Client Protection: Are We There Yet?

Since its launch, the Smart Campaign has made enormous strides toward ensuring that clients of microfinance would receive transparent, respectful, and prudent treatment. The Campaign is proud to now have more than 1000 institutions as endorsers and these organizations that serve over 40 million low income people.

In the last year, at least 10 major microfinance investment funds managing over US$2 billion have integrated client protection into their due diligence and reporting.

The Campaign is a truly global effort. It is governed by a 28-member Steering Committee whose membership represents all facets and geographies of the sector and its work is accomplished through partnerships with virtually every facet of the industry.

Through a collaborative effort involving practitioners around the world, the Campaign has created a suite of nearly 50 tools to help MFIs move from endorsement to implementation of the Client Protection Principles. These provide MFIs with concrete examples of how their peers put the principles into practice, along with how-to guides for assessing and implementing best practices. To date, the site’s tool pages have logged more than 70,000 visits.

The good news

A lot of great examples are starting to emerge on how financial providers are concretely implementing client protection. These come mainly from a “Call for Tools” process initiated by the Campaign to recognize providers that have the best tools to integrate the various components of client protection.

These resources range from practical guidelines and downloadable forms such as Fonkoze’s Guide for Credit Agents to evaluate clients for its Post-Disaster Recovery Program to online simulations such as the Client Protection and Financial Education Simulation.

The online simulation tool allows you to simulate being a manager or loan officers of a fictional MFI, and see the effects that your decisions have on the clients of that institution.

The upcoming report from the Smart Campaign Implementing Client Protection in Microfinance: The State of Practice 2011 also shows that on average – MFIs are protecting their clients adequately, with scores above the minimum standard for client protection on all the Principles. The study is based on the analysis of client protection data from close to 400 MFIs around the world.

Some examples highlighted in the report include:

  • The “one-client, one-lender” campaign spearheaded by AccessBank, Azerbaijan in collaboration with the Azerbaijan Microfinance Association (AMFA) to promote a strategy where a lender seeking to provide a second loan to another MFI’s client commits to pay off the client’s existing loan so that the client has only one loan.
  • The educational video developed by Ujjivan, India to highlight the risks of multiple borrowing and ghost borrowing by featuring rural women who represent typical microfinance borrowers in India and teach by example. This video has already been showed to over one million families.

So is the great flurry of activity around client protection actually making a difference in the operations and day to day practices of providers? Are clients adequately protected from over-indebtedness and treated fairly and respectfully? Do they understand the information associated to the financial products that they are receiving and are those priced reasonably? Is their data protected? And if not, do clients have an effective mechanism to voice their complaints?

The bad news

As Kate McKee mentioned in her post, Client Protection can be achieved with three strategies: improved practices and standards, consumer protection regulation, and supervision and financial education.

At a global level, more collaborative and focused work is needed to work on the later strategies: consumer protection regulation and supervision and financial education.The fact that three client protection issues: financial education, credit bureaus, and client protection regulation make the top 5 list of the Opportunities identified to reach full financial inclusion shows that there is much work to be done.

Although insightful, the available client protection data gives only a preliminary indication of the overall state of practice and leaves many questions unanswered. In addition, there are already some areas of concern that are emerging when looking at providers practices:

  1. Small providers at a disadvantage – Their practices are not yet adequate for prevention of over-indebtedness and complaint resolution and they score lower or not at all (for lack of data) on the other Principles as compared to larger providers. This is an indication that their scarce resources may not allow them to invest adequately in client protection by having dedicated units or people responsible for it. Once minimum scale is achieved, client protection seems to be more a function of focus than resources.
  2. Scores for responsible pricing, while still adequate are the lowest, and banks and large MFIs are the lagers - Top-scoring MFIs (with assets between $5 and $10 million) have relatively low yields, along with moderate expenses and moderate profitability. Meanwhile, bottom-scoring large MFIs (with assets over $100m) have slightly lower yield and profitability, but far lower operating expenses, suggesting that profit margins may be excessive, even with the relatively low ROA.
  3. Implementation is uneven – Prevention of over-indebtedness and transparency are getting most of the attention from investors and raters, with more data available on these principles than any other. Appropriate Collections Practices and Privacy of Client Data receive surprisingly little attention.

The way forward

In order to ensure that the CPPs become part of the microfinance DNA, we need to stop taking for granted that providers will protect their clients adequately – because they want to and should – and recognize that doing so will require conscious effort and investment.

Here are the top 3 ideas that the Smart Campaign will pursue:

  1. Roll-out a Client Protection Certification Program to publicly recognize providers who are meeting client protection minimum standards, and work with rating agencies and funders to incorporate the minimum standards into their work
  2. Encourage more self-assessments and in-depth third party assessments from providers, to compile robust Client Protection Benchmarks
  3. Design new tools trainings curriculum to help providers “put the Principles into practice”
  4. Identify and drive new research that helps to deepen the understanding and implementation of the Principles.

At the same time, new tool identification and development will continue, focusing on financial products beyond credit, the recently added principle that addresses non-discrimination and other areas where gaps remain. The Campaign will continue to expand the cadre of individuals who can provide adequate support on implementing the Principles by building capacity for client protection at the local level through partnerships with national associations and others where needed, and explore launching local Smart Campaigns where client protection champions can take the lead in training, assessing and implementing the Principles.

