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"Smart" Microfinance and Client Protection
In Andhra Pradesh, two factors behind the crisis were that clients were over-indebted and MFIs were employing coercive collections practices which led multiple deaths and stifling government regulations. Of course there were other contributing factors, but in addressing these two issues one has to wonder what could have been done? Although there are many different possible answers to that question in my opinion there is a simple answer: client protection. Client protection is ensuring that clients receive fair and appropriate treatment from MFIs and is vital in the practice of responsible microfinance. If you think about it, in many countries some sort of bureau or agency on Consumer Protection exists to protect consumer’s rights and interests, why shouldn’t there be the same in microfinance?
The Smart Campaign, founded in 2009, is the industry leader in Client Protection and it has developed six core principles for the treatment of microfinance clients. The Client Protection Principles are minimum standards that clients should expect to receive when they do business with an MFI and include:
1. Avoidance of over-indebtedness
2. Transparent and Responsible Pricing
3. Appropriate collections practices
4. Ethical staff behavior
5. Mechanisms for redress of grievances
6. Privacy of client data
The Campaign has developed tools and trainings that MFIs can download in order to put the principles into practice. Many MFIs and industry stakeholders have endorsed the principles and The Smart Campaign and in doing so they have created a win-win situation for themselves and their clients. It is in the best interest of MFIs to keep their clients happy and practice “Smart Microfinance” and clients receive fair and adequate treatment.
Although there are other factors involved, maybe if MFIs in Andhra Pradesh had practiced client protection and put the 6 principles into practice there wouldn’t be almost shut down of the sector that we see today.
What are your opinions on client protection? What measures or practices does your MFI employ to ensure that clients are treated fairly and with respect?
To get involved on SEEPCommunity.com, join the Client Protection group at: http://seepcommunity.com/group/cppp
For more information on client protection and The Smart Campaign, visit: http://www.smartcampaign.org/index.php
Views: 59
Replies to This Discussion
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Permalink Reply by Fehmeen Khan on -
We believe client protection should be a priority for MFIs, whether they are driven by financial profits or social profits. The reason seems obvious in the latter case, but if one thinks about it, adopting client protection principles can offer strategic benefits for profit-oriented MFIs too. It would be nice to see the SMART Campaign highlight this point too (I may be wrong to assume they still haven't promoted this angle, so do correct me).
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Permalink Reply by Dheeraj Pao on -
good contri' u r giving to MFI ,it is the most crucial factor for the very purpose for which the MF was started i.e. client benefits ,but now what u see in places like Andhra is the counter of the purpose MF was started.kudos to you
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Permalink Reply by Melissa Matlock on -
The Smart Campaign is promoting client protection among all types of MFIs both non-profit and for-profit. There are some for-profit MFIs such as Compartamos Banco which have really embraced the principles and support the Campaign. I don't know if they have explicitly said there are strategic benefits for profit-oriented MFIs but maybe that is something they should make clearer. Thanks for the suggestion!
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Permalink Reply by Fehmeen Khan on
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Exactly. When clients are better off, the MFI is better off, and the microfinance sector is better off (when all MFIs are better off). However, MFIs may not find this indirect success immediately appealing, and so it's important to tell MFIs that they 'can' benefit directly too. I recently wrote a guest post for Microfinance Focus where I discussed five strategic benefits in this context (human resources, portfolio quality, marketing, access to funds and overall market prosperity through more choices for consumers). If we actively promote this angle as well, we need not wait for MFIs to 'voluntarily' adopt these principles;instead, MFIs may pro-actively realize they 'need' to go this way for their own benefit.
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Permalink Reply by Fehmeen Khan on
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I didn't know CB embraced these principles. We're gradually learning that the bank's transition to a for-profit entity wasn't harmful for clients.
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Permalink Reply by Fehmeen Khan on
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here's the link to the guest post - just in case you're interested :)
http://www.microfinancefocus.com/news/2010/10/08/strategic-benefits...
