Posted by: Katherine Oglietti
The Smart Campaign, a client protection initiative housed at the Center for Financial Inclusion, was developed by financial industry leaders in response to increasing public concern over high interest rates, accountability, transparency, and aggressive lending practices in microfinance. To assist microfinance institutions (MFIs) in determining whether the financial products and services they provide help or inadvertently harm their clients, the Campaign identifies six principles of client protection:
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
Last week, the Center for Financial Inclusion hosted a Dialogue Group on Client Protection with representatives from MFIs and networks from Mexico, Bosnia, the Philippines, India, and Kenya who participated in a preliminary study on the principles. Participants discussed and ranked specific indicators used to measure each principle, continually expressing the need to move from MFIs’ use of subjective and qualitative analysis to universally measurable, verifiable, and comparable indicators.
Plenary discussions also gave participants the opportunity to identify challenges they face in implementing and adhering to the six principles of client protection. Representatives from India, for example, commented that price transparency depends on the degree to which clients understand loan terms. In response, representatives from the Philippines suggested that one mechanism for ensuring client comprehension is an oral examination of the loan terms before funds are disbursed. Participants also discussed how broader client financial education can assist comprehension and enhance price transparency, though it was said that MFIs struggle with how to finance that education.
Another popular topic was how to avoid client overindebtedness when clients can access loans from many different institutions, especially where credit bureaus do not exist. Participants argued that loan officers should be trained to calculate clients’ total debt and repayment capacity. Participants also suggested that client indebtedness may occur when clients’ financial needs cannot be met within a single institution, and recommended that MFIs provide a range of financial products that allow clients to finance a variety of activities, such as agriculture, microenterprise, and home improvements. Diversity in product offerings could increase client loyalty and allow loan officers to better monitor clients’ financial situation.
The principle identified by participants as the most difficult to meet is ensuring mechanisms for client grievances. Cultural mores among clients may play a role – representatives from the Philippines, for example, said that their clients’ reluctance to provide feedback directly has restricted MFIs’ ability to collect and address grievances. Mechanisms such as call centers for client complaints, which have been successfully implemented by participant Compartamos in Mexico, therefore do not work in the Filipino context. In response, Filipino MFIs are considering using SMS messaging – considered a less confrontational medium – to collect client feedback.
To fine tune indicators for its six principles, the Campaign will be compiling participant input and conducting further research over the next year. Director Robin Ratcliff states that the Campaign aims to ensure that half of the 500 largest MFIs reporting to MIX are implementing the six principles of client protection in Smart Microfinance by 2013, with the vision of providing transparent, helpful, and respectful services to clients and “distinguish[ing] the microfinance industry as a finance leader.” She invites networks and individuals to endorse the Smart Campaign at www.smartcampaign.org.
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