CLIENT PROTECTION IN MICROFINANCE: INTERNATIONAL EXPERIENCES AND IMPLICATIONS FOR VIETNAM45392

The paper aims to clarify the principles of customer protection in microfinance, present the best practices of client microfinance protection in some countries, thereby provide some impl

CLIENT PROTECTION IN MICROFINANCE: INTERNATIONAL EXPERIENCES AND

IMPLICATIONS FOR VIETNAM

Hoang Thi Minh Chau, Ph.D Hoang Bao Ngoc, Msc 5 - Trade Union University, Hanoi, Vietnam

Abstract

Financial consumer protection has become one of the central issues worldwide Protecting consumers from abusive practices and enabling them to make well-informed decisions on financial services not only is an important policy goal but also plays a crucial role in the subtainable development of financial sector, financial inclusion, and economic growth As a part of this, client protection in microfinance has turn into more and more essential since microfinance clients are low-income earners and highly vulnerable The paper aims to clarify the principles of customer protection in microfinance, present the best practices of client microfinance protection in some countries, thereby provide some implications for Vietnam

Keywords: Microfinance; client protection, customer protection, client protection principle

1 INTRODUCTION

Over the past decade, financial client protection has become an increasing priority of both policymakers and authorities all over the world Client protection is to implement range of solution that prevent irregularities or transactions negatively influences consumers; to empower them to exercise informed choices and select value-for-money services; provide fair access to basic services; and open avenues to address consumer interests and concerns A consumer protection regime is key

to ensuring that expanded access to financial services benefits consumers, allow them make well-informed decisions on best financial services, building trust in the formal financial sector, and contributing to sustainable development of financial markets Because of all reasons mentioned, the global financial crisis of 2008 highlighted the essential of financial consumer protection for the long-term stability of the financial system

Microfinance, a part of financial sector, provides financial services for low-income and poor people, for formal financial services are not available to poor people because of collateral requirements, complicated application procedures, and long admissions processing By dint of this, microfinance is known as an effective tool that can help to reduce poverty by both promoting opportunities and facilitating empowerment (Worldbank, 2000) In general, most of microfinance clients are individuals and households living in rural areas who are vulnerable and lack of financial awareness Client protection in microfinance is the prohibition of deceptive and unfair practices in lending and collection practices, which would seek to abuse the vulnerability of beneficiaries of the services (Buyondo, 2007)

5 ngochb@dhcd.edu.vn

On the other hand, previous scholars have proven that MFIs can be sustainable if they are concerned about their clients, and they can also achieve their objective of alleviating poverty even if they are not profit-oriented (Paul and Conroy, 2000) For instance, (Parveen J , 2009) stated that by maximizing the welfare of its clients, a microfinance programme under the Islamic Bank Bangladesh could be highly sustainable in reaching the very poor of the society Also, several previous studies have provided evidence that the failure of MFIs around the world, such as Bangladesh, 30 MFIs in Ghana and many more in Andra Pradesh in India, reflects how the issue of sustainability of MFIs can be deeply affected if they do not take care of their clients and ensure their clients’ loan repayment

on time (Kratovic, 2015) (Mader, 2013) argued that inefficient systems for tracking indebtedness, irrational growth expectations and lack of analysis to assess a client’s ability to repay the loan are among the factors that lead to inefficiency in MFIs

Despite the importance, matter of consumer protection and financial literacy in microfinance field has remained challenges, especially in developing countries Client protection remains weak particularly in developing economies where the vast majority of customers do not have a clear understanding of financial contracts to engage in meaningful negotiations with financial institutions This paper aims to clarify seven client protection principles in microfinance, analyze international experiences in some countries, and to indicate some implications for Vietnam

2 MICROFINANCE AND CLIENTS

Microfinance refers to the financial services povided to low-income and poor individuals or households mostly living in remote areas and typically excluded from traditional banking Most microfinance institutions (MFIs) focus on offering credit in the form of small working capital loans Also, they provide their clients some other basic financial services including insurance, saving products and money transfers services

(WorldVision, n.d.) indicated roles of microfinance in helping the poor as bellowed:

• Helping them get started: With a small loan, a savings account and some basic training, many

farmers, fishers or entrepreneurs begin turning a profit They can put money away, gaining interest Many pay off their micro-loans quickly As their income increases, borrowers can even hire another worker or two

• Empowering women: For decades, microfinance institutions have been a key driver for

women’s empowerment In 2018, 80 per cent of microfinance borrowers were women Empowering women yields undeniable returns, for everyone in the community

