Client protection in practice
As an institution with a social mission, your first commitment to your clients should be to ‘do no harm’. In other words, all MFIs (whether for-profit or non-profit) have a social responsibility to protect their clients.
Experience from the field shows how to put this committment into practice:
1. Price your products fairly
While microfinance interest rates generally need to be higher than traditional bank lending rates (mainly due to higher cost structures and smaller loan sizes), sometimes MFIs charge their clients more than is necessary. Fair pricing should be standard for all products and services: savings, insurance, remittance transfers, etc. While there is no one clear way to determine what a fair price is, unfair pricing usually results when there is a lack of competition. This allows an MFI to charge high interest rates that generally either cover operational inefficiencies, excessive profit-taking or rapid growth.
As AlokMisra, a microfinance consultant, explains: “Many MFIs are inefficient and should find ways to improve their cost structures and pass on the benefits to their clients. Often this can be done without resulting in lower profit margins.”
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CRECER (Bolivia) examined its cost structure to identify ways to provide more benefits to clients, to respond to client feedback and to become more competitive. As a result of this review, CRECER was able to reduce its interest rates from 3.5 per cent to 2 per cent per month. By increasing efficiency and improving productivity while incrementally reducing the rate, CRECER was able to do this without affecting profitability. |
2. Price your products transparently
Your marketing materials and communications should give clients full information about the true costs they are paying for loans and transaction services, and how much they are receiving for savings.While all clients understand that paying a low interest rate is better, few can calculate the effective interest rates when factoring in a declining (rather than ‘flat’) rate of interest, and associated fees such as loan origination charges, membership fee, compulsory loan insurance, etc. The boxbelowgives information on a useful new transparency initiative.
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Chuck Waterfield, of Microfin, has begun a new transparency initiative called MF Transparency. The website presents information on loan products and their pricing in a ‘clear and consistent fashion’ by disclosing repayment schedules for each product and calculating the ‘true’ price through an APR (annual percentage rate) calculation. For more information, visit Microfinance Transparency. |
3. Avoid over-indebting your clients
This is linked to the importance of transparency. Both forms of client protection are part of AMK’sofficial Client Protection Code. When qualifying a client for a loan, in most cases except for start-ups, loan officers should make sure that the client has sufficient and stable sources of income to repay the loan, as well as checking to see what other outstanding debts they have.
In AMK’s case, the internal audit department continues to verify clients’ level of indebtedness, even after loan disbursement. MFIs, especially those in regions with significant microfinance market penetration (such as Bolivia), may want to work with local competitors, banks, and even local governments to coordinate information sharing or encourage the creation of a credit bureau if feasible.
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1. Maximise the inclusion of the poor and other marginalised populations who meet AMK’s other criteria for selection 2. Minimise the exposure of (poor) clients to financial products that may prove harmful if they promote over-indebtedness. 3. Provide complete information to clients about policies and procedures, and ensure complete transparency in transactions. 4. Facilitating and promoting complete freedom of choice to clients. 5. Ensuring appropriate and respectful behaviour towards clients of staff management. |
4. Protect clients’ savings
Using client savings to fund the loan portfolio implies higher risk and responsibility for an MFI than for a lending-only institution. MFIs are rightly required to meet higher regulatory standards when it comes to offering savings products, as microfinance clients cannot risk those savings. Information on your use of funds and reserve balances, as well as interest margins, should be transparent, and in the public domain.
5. Treat clients fairly and with respect
In recent times, this issue has revolved around ensuring appropriate debt collection processes. All clients deserve to be treated with respect, even when they have failed to repay their loan on time. As one loan officer explains about repayment issues, ‘bad things happen to good people’.
There are a number of reasons why loans are not paid on time. You should begin the debt collection process by trying to understand the client’s situation. Intimidation or bullying is never appropriate, and can result in repercussions for your MFI. A client of a bank in India, for example, committed suicide as a result of the humiliation he endured through mistreatment by the police acting as loan collector proxies for the bank. And in a separate incident, staff from one MFI were accused of kidnapping a child and holding her ransom until the loan was repaid.
It is your MFI’s responsibility to make sure that there are clear guidelines for the loan collection process and that these are adhered to.Many of the issues around aggressive loan repayment tactics can be linked to inadequate staff training, and incentive structures that encourage ‘zero tolerance’ delinquency policies.
There are other ways that clients can be mistreated or have grievances. You should consider creating a formal grievance system for clients so that they can filea complaint anonymously, without fear of recourse, and with the knowledge that the MFI will actually act upon the information.
Convenience to clients
You should also consider the potential negative consequences of how you deliver services to clients, such as the time a client must wait to secure a loan, how far they must travel for a group meeting or to receive a loan disbursement, etc. For example, if a client borrows money to increase the working capital of his or her business, but loses a day’s business completing the paperwork, the loan may not be serving its intended purpose.
6. Protect privacy of information
Few developing countries have well-established frameworks for protecting a client’s rights to privacy of information. Clients’ financial information, however, is perhaps the most important to safeguard, especially as it relates to personal security. There have been incidents, for example, in Asia and Africa, where female clients have suffered physical abuse as a result of husbands or others finding out about their savings or loan accounts. While some cultural contexts require that husbands know about debts incurred by their wives, in others it may not be appropriate for them to have access to such information. You should err on the side of cautionand always work to protect client information. Ideally, you should create a policy that no information will be released without the client’s consent or at least knowledge.
7. Reinforce ethical behaviour of staff
It is your organisation’s responsibility to create a culture that reflects its ethics and values. Some MFIs have a code of ethics, such as Constanta in Georgia; others may not have a formal code, but have worked hard to instil a respectful culture, which is reinforced through human resource training and operational policies and procedures. Even where corruption is a challenge, MFIs should expect ethical behaviour from their staff. In Kenya, for example, K-Rep created an organisational culture that set high ethical standards for employees, which was reinforced through its low tolerance for fraud (e.g. employees knew they would be fired for taking bribes).