Designing disclosure regimes for responsible financial inclusion

In East Africa, a micro-borrower who goes to pay off his loan early is surprised by a hefty prepayment penalty that was not mentioned in his loan agreement. A small business owner in Southeast Asia becomes frustrated trying to determine which of several loans is the least expensive, one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction. 'Disclosure regime' in this focus note refers to regulation and guidelines, supervision and enforcement efforts, and other policy initiatives meant to increase transparency. Disclosure regimes can increase transparency by targeting two key objectives: (1) increasing consumer comprehension, allowing consumers to understand and choose appropriate products, and (2) increasing market competition, allowing comparison shopping by consumers and greater competition among providers, which may help to lower prices and improve the quality of products offered. Though there is little available data on impact, preliminary evidence suggests a positive correlation between disclosure and favorable pricing trends, which may indicate improved consumer comprehension and increased market competition.