MICROCAPITAL STORY: Client Protection In Microfinance - Observations by ACCION and Prizma Mikro From A Hanson Wade Conference On Microfinance Investments

At a recent conference on ‘Investments In Microfinance’ which was held in London and organized by Hanson Wade, a panel discussion was dedicated to the issue of client protection. The panel was led by Ms. Elisabeth Rhyne, Managing Director at the ACCION Centre for Financial Inclusion and Mr. Kenan Crnkic, General Director of Prizma Mikro, an MFI headquartered in Sarajevo. According to its profile on the MIX Market portal, a database which collects financial and other information about MFIs across the globe, Prizma is a non-bank financial institution and was established in 1997. Its total assets as at 31 December 2008 is USD 52,445,597 and it has a Debt To Equity ratio of 297.89 percent. Its Return On Equity is 8.17 percent and its Return On Assets is 2.28 percent. Prizma has 55,820 active borrowers as at 31 December 2008.

Ms. Rhyne discussed the principles of client protection that are the subject of an ongoing campaign led by the Centre for Financial Inclusion at ACCION. The campaign has been the subject of previous Microcapital Stories which are referenced in the ‘Additional Resources’ section below. Among the main objectives of the campaign are to raise awareness and encourage industry dialogue about client protection and to encourage collaboration between MFIs, national associations and other bodies to develop and implement standards for the appropriate treatment by financial institutions of low income clients. The campaign has been endorsed by many MFIs since its introduction at the end of 2008. A list of the current endorsees and specific details of the campaign can be found on the website of the Campaign for Client Protection.

Ms. Rhyne mentioned during the panel discussion that one of the main aspects of consumer protection in the microfinance sector is to avoid over-indebtedness. She added that this important aspect had been ignored by many participants in the microfinance industry during the sub-prime crisis with adverse consequences to the reputation and image of the microfinance sector. She stressed the need for more industry dialogue and consensus building within the microfinance industry as far as consumer protection issues are concerned. A point was also made about investors who are keen to ensure that they work with and invest in pro-consumer MFIs so as to avoid over-indebtedness and the corresponding increased risks of default. Ms. Rhyne added that certification is an important component of the Campaign For Client Protection although she mentioned that details about certification will emerge at a later phase of the campaign. Nonetheless, the panelists agreed that it is important to ensure that MFIs are certified and assessed in terms of their compliance with client protection principles on an agreed scale by a suitable entity (possibly a rating agency). The idea is that certification would better enable investors to form views about the pro-consumer stance of MFIs before making their investment decisions.

Another question raised during the course of the panel discussion came from an MFI which had concerns about incentivizing staff and loan officers to comply with any applicable client protection principles. On the one hand, loan officers are continually encouraged to improve their loan sales records. This goal may conflict with the requirement to observe client protection principles and ensure that credit is not extended to unsuitable borrowers. The panelists responded by stressing the need to provide adequate training for staff. Mr. Crnkic highlighted the importance of training staff so that they properly understand the rationale behind client protection principles.

A point that was repeated by both panelists during the discussion was the challenge of actually implementing client protection principles. There are many challenges to the practical implementation of client protection principles, one of which is the lack of will by industry participants to move discussions forward. A member of the audience raised a question about the problem of competitive disadvantages if one MFI complies with consumer protection principles only to lose customers to a neighbouring MFI that is willing to extend credit on the basis of less onerous consumer protection procedures. In response, Ms. Rhyne stressed the need for national associations and even government bodies to get involved in the discussions on client protection so that principles can be implemented evenly across the microfinance sector.

Additional Resources:

MICROCAPITAL STORY: Center for Financial Inclusion at ACCION International Holds First Meeting of the Steering Committee for the Campaign for Client Protection in Microfinance; International Leaders Endorse the Six Principles of Client Protection in the Meeting

MICROFINANCE PAPER WRAP-UP: Microfinance Sector’s Consumer Protection Initiative, By Maheen Saleem and Aban Haq

MICROCAPITAL STORY: Thirty-Five Organizations Sign Client Protection Principles to Ensure Fair Treatment and Financial Protection of Low-Income Microfinance Clients

MICROCAPITAL STORY: How Will The Center For Financial Inclusion Positively Affect Commercial Microfinance?

MICROCAPITAL STORY: CGAP-Supported Global Microfinance Consumer Protection Campaign Launched in Ghana by GHAMFIN and SPEED Ghana