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Permalink Reply by Melissa Matlock on
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The last news that we had from The Smart Campaign about certification was at the Global Network Summit in November 2011. This was what the thoughts were at the time, although it could have changed since then.
In August 2010, The Smart Campaign created a Certification Task Force that was responsible for developing a certification process and overseeing its implementation. The task force met in 3 virtual meeting and will present its options for certification to the Smart Campaign Steering Committee in January 2011.
The reasoning behind certification for the Smart Campaign was to protect clients and to reduce reputational risk. If a MFI is certified by the Smart Campaign it means that the MFI is pro-client. The Smart Campaign is exploring a model in which there will be two levels of certification. A Level 1 classification will signify that the MFI meets the minimum standards in client protection practices. Policies, systems and front-line levels will be verified in a systematic manner. A Level 2 classification means that MFIs meet higher standards in client protection practices although the specific standards have not yet been defined.
The specifics of certification are still being worked out including how the MFIs are certified and who will certify them. MFIs will be assessed separately on the 6 principles of client of protection and as to who will certify the Smart Campaign is investigating a model whereupon it would certify other certifiers.
PowerPoint (English): http://www.scribd.com/doc/47198767
PowerPoint (Spanish): http://www.scribd.com/doc/47198769
PowerPoint (French): http://www.scribd.com/doc/47198768
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Permalink Reply by Ismael Valigy on -
Hello Melissa and all group for this discussion.
I'm new here and I agree that clients need total protection. I want to comment on “when customers become more indebted and MFI were employing coercive collections”.
In my opinion, this attitude leads to bad consequences for any organization and then reflects negative for new borrowers. People talk and spread the message....
If we agree that the characteristics of borrowers in MFI is for the poor and most cases they are illiteracy and cannot have access to a traditional bank system, then why some implementing coercive collections?
My experience in the field in two different contexts (two countries) with different habits and cultures, its analysis shows that the fault in most cases is not beginning from the borrowers but the methods of loan assessment. An organization can have the best methods (using best software’s) but if the teams of loan officers (front office) are not well trained and prepared, it will always reflect on this problem. I call loan officers the face of the institution.In many of the cases examined from the beginning of the process of credit application to disbursement, the loan officers are subject to the achievement of targets and needs to achieve in certain period of time. The pressing imposes leads to a bad credit evaluation and normally they not look at the customer's willingness payments. They only want to disburse and leave the consequences to the top managers (to solve...). This can be minimize if the loan committee are well organize but Here there is another issue when too many application is going to the table to analyses and to approval..)
On the other hand, normally in one MFI loan officers are usually those with lower wages or benefits of the institution. If we think on logic way, they will not do the correct borrower follow-up because of low motivation. Another aspect of these types of loan officers is the credit abuses of beneficiaries, benefiting them self (corruption).
In these two scenarios, the top management team has no other outlet unless order enforcing coercive collection. But the real problem was not attacked...
In this matter (why coercive collection) there is a lot of issues to discuss. I have more opinions founded in the field but I will stop here.
PS.: One case I read recently in newspaper in Mozambique, one borrower commited suicide because of their bad loan and coercive collection from the institution.
Another point, I want to take to the discussion is understanding in what stage of the process of repayments the borrower enters in arrears? Ever think of that?
In my analysis and my point of view, there are two moments with different causes. The first phase occurs between the 3rd and 5th installment. The other occurs in the last two installments. I would like to take the group opinions. I have some reasons but would not want to influence the discussion. I think this matter can link to your discussion about over-indebted and coercive collection.All the best,
Ismael Valigy
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Permalink Reply by Petro Mattaba on -
The Smart Campaign will be one of the best practice in microfinance if it is implemented well, personally I am more concern with the idea of transparency and responsible pricing.This is the same issue done by Microfinance Transparency a US based NGO which is promoting transparency and fair pricing in microfinance industry. Transparency in loan pricing is one of the factors which contribute to over indebtness on micro loan clients. MFIs does not disclose the full cost of the loan to the client starting with hidden charges like complusory deposits, loan insurance charges, flat interest rate calculations and loan processing fees. Taking into account that most of these clients have no financial education, they end taking loans which are too expensive for them to repay because were not well informed to make reasonalble decisions.