Through a recently launched Client Voice Task Force, the Campaign will bring the views and needs of the client more squarely into the Campaign and link to existing financial education efforts and pro client/consumer initiatives.

The work needed to make sure that we move beyond endorsement and to changing practices is not over but with an ambitious work plan and the continued collaboration of many in the industry, such as MFTransparency, the Social Performance Task Force, SEEP, Mission CRS, the MIX, we will reach our collective goal.


09 September 2012 Submitted by Dr V.Rengarajan (not verified)

Isabelle Barres

The new series in the blog on ’Responsible finance’ by Kate and ‘Consumer research’ by Rafe followed by Isabella’s ‘client protection’ focus by and large on customer protection measures through smart campaign and CPP application in microfinance arena,It appears that these measures are framed with more on institutional perspectives from supply front. Since these postings delve on the various issues related to customer of Microfinance, it becomes a pre requisite for appreciating the dynamics of multifaceted profile of the poor client and the plurality of their needs in this poverty sectorfrom demnad side. Further it would help for designing appropriate norms for, Responsible financial inclusion, Responsible finance and Comprehensive customer protection measures suited to the target clients and facilitate for making a sustainable dent in poverty canvas. In this regard towards introducing value added CPP for universal application for ensuring a comprehensive protection to the target clients, attention is drawn to following five suggested areas
1. Clarity on the terms – customer, client , consumer, borrower, low income people
Are all these terms represent the same in MF platform ? The customer of ‘Wall Mart’ or client of ‘KFC’ or consumer of ‘ Peter England’ is different from MFI’s poor client in terms of demands and services . The demands of the customer of Bank doing financial intermediation is not same of the poor borrower of MFI whose demands may vary . It is imperative for research on customer that ambiguity need to be removed in the terminology for appreciating the proper identification of customer or client exclusively for MF arena making subtle difference from other financial and commercial institutions
2. Similarly clarity on the concept Microfinance .
MF concept need to be spelt out as it would facilitate identification of areas and related issues precisely so that CP is ensured comprehensively . Here it may noted that Micro finance is a package of pro poor financial services mainly for the purpose of poverty reduction. Since the terms MF and Micro credit are inadvertently represented as synonymous one , the existing regulatory norms, products and services and customer protection measures mostly remain related to credit service and credit customers only. Under the MF platform, other MF services have not received due attention they deserve or been neglected in the process of institutionalization in the battle against poverty. . In this context, is it justifiable to treat this monopoly of single credit service for the said mission as ‘Responsible finance’, ’Financial inclusion’ and cover credit borrowers only under CPP in poverty sector? In case of some poor seek for micro insurance or micro savings service, don’t they belong to the category of MF clients or customer or consumer? Is it ethical to recognize micro credit borrowers alone as MF Customer and work out strategies for their welfare ? ‘In search of a tree the forest is lost’
3. Diversification of MF services
Even in the case of micro credit client, he needs savings and insurance facilities also to ensure a protected environ for his livelihood and sustainable income generation. Further for ensuring productive functioning of the micro credit , adequate supporting(non financial services) services like training, transport, marketing are also required .With mere micro credit alone neither financial inclusion nor responsible finance can function in vacuum for the said social goal unless diversified micro financial services and non financial services are arranged as a part of customer protection measures more particularly in this poverty sector
4. Classification of borrowers and type of needs
Again in the poverty pyramid there are different layers with the poor in the top followed by the poorer in the middle and the poorest in the bottom. While the MF client in bottom layer may demand savings, capacity building and insurance for their graduation (CGAP-Pilot projects), the poor in middle and top may demand micro credit integrated with other MF services. In the process of poverty reduction through Microfinance the status of customers in the poverty sector need to be categorized and then wide range of their need (both financial and non financial) to be identified distinctively . Finally for each category their needs are to be arranged sequentially either by single or jointly with other institutions. This calls for meticulous MF planning at the bottom
5. CPP for drop out customers
In the client protection principles, there is an imperative need to focus attention on client retention and client attrition/drop out phenomenon which is quite common in MFI-SHG system in Asian region where poverty is more found pronounced . (India MF status report points out that 42% of SHGs reported dropout ) It is more important to retain the poor customer at least till he comes out of poverty line. Similarly customer protection strategy need to address the issues related to the drop out clients and adequate protection measures for re inclusion or rejuvenation. Other wise it is unfair to see some of the poor clients once ceremoniously included in Financial inclusion camping but subsequently excluded for various reasons. No body knows where they are now? Most of the MFIs and even MIX hardly have data on the drop out customers. So long they also enjoyed the status of customer or client of MFI , isn’t ethically sensible to cover under CPP for their rejuvenation of their livelihood at least from the perspective of poverty reduction (halving the number)mission.? Ethical codes should include this fact also. Other wise there is financial inclusion vociferously at one end and exclusion invisibly at another end. MDG will remain elusive and we may not be able to see any light at the end of tunnel in the battle against global poverty.

Thank you for sharing my views
Dr Rengarajan

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