Archive for: Consumer Protection

This is the final post in the short series on microfinance in Russia. You can find the previous two posts here and here.

In the two previous blog posts on this topic, we wrote on the situation with exorbitant interest rates charged by a few Russian commercial lending companies calling themselves “microlenders” (though we prefer to label them “payday lenders”).  We also shared suggestions from the Russian MFI community to the Russian regulatory authorities, which have been favorably received.

Certainly, Russia is not alone facing this issue; there are many other countries struggling with the question whether it is possible to draw a meaningful line between “justifiable” and “exploitative” interest rates – in other words, trying to answer the question “how much is too much?” The question has enormous political as well as operational relevance.  In this final post of the series, we would like to explore the issue by going back to the basics of what can – and should – go into setting the price of a loan. Read the rest of this page »

A micro-borrower in the Philippines struggles to figure out which one of several loans is the least expensive—one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction. In Senegal, a recent survey of low-income consumers revealed that more than 99% of respondents were unaware of their right to standardized price information on the loan and deposit services they used. In Mexico, poorer consumers looking for a cheaper way to save, reported to CGAP losing 25%, 50%, or even their whole savings due to hidden fees on “low-balance” accounts they were not aware of until it was too late.

Consumer research supported by CGAP and others around the world is painting a similar picture – customers face many challenges in understanding the prices, terms and conditions of the financial services they use, and this lack of understanding carries very real economic consequences. Even if consumers are fortunate enough to have multiple options for loans, savings or payments services, many find it very difficult to “shop around” and identify the option that offers the best value-for-money.  Sometimes the problem is the opposite, when excessive fine print floods consumers with too much information and distracts them from the factors that are most important for their decisions—factors such as total finance charges. Read the rest of this page »

Sub-Saharan Africa (SSA) continues to be a region plagued with challenges but ripe with opportunities in microfinance. Just one in five households has access to formal financial services, with high operating expenses as well as a general lack of financial infrastructure, supervisory frameworks or consumer protection plans being just a few of the stumbling blocks to greater financial inclusion. Read the rest of this page »

The year 2011 was not particularly easy for microfinance institutions (MFIs) in Eastern Europe and Central Asia (ECA).  Though overall many managed to overcome crisis, many MFIs have not yet returned to their pre-crisis growth rates, and delinquency levels were still higher last year than in 2007. One of the issues commonly faced has been client over-indebtedness in the most saturated markets, such as Azerbaijan, Read the rest of this page »

Disclosure and pricing transparency are  important building blocks for countries looking to develop effective consumer protection regimes. They also are of particular importance for low-income populations, who often have lower levels of literacy and numeracy, and limited experience with formal financial products. Recognizing  this, CGAP has been using consumer research to inform consumer protection policymaking  on disclosure forms and pricing transparency. An effective method has been to present consumers with sample loan disclosure forms and asking them to identify the most salient information for their decisionmaking processes.  This information has proved valuable in developing new approaches to disclosure.

In the Philippines, the Bangko Sentral ng Pilipinas (BSP) and CGAP conducted a series of focus groups with 123 consumers from different financial provider types and geographic regions. The objective was to test consumer comprehension of key terms and cost as well as their  ability to compare similar products across providers. Focus group results provided  important feedback from consumers that led to improvements in disclosure and pricing rules for microcredit. The BSP has since released a new circular modifying several provisions in the Truth in Lending Act, including the requirement to use effective interest rate and declining balance calculations on payment schedules, and modifying the loan disclosure form for small business, retail, and consumer credit.

The experience in the Philippines and several other markets have generated the following high-level points for making disclosure work for low-income consumers: Read the rest of this page »

Which one of these would you trust and use more for your financial needs: A pawn shop or a bank? If you are a low-income financial consumer in Mexico, the answer is quite likely the pawn shop, due both to social factors (“they treat us with respect when we enter”) and product features such as simpler, more easily understood pricing structures, flexibility in the terms of the loan, and efficiency and speed of access.

This insight into how low-income consumers in Mexico shop for credit, and what information is easy or difficult to understand has implications for developing effective disclosure and pricing transparency rules that take into account consumer behavior. More broadly, it serves as an example of how direct consumer research is an important tool for policymakers looking to develop consumer protection that takes into account the experiences and behaviors of low-income consumers. Read the rest of this page »

The draft Indian Microfinance Institutions (Development and Regulation) Bill 2011 has been made available by the Central Government for comments. The bill has been under preparation for a long time and in its last avatar left out the for-profit Microfinance Institutions (MFIs) outside its ambit completely.  However, in its new avatar, the bill appears to be a comprehensive piece of legislation that wants to resolve the long standing challenges that the microfinance sector has faced.