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Permalink Reply by akan udoh on
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Client protection is a very necessary policy which MFI should adopt even if they financial self sustainability MFI or operational self sustainability MFI.
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Permalink Reply by Melissa Matlock on
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I agree that in most cases where clients are over-indebted it is not by their own choosing. I don't know if it exists but it would be interesting to see a study on over-indebted clients, why and how it happened.
Performance targets set by management can force loan officers to make loans simply because they need to fulfill their goals; they don't examine the willingness or capacity of the borrower to repay and they pressure the client to take the loan. It is difficult when these targets are being set by upper level management, but if an institution really cares about it its clients and preventing over-indebtedness it needs to take certain measures such as a loan review committee and instituting a code of ethics and conduct and have a monitoring system to make sure it is followed. They could do random viewing of loan disbursements, collections and then tie that to the staff performance reviews/bonuses.
What are everyone else's thoughts on how MFIs can have performance targets but also practice responsible lending?
Ismael Valigy said:Hello Melissa and all group for this discussion.
I'm new here and I agree that clients need total protection. I want to comment on “when customers become more indebted and MFI were employing coercive collections”.
In my opinion, this attitude leads to bad consequences for any organization and then reflects negative for new borrowers. People talk and spread the message....
If we agree that the characteristics of borrowers in MFI is for the poor and most cases they are illiteracy and cannot have access to a traditional bank system, then why some implementing coercive collections?
My experience in the field in two different contexts (two countries) with different habits and cultures, its analysis shows that the fault in most cases is not beginning from the borrowers but the methods of loan assessment. An organization can have the best methods (using best software’s) but if the teams of loan officers (front office) are not well trained and prepared, it will always reflect on this problem. I call loan officers the face of the institution.In many of the cases examined from the beginning of the process of credit application to disbursement, the loan officers are subject to the achievement of targets and needs to achieve in certain period of time. The pressing imposes leads to a bad credit evaluation and normally they not look at the customer's willingness payments. They only want to disburse and leave the consequences to the top managers (to solve...). This can be minimize if the loan committee are well organize but Here there is another issue when too many application is going to the table to analyses and to approval..)
On the other hand, normally in one MFI loan officers are usually those with lower wages or benefits of the institution. If we think on logic way, they will not do the correct borrower follow-up because of low motivation. Another aspect of these types of loan officers is the credit abuses of beneficiaries, benefiting them self (corruption).
In these two scenarios, the top management team has no other outlet unless order enforcing coercive collection. But the real problem was not attacked...
In this matter (why coercive collection) there is a lot of issues to discuss. I have more opinions founded in the field but I will stop here.
PS.: One case I read recently in newspaper in Mozambique, one borrower commited suicide because of their bad loan and coercive collection from the institution.
Another point, I want to take to the discussion is understanding in what stage of the process of repayments the borrower enters in arrears? Ever think of that?
In my analysis and my point of view, there are two moments with different causes. The first phase occurs between the 3rd and 5th installment. The other occurs in the last two installments. I would like to take the group opinions. I have some reasons but would not want to influence the discussion. I think this matter can link to your discussion about over-indebted and coercive collection.All the best,
Ismael Valigy
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Permalink Reply by Jenny Morgan on -
Excellent point Petro and this is why Transparent and Responsible is one of the principles. The campaign too sees that link and wants the industry to commit to being upfront, not only about the interest rate, but about how it is calculated (monthly, annually etc) and all of the additional fees. The campaign also insists that MFIs clearly communicate this to clients because what good is transparency if it is not communicated.
I agree that MF Transparency is doing an great job of highlighting this issue.
Translation
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