of the mandatory annual percentage rate (APR) disclosure to the Palestinian financial sector in two workshops in Ramallah, and supported the PMA in the formulation of a respective regulation.
Transparent pricing is an important precondition for fair competition as it enables consumers to take informed decisions. Firms in many markets, and certainly not only in developing countries, are keen to hide the true price of their products. This practice is competition neither in prices nor in quality, but in deception. For instance, when it comes to taking up a loan, in addition to the interest rate the creditor may charge upfront-fees, bundle the loan with different insurances, or require a security deposit, not to mention different ways the interest rate is calculated. In the MENA region, we also find a range of Islamic products, which exhibit their own individual pricing scheme. In the end, it is all money: which loan is cheaper? Answering this question so far demands certain skills on the side of the consumers.
This is where the APR comes into play. It is a standardized cost parameter that reduces the complexity to one single number and thus allows a direct comparison between all kinds of products. In particular, it tells the consumer how much it would cost him/her to borrow one unit of currency and to keep it for one year. The PMA plans to require all lenders to indicate this price on their products.
Chuck Waterfield welcomes that the financial institutions are involved in the process, yet without being able to control it. Besides, his impression is that in the Palestinian Territories “an expectation of reasonably ethical behavior” prevails. He assumes the banks to cooperate willingly as they seem to understand the need for and positive impact of this regulation. From his experience of advocating consumer rights in the microfinance industry across the globe, however, he knows that the situation can change within one year. It often only needs one lender to break with the unwritten norm, forcing his competitors to follow suit. Therefore, Mr. Waterfield emphasizes to use this favorable moment to put these safeguards into place.
By Marc Sindlinger