Protecting Microfinance Consumers

October 19, 2009    

Consumer protection is on everyone’s mind these days, with the financial crisis throwing the issue into bold relief for financial institutions of all kinds. Microfinance finds itself ahead of the curve because client protection already has been on its agenda for quite some time.

Today, more than 450 organizations—retail microfinance providers, networks, associations, support organizations, and investors and donors—have embraced the Smart Campaign’s Client Protection Principles, and many are ready to put them into practice. Some are using tools like CGAP’s Implementing the Client Protection Principles: A Technical Guide for Investors to help them incorporate the campaign’s Client Protection Principles into their due diligence, monitoring, and governance efforts.

Consumer protection in microfinance
Financial services can help poor people transform their lives. “However, if they’re not designed and implemented properly,” says CGAP’s microfinance expert Kate McKee, “Financial services—particularly credit—can, in some cases, do more harm than good.”

To help guard against this, the Smart Campaign (formerly known as the Campaign for Client Protection in Microfinance) is bringing together a broad range of players in microfinance: practitioners, networks, donors, investors, fund managers, and policy makers. Launched in March 2009, “the goal of the Campaign is to make sure financial service providers treat customers fairly, and avoid offering financial products that could get clients into trouble,” says McKee.

The Campaign is working to establish standards for the appropriate treatment of low-income clients based on six Client Protection Principles:

1. Avoidance of over-indebtedness
2. Transparent pricing
3. Appropriate collections practices
4. Ethical staff behavior
5. Mechanisms for redress of grievances
6. Privacy of client data

Given its extensive work with social investors, microfinance investment vehicles, and donors, CGAP has taken the lead within the Campaign in encouraging investors and donors to integrate the six principles into their ways of doing business.

New Technical Guide
CGAP’s new Technical Guide was developed through close collaboration with the full spectrum of microfinance investors, including large development finance institutions, like KfW; large commercial banks with small microfinance units, like Deutsche Bank; and small private equity funds, like Grassroots Capital and Aavishkaar Goodwell.

Real practices
“A critical feature of the Guide is its basis in real-life investor practice,” says McKee. The Guide details the client protection measures taken by actual institutions to encourage dialogue, knowledge sharing, and peer support amongst investors.

“These are early days for implementing the client protection measures—and specifically the Client Protection Principles—so the Guide provides a snapshot of different measures investors are developing now. It doesn’t spell out one correct way of protecting clients. The idea is that, at this stage, investors can learn from each other, as the industry as a whole moves toward standard practices,” says McKee.

Real tools
In the Guide, investors will find concrete samples of current investor practice, like FMO’s guidelines for consumer finance and Deutsche Bank’s due diligence questionnaire for head and branch offices, as well as the part of its loan application that relates to the Principles. The Guide also includes Beyond Codes’ self-assessment client protection guide; sample letters from endorsing investor to investee microfinance institutions; KfW’s checklist for promoting responsible finance; and Incofin’s social performance assessment tool.

Action steps
In addition to offering specific tools, the Guide suggests seven steps investors should take to protect clients, drawn from the current practices of investors and fund managers. Beyond incorporating the principles into investment policies and financing and shareholder agreements, these steps include endorsing the principles publicly and urging investees to do the same; monitoring investee implementation of the principles; and reporting on progress to investors and other stakeholders.

A work in progress
However, according to McKee, “The Guide is intended as a ‘living’ document. We plan to update it regularly as investor practice evolves, and we strongly encourage investors to give us their feedback on how the Guide can be improved. We want it to be the most useful tool possible to ensure the best possible results for microfinance clients.”

Comments and material can be sent to Kate McKee and Estelle Lahaye.