The change in the thinking of the government in terms of introducing the comprehensive microfinance bill to replace the old one and emphasizing the supremacy of the regulator, the Reserve Bank of India (RBI) is a consequence of the events in Andhra Pradesh where the State Government has introduced a State level Act to regulate MFIs.  It thus is best if we look at the Bill from that perspective and comment on its ability to answer the key challenges it had identified to resolve. Read the rest of this page »

Broad access to safe and affordable small savings accounts promotes financial inclusion and helps households prepare for unexpected expenses and plan for a more secure financial future.

Deposit insurance, which insures the safety of depositors’ savings in the event of bank failure, can play a key role in protecting savers, particularly those who save in small amounts, have little experience with formal financial institutions, and live in emerging economies with less developed banking systems.  Read the rest of this page »

Jessica Shicks’s post in this series argues that from a consumer protection perspective–I assume that’s the most relevant perspective for development practitioners–the notion of over-indebtedness should include not just situations where the borrower can’t repay, but also situations where the borrower can repay but only at the cost of “unacceptable” sacrifices. Adrian Gonzalez made much the same point in his doctoral dissertation; likewise Beth Rhyne in a blog post a few months ago. I think that they’re right, and that it makes sense to incorporate this sacrifice dimension into a definition of over-indebtedness for research purposes.

But there’s a knotty problem here.  When we talk about “over-indebtedness,” we usually assume that it’s something that ought to happen pretty rarely if credit is being delivered responsibly.  But take Jessica’s example of a woman who is “over-indebted” in the sense that she has to go hungry in order to make a loan payment.  Suppose she goes without food for three days to pay off a loan: at first blush, this probably sounds like an unacceptable sacrifice. But further suppose that she borrowed the money in the first place to avoid going without food for three weeks.  This is a loan that resulted in over-indebtedness as we’ve defined it, even though the loan may have been a good deal for the borrower, and we’d want the same deal to be available to plenty of other borrowers if they’re in similar circumstances.

Paying off a loan is just one among many payments that poor people have to make. The fact that they’re poor implies that coming up with cash for any  purpose can be associated with serious sacrifices—someone may, for instance, have to go hungry or sell productive assets to pay school fees or medical expenses.  With this in mind, maybe we should expect  to find substantial levels of over-indebtedness (thus defined) among poor microborrowers, even if the lending is responsible.

Of course, a lot depends on how high we set the bar in defining which sacrifices are “unacceptable.”  This is really a tough one. It’s hard to argue with Jessica’s position that the answer has to come from the borrowers themselves. But like everything else about over-indebtedness, this involves complications too. Do we wind up defining over-indebtedness as loans the borrowers wish they hadn’t taken?  I’ll be very interested to see how this is operationalized in Jessica’s forthcoming paper on her Ghana research.

(Adrian Gonzalez’s dissertation avoided the question of what was “unacceptable,” and focused instead on whether a sacrifice was “unanticipated.” This may be easier to determine in a field interview, but it further weakens the link between “over-indebtedness” thus defined and a conclusion about whether the lending operation is a responsible one.)

–Rich Rosenberg

Dear Sanjay,

Thanks for your thoughtful critique and ideas on how CGAP can best support the healthy growth of microfinance. We welcome your analysis of where the industry has come during a really exciting period in its development and growth. And we agree that we all need to do much more work to ensure that the 2.7 billion people still financially excluded today gain access to safe, reliable, and well-priced services that can help improve their families’ lives.

As we celebrate 15 years of CGAP, we are also reflecting upon where the industry has come, and where CGAP can be most useful in helping to advance financial access for the world’s poor. Like you, we believe that advancing financial access isn’t just about expanding access from a sheer numbers perspective—though that’s critical—it’s also about the quality of that access. This requires ensuring the establishment of healthy business practices, strong governance and oversight, and most important, developing products and services that meet the real needs of poor people, an area where the industry still sorely lags. On that last point, we have all learned a lot from the book published earlier this year, Portfolios of the Poor.

Your analysis of an industry that has become an “overcharged bull” is true of some markets. Indeed, we have written about the perils of unchecked growth, warning of the need to address core internal vulnerabilities within microfinance, and making recommendations on how to strengthen the industry. We also took a strong—and with some, unpopular—position on governance around the Compartamos  IPO. IPOs and 70-100% growth are the vivid symbols of rampant growth in pockets of India. But as a global organization, we are sharply aware that such buoyant growth is far from uniform. In still too many regions and markets, the opposite scenario prevails where access to financial services remains limited to a tiny percentage of the population. Even the global averages [23% growth in borrowers] mask what is really a very uneven picture.

CGAP’s messages have evolved as the industry and wider climate develops. We recognize that an approach that served the industry and its clients well at a time when it was in its infancy may not always hold today. We appreciate your generous recognition of the important role that CGAP has served for the industry in helping to establish consensus around some core principles and standards. We also believe that our founders were quite visionary in recognizing a need in the industry and in creating a global platform in CGAP through which debate could be had, and consensus reached.

CGAP continues to play an important role as a platform for a wide range of stakeholders to engage around standards, and agree on norms of practice. But the context in which we are working today has changed radically. And we must adapt.

