Posted by: Katherine Oglietti
Last week, Kate McKee at the CGAP Microfinance Blog posted an excellent article, "The struggle to be responsible - what leads good providers down the road to bad practices," which comments on growing industry discussions of responsible finance and client protection and challenges to the implementation of these goals. She notes the tension between ensuring both financial viability and customer service, paraphrasing a common response from MFIs:
“We need capital to grow and our investors are also pushing us on growth, efficiency, and profitability, sometimes with short time horizons that make it hard to prioritize quality of products, operations, and customer service.”
This difficult situation may be exacerbated in an increasingly competitive microfinance market. During plenary discussions at the Dialogue Group on Client Protection at the Center for Financial Inclusion, participants from the Philippines described a situation in which a flooded microfinance market led to client overindebtedness. According to MIX Market, the Philippines is home to the second highest number of MFIs per country, with 109 MFIs serving the 24.4 million people below the national poverty line. If it is true that the market is saturated, then supply for loans exceeds demand. Clients have the ability to shop around at different financial institutions for the best loan terms. This creates a competitive environment among MFIs, which is arguably good for clients because it puts downward pressure on interest rates and motivates MFIs to improve their programs. However, the abundance of MFIs may also tempt clients to make payments from one loan with funds from another loan, easily becoming overindebted.
At the same time, some MFIs are demanding very high minimum loan portfolios—over 300 clients per loan officer, for example. Therefore, while loan officers may be aware that their client has multiple loans from different MFIs, some still distribute loans to these clients. Presumably, when loan officers cannot compete for new clients, they underwrite loans that exceed the clients’ ability to pay in order to meet their portfolio quota. The natural result is a higher portfolio at risk for the MFI.
How will loan officers ensure repayment on loans that clients cannot afford? Dialogue Group participants suggest that the conundrum has led to unethical collections practices on the behalf of staff. In further discussions with MIX, an area manager recounted a story of how, in one instance, a loan officer from another MFI drove his client on his motorcycle to a private lender and encouraged the client to take out a loan (at a higher interest rate) so that the client could make payments on the original loan. Likewise, in another instance, a private lender took the client’s debit card, made withdrawals from the client’s account to take the installment owed, and gave the client her change.
While anecdotes of unethical staff behavior cannot tell the whole story and do not show the many dedicated loan officers concerned for the well-being of their clients, they do illustrate the potential for unethical staff behavior when it is not being carefully monitored by management and/or independent evaluators. What the Philippine story illustrates is the link between each of the six principles of client protection. When one principle is not met – such as preventing client overindebtedness – other principles, such as ethical staff behavior, are also compromised.
For further discussion regarding the challenges of ensuring client protection, read Rafe Mazer’s article posted yesterday at CGAP’s blog, “Whose Responsibility is Responsible Finance?
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