Designing Disclosure Regimes for Responsible Financial Inclusion
In East Africa, a microborrower who goes to pay off his loan early is surprised by a hefty prepayment penalty that was not mentioned in his loan agreement. A small business owner in Southeast Asia becomes frustrated trying to determine which of several loans is the least expensive--one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction.
Situations like these can be quite common. Country-level policy makers working to expand financial inclusion are increasingly recognizing the need for complementary efforts in financial consumer protection. Recent initiatives at the global level include the G-20 High-Level Principles on Financial Consumer Protection and work within the Global Partnership for Financial Inclusion. If financial service delivery is transparent, services will be used more, customers will benefit more, and inclusion in the formal financial sector will pose fewer risks for vulnerable, low-income people who have less experience with formal finance and lower levels of financial literacy and capability. (Such consumers are referred to as "low-income consumers" in this Focus Note.)
Transparency is a basic element of consumer protection. To determine whether a product or service is appropriate to them, consumers first need to know what they are getting. Pricing and other terms of financial products can often be opaque or even deceptive, particularly for low-income consumers.