Disclosure: Is it really necessary?
by Nataliya Mylenko: Tuesday, April 21, 2009
As the graph shows (from “Banking the Poor”), countries with more comprehensive disclosure requirements tend to have easier access to finance.
Consumer protection, financial literacy, and better disclosure are all topics much talked about now. Some argue that the world would not be in the present financial crisis if only people knew how much lenders were really charging them. If only people understood what compounded interest rate meant; or if regulators checked what lenders were selling to their customers. But would it really make a difference? Should we be enhancing disclosure requirements, ramping up supervision, and funding financial literacy programs now?
I’ve heard the same thing from lenders in Azerbaijan, Peru, and Kenya: it wouldn’t make any difference if people knew what they are getting into. My counterparts seem convinced that people only learn the hard way. Only after they get hit by penalties and fines and face a debt collector will people become more cautious about borrowing, they say.
Imposing disclosure requirements is viewed as a needless burden: extra text to be printed in the documents that no one bothers to read anyway. In support of this view, lenders in emerging markets would point to the U.S. as an example – all the loan details were written in plain English in loan contracts – and did that make any difference? It does not seem like it.
Obviously disclosure will not solve all of our problems and prevent future crises. But those pointing to its ineffectiveness, especially coming from countries with no disclosure requirements at all, are wrong. Naturally, lenders will continue to try to make terms less clear and hide charges. Of course every individual on the planet will not educate him or herself about all the intricacies of finance. But regulation leveling the playing field and requiring lenders to tell borrowers in clear language the truth about costs and terms is a must. So is making it clear that it’s an individual’s responsibility to protect his or her financial interest – not the lender’s (contrary to what financial industry advertisements say).
Disclosure is essential for sustainable credit growth. As the graph shows (from “Banking the Poor”), countries with more comprehensive disclosure requirements tend to have easier access to finance.
6 Comments
April 21st, 2009 at 5:08 pm, Chris Leibig ()
I 100% agree
April 21st, 2009 at 8:41 pm, NIcolas Leupold ()
People arguing that wording is useless because reckless borrowers have nonetheless fallen in the credit trap do not take into account the very many others that have avoided those risks in first place. Those latter ones are not counted at all!
You cannot discard a vaccine or a drug because it is not 100% effective. Try not putting risk disclaimers and you will find an even worse scenario in the future.
April 23rd, 2009 at 3:38 am, Bernard Kahiga ()
Indeed disclosure is required. Some call it transparency.
BEFORE you buy any medicine, aren’t the contents listed on the side? dosage? and symptoms to look out for? It’s on you as the consumer to check and ensure what your paying for and or what your consuming is not causing no harm to you- and you may spot the signs early if so.
Disclosure ( lender fees, what’s owned by the consumers, real time information on price fluctuations and market trends, new opportunities and sectors performing well): Transparent, Reliable Information disclosed to the general public would alleviate some of the problems.
I agree- it makes access to finance easier.
April 27th, 2009 at 12:06 pm, Nataliya Mylenko ()
Thank you for your comments and support for disclosure and transparency. It would be interesting to get more views on what in your view is a good disclosure? I recently came across an interesting article analyzing how poor rural borrowers understood their loan terms. Interestingly more than half did not understand interest rates and could not compute interest payment value. At the same time most knew monthly payments and the total value of loan. The sample size in the study is small and the findings may potentially apply only to a small group of borrowers in India. It does raise a question though as to what extend the focus on effective interest rates as a most informative item of information is sufficient.
May 10th, 2009 at 4:18 am, Sushmita ()
The above-mentioned study was conducted by my colleagues at the Centre for Micro Finance, India and can be found here: http://ifmr.ac.in/cmf/publications/wp/2008/25_Ramji_Loan%20Contracts_Financial%20Literacy.pdf
May 14th, 2009 at 5:24 pm, Nataliya Mylenko ()
Sushmita - - thank you for attaching the link! If other readers have links for similar studies - or examples of experience on the ground - would be great to hear.
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