Earlier this month I was in Nairobi, Kenya, as part of a diagnostic team assisting the government to figure out how to improve financial consumer protection for average Kenyans using mass-market credit, savings, and payment services. The team interviewed more than 60 people, including regulators and policy makers, retail providers, trade association reps, and consumer advocates. But the conversation that keeps coming back to me is the one with Hiram, a sharp young guy who has a growing car-hire business and ferried us to some meetings. While stuck in one of the notorious Nairobi “go-slows,” we started talking about how Hiram manages his finances. I was curious about how the rubber meets the road, as they say, for financial consumer protection for someone like Hiram.

It turns out that Hiram had been quite proactive in his finances, piecing together services from at least five formal and semi-formal providers to meet his needs. (For more about the endless quest that lower-income people around the world go through to put together workable bits and pieces of finance, see Portfolios of the Poor by Collins et al.) Let’s start with the MFIs. Hiram had been with one NGO MFI (a group lender) for around a year, taking and repaying a series of loans and had just the day before taken a loan from a second group-lending MFI. I asked why he had chosen these two credit providers and he said that they were low-cost, citing the flat-rate monthly interest rate quoted in the advertisements and on the loan agreement. He thought there might be some fees but wasn’t entirely clear. Potential consumer protection problem #1: lack of transparency on the all-in cost of credit. Quoting monthly flat rates of interest dramatically understates the actual interest rate, and additional fees, commissions, and costs like mandatory credit insurance premiums can hike it further. Not to mention the typical 20% cash collateral required by MFIs in this market. These practices are not unusual in the microfinance world (and for that matter, in the consumer finance world as well). And Hiram seemed happy that these were lower-cost and flexible sources of credit, compared to his alternatives. But studies by Microfinance Transparency suggest that the actual cost of credit is typically MUCH higher than customers understand, and soon-to-be-published data for Kenya is highly likely to reveal the same reality.

I asked Hiram if either of these lenders had asked him about any other loans he had from others, and he said no. The MFIs wanted to see his car and talked him through his earnings and expenses from the car service. I asked if he kept the loans for the full term, and he said no – he had repaid at the earliest possible moment (after three months with his first lender), so he could get a larger loan. Now in Hiram’s case, his business might have been generating sufficient cash flow to cover multiple loans of a size larger than any lender available to him (as a self-employed guy) was willing to make. This is a pretty common situation, with successful group members cycling quickly into new, larger loans and tapping multiple credit sources. But it did raise worries for me about potential consumer protection problem #2: the risk of over-indebtedness, especially when there is no credit information available to lenders and they are not even asking about existing debt levels as they move the success stories like Hiram up the ladder into more profitable territory. Hiram might be able to handle it, but how many people would get in over their heads? And how long would it take for the lender to discover that fact?

But Hiram needs more than credit, so we talked about his other banking services as well. He has what he described as a “business account” at one of the big international banks. He hated their fees (relatively costly charges to cash checks, and close to $10 a month in “ledger fees” and other charges for a savings account) but he had compared the banks and this one would cash a check from a customer in two days instead of four, which made a big difference for his cash flow. Potential consumer protection problem #3: high fees for straightforward services.

So how did he manage his cash? He had opened a savings account in another bank, because they were going after mass-market customers like Hiram with no minimum opening balances or monthly ledger fees. Best of all, one of their nearby branches had a cash-in ATM. For Hiram, this was perhaps his biggest financial headache. He had been driving around some pretty crime-ridden areas with cash hidden all throughout the car, so that if robbers stopped him he could reduce his losses. Going to a regular bank would cost his business too much – “how can I be waiting forever in those long queues in the banking hall when I have customers calling me to drive them?” Keeping cash and being unable to find a safe and convenient place to store it is a problem for all sorts of reasons the world over. Solution #2 for Hiram was M-PESA, the mobile payments services that has taken Kenya by storm. He uses it to make and get payments and had few complaints.

So here’s Hiram, a promising young entrepreneur, piecing together the services available to him to strike the best balance he could between access and safety (of himself and his cash). He happens to be young, relatively well-educated, and with it. It shouldn’t be so hard for Hiram. And imagine how challenging the choices are for someone much poorer and without these advantages.

Financial consumer protection seeks to help Hirams (and more typical poor people) have better options, be able to figure out what they are getting, manage debt responsibly and have an avenue for recourse if things go wrong. Transparency, fair treatment and effective recourse emerged out of our diagnostic mission as the key issues to be tackled in that market. The Kenya government is seriously engaged in the search for solutions that will strike the right balance — enhancing protection and increasing transparency while expanding the access frontier outwards.