by Yanni Hao - South Asia, East Asia and Pacific -

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

Maheen Saleem and Aban Haq wrote an article entitled, “Microfinance Sector’s Consumer Protection Initiative,” published in the February issue of Business Recorder. The authors first summarize the rapid development of the microfinance industry in Pakistan. They then highlight how increasing competition in the microfinance industry can lead to the use of unethical and illegal practices by organizations in order to gain a competitive advantage. They contend that these facts, combined with the characteristic vulnerability of microfinance recipients, demonstrate the need for institutionalized consumer protection. Accordingly, Pakistan Microfinance Network (PMN), an association of professional organizations in the field, has laid out a set of guidelines and principles for the treatment of microfinance clients called the Code of Conduct for Consumer Protection. The Code was officially launched on the 26th of January, 2009. The full text of the article is available at:

http://www.brecorder.com/index.php?id=890801&currPageNo=1&query=&search=&term=&supDate=

With a growth rate of 45 percent over the past three years, Pakistan’s microfinance industry has emerged as one of the fastest growing finance sectors globally, reaching 1.9 million clients as of September 2008. Product diversification has taken root, and savings and insurance uptake has surged. Microfinance institutions are moving towards financial sustainability and accessing commercial sources of funding. That is, despite its late start and therefore the relative youth of the sector, microfinance providers in Pakistan have been significantly proactive in terms of fostering innovation and channeling the development of microfinance as a whole.

One of the key steps in this direction was the establishment of Pakistan Microfinance Network (PMN), which emerged informally in 1999 out of the efforts of several microfinance practitioners who felt that a platform to share views and experience was needed. Today, PMN’s membership includes 20 entities, including: microfinance banks, specialized microfinance institutions, commercial financial institutions, multi-dimensional microfinance NGOs, and rural support programs.

The past few years have seen the microfinance industry grow to become more complex and more closely linked with the mainstream financial sector in Pakistan. The sector has grown exponentially in the number of people served, but also widened in terms of what services are made available. Competition in the sector has also increased, which should result in better services and competitive pricing for microfinance clients in the country. Yet, sometimes, competition can also lead to the use of unethical and illegal practices by organizations in order to gain a competitive advantage. This – combined with the characteristic vulnerability of microfinance recipients – highlights the increasing importance for microfinance institutions to act responsibly, and further ensure that best practices in terms of consumer protection and consumer rights become institutionalized.

However, consumer protection as an issue has historically been ignored in Pakistan at the policy level. Official legislation for the protection of consumer rights either did not exist, or was not enforced. Yet, in 2005, formal consumer protection legislation was drafted in Islamabad and at the provincial level. While this legislation seems to be a long overdue step in the right direction, there are still areas which have been overlooked. One major zone that falls into this category is financial services. The services sector in general has barely been addressed in the drafted legislation – which instead focuses heavily on manufacturing – and financial services in particular have been entirely overlooked. This can be particularly problematic for microfinance clients who are, for the most part, disenfranchised and unaware of the very existence of their rights. Otherwise, the State Bank of Pakistan has recently begun some work on consumer protection for the formal banking sector, but this does not encompass microfinance institutions.

These principles and guidelines are in line with ethical and operational norms in microfinance globally, and are structured around six core values which are fundamental to the provision of services. Each signifies a key area of concern for microfinance clients, with the Code as a whole attempting to present in unambiguous terms what clients can expect from microfinance providers. The core values around which the Code is structured are:

1) Transparency

2) Fair practices

3) Dignified treatment

4) Privacy and fair disclosure

5) Governance

6) Client satisfaction

The Code will be translated into all regional languages and distributed to the branches of the signatory organizations. The Code itself mandates that copies of it be present in all offices of each microfinance provider, and be given to a client if they so require. Although microfinance clients will be the direct beneficiaries of the Code, there could be positive spillovers for microfinance practitioners as well through increased customer loyalty.

Moreover, by helping clients understand that they have rights and responsibilities, and increasing their understanding of product pricing, the Code will help persons comprehend their true financial assets and liabilities. This could help clients avoid over-indebtedness, and thus reduce default risk for the service provider. Additionally, Pakistani microfinance providers operate in geographically diverse areas which sometimes results in a communication gap between senior management and field staff. Related measures to gauge client satisfaction would therefore provide valuable insights into on the ground, operational implementation.

Still, developing and launching the Code of Conduct is the just first part of the consumer protection process initiated by PMN. The organization notes that the next step in the process is developing a long term consumer feedback and grievance redress system. Such an outlet would provide clients with a way to file complaints over perceived violations of the Code of Conduct. The final and related step in the consumer protection process will be monitoring compliance with the Code, and presumably, ensuring equitable resolution of grievances.

By Yanni Hao

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