Where the emphasis of our work in the early days was on establishing core standards of financial transparency and reporting, significant progress has been made and others continue to take that forward, so our emphasis today has shifted toward other areas needing attention, such as social performance reporting, consumer protection, and responsible finance. Some current work in this area includes the social performance reporting awards, developing consensus guidelines for MIVs that cover ESG, substantial policy work on consumer protection, and CGAP’s key role in the SMART campaign. None of this is a reversal from the achievements made on financial performance, but the rounding-out of those achievements to ensure that the industry best serves its mission to help poor clients. And we continue to support the MIX as a platform where institutions can report both financial—and increasingly social—performance in one place.

There are many useful insights in your analysis, though your interpretation of CGAP positions is not always accurate, or up-to-date. Even if “zero-tolerance-for-delinquency” language may once have been useful as a counterweight for a widespread lack of collection discipline, you are clearly correct that 100 percent on-time repayment is neither practically achievable nor even desirable in principle, most basically because it would imply exclusion of all clients who present any credit risk. CGAP did talk about zero tolerance in our early years, and will even plead guilty to having failed to nuance the concept adequately. But we’ve been clear for many years now that zero tolerance for delinquency is not feasible or appropriate. (And of the many MFIs we’ve recognized with grants and awards, we can’t remember one that ever had zero delinquency.) Or to take another example, our view about loan renegotiation has not been that it should never happen, but rather that it should not be used to avoid sound collection discipline or to conceal repayment problems.

We appreciate your acknowledgment of our work with mobile network operators and other new technologies, including G2P (government-to-people) payments, to promote financial inclusion. And it is also obvious that people living in extreme poverty need more than financial services: a whole range of interventions from livelihoods support to business development, education, health services, and even addiction counseling or other services related to the social issues that can be bred by poverty, are necessary. CGAP is committed to advocating for the needs of those living in extreme poverty.  Our work with “microfinance plus”, including the CGAP-Ford Foundation graduation program,  which now has 9 pilots active in 7 countries, has reinforced some key lessons: 1) the importance of savings; 2) people living below the poverty line need more than financial services; and  3) doing it well is hard. Any organization can claim to do all this, but each of the interventions mentioned above is a highly specialized business. Few organizations have the set of skills, or can even acquire the set of skills needed to provide such a complex set of services. Our experience with the CGAP-Ford Foundation graduation program has taught us that, often, quite an elaborate series of institutional partnerships and alliances are needed to deliver the right mix of services to very poor people. There are impressive organizations building businesses to address the range of needs they identify—a group of us recently had the privilege of visiting Jamii Bora which takes this approach in their work with slum dwellers in Nairobi—but in many more cases, partnerships will be critical to success.

In recent years and in some quarters the term “commercialization” has been used to denote greed, excessive profit, and uncontrolled growth—with all the negative consequences that entails for poor clients. Even though we have seen negative effects and excesses in some countries and institutions, we continue to believe that on balance the commercialization of microfinance has yielded great benefits for poor people. Overall, it has led to more professional, safe, and predictable services. It has resulted in the broadening of services beyond credit, most particularly the offering of safe savings services, and it has meant that many, many more people have access. The entry of socially responsible investors—still a much more prevalent source of funding than purely commercial investors—has opened up new opportunities for microfinance, and thus for poor people.

Clearly, cases of abuse need to be tackled, and tackled swiftly. There are refinements and improvements to practices needed, as well as greater transparency on all fronts. But we should be wary of chalking up every negative occurrence to a label of “commercialization”, and focus on the real challenges facing the industry. We need to reach agreement and develop practices around reasonable pricing and profits, governance, and what constitutes “responsible finance”—particularly getting a handle on the over-indebtedness of poor clients. At the same time, in many parts of the world the biggest challenge is not the excesses. It remains, quite simply, the basic challenge we’ve always had: reaching those who are still unserved, and developing the right kinds of knowledge and business models to do it well.

One of the hardest questions we ask ourselves constantly at CGAP is where we can add most value. We believe that our strengths as an organization lie in spotting and documenting trends, taking risks, and innovating so that successes can be taken forward by our members, partners, and others. Our best role is not so much in implementing models whose success is already proven, but in experimenting with unproven concepts, convening and sharing knowledge, helping to define standards and good practices in new areas, and advocating. As the microfinance landscape becomes ever more complex we, like so many other organizations in this field, constantly need to re-evaluate the focus and scope of our work and the technical skills and expertise needed to help us to achieve our mission.

And we do not undertake this reflection alone.  We hope that over the coming years CGAP will continue to be a key player in facilitating a more ambitious and expansive microfinance industry, with many new players and many new ways of working. But one thing is for sure: our mission is not one that can be achieved by any one organization. We fully believe that any advances will be made in partnership. So as we think about CGAP’s future role, and focus on where we can most add value, we’re also thinking about where we can work with others to achieve our shared vision of universal access to high-quality services that can help improve lives—something that people everywhere deserve.

With best wishes,
Alexia.