• Protection from “loan sharks”: Around the world, families have traditionally turned to “loan

sharks” or payday lending institutions when they’ve needed cash for business ventures, necessities

or debt Such lenders often have exorbitantly high interest rates They can trap borrowers in a strangle-hold of debt

• Building credit worthiness: Through microfinance, borrowers can establish both collateral and

a credit rating When the time comes to expand the company and hire more workers, many business-owners are then ready for a bank loan

• Facing emergencies: With microfinance, families can rebound when emergencies strike

Consider a drought, in which farmers lose their crops and can’t purchase seed for the following year With crop insurance, business loans and a savings account, they are better equipped to feed their families through the winter and plant again next year

3.THE CLIENT PROTECTION PRINCIPLES IN MICROFINANCE

Recognizing the importance of consumer protection, the Group of Twenty (G20) set up the High-Level Principles on financial consumer protection in 2011, underscoring the importance of advancing financial consumer protection The principles address ten priorities, as indicated in Table

1 below Along with this, the providers, investors, donors, and support organizations that make up the microfinance community introduced the Client Protection Principles (CPPs) in 2008 The Smart Campaign was launched in 2009 to assist the microfinance industry in implementing the principles The Campaign now has over 2,300 endorsers from 130 countries, including 700 microfinance institutions (MFIs) The Campaign is a global effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry At the heart of the Campaign is encouraging the endorsement and implementation of the Client Protection Principles

The Client Protection Principles are the minimum standards that clients should expect to receive when doing business with a financial service provider These principles were distilled from the path-breaking work by providers, international networks, and national microfinance associations

to develop pro-client codes of conduct and practices There is consensus within the financial inclusion industry that providers of financial services should adhere to these core principles:

Sources: G20 High-Level Principles on Financial Consumer Protection 2011 OECD; Smart

Campaign website

Appropriate product design and delivery

Providers will take adequate care to design products and delivery channels in such a way that they do not cause clients harm Products and delivery channels will be designed with client characteristics taken into account

Prevention of over-indebtedness

Providers will take adequate care in all phases of their credit process to determine that clients have the capacity to repay without becoming over-indebted In addition, providers will implement and monitor internal systems that support prevention of overindebtedness and will foster efforts to improve market level credit risk management (such as credit information sharing)

Transparency

Providers will communicate clear, sufficient and timely information in a manner and language clients can understand so that clients can make informed decisions The need for transparent information on pricing, terms and conditions of products is highlighted

Responsible pricing

Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable Providers will strive to provide positive real returns on deposits

Fair and respectful treatment of clients

Financial service providers and their agents will treat their clients fairly and respectfully They will not discriminate Providers will ensure adequate safeguards to detect and correct corruption as well as aggressive or abusive treatment by their staff and agents, particularly during the loan sales and debt collection processes

Privacy of client data

The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions Such data will only be used for the purposes specified at the time the information is collected or as permitted by law, unless otherwise agreed with the client

Mechanisms for complaint resolution

Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients and will use these mechanisms both to resolve individual problems and to improve their products and services

So, the client protection principle covers many dimensions of product and delivery quality, from ensuring that microfinance products will not result in further impoverishment of already poor clients to providing reliable channels for addressing client complaints Moreover, the principles is built on a notion that is self-evident: that clients be treated with transparency, respect, and prudence This is especially important for the vulnerable, low-income populations that make up the bulk of microfinance clients It is a must for new clients who lack experience – those in newly penetrated

areas and young people It is critical for clients who are served by institutions that operate in environments of limited government regulation

4 INTERNATIONAL EXPERIENCES

Law and regulation on client protection in microfinance

The Worldbank’s research in 2017, which was conducted in six countries including India, Medium Azerbaijan, Kyrgyz Republic, Lao PDR, Myanmar and Papua New Guinea showed that there were 3 levels of client protection along with market maturity as the figure below

Source: (ADB, 2017) Figure 1: Microfinance market Level

In India, the microfinance industry has gone through boom and bust cycles, and client protection is not only a part of regulation, but also embedded in the industry’s code of conduct In Andhra Pradesh, poor governance and low credit discipline in the microfinance industry allowed multiple borrowing among households, with high interest rates, and caused the microfinance crisis

in 2010 From 2011, along with support from the Smart Campaign of Worldbank and ADB, India applied a range of solutions to help protect microfinance customers from abusive debt collection, and the Reserve Bank of India has promoted the Fair Practice Code nationally Besides, Microfinance Institution Network (MFIN) together with Association of community finance institutions (Sa-Dhan), have developed a comprehensive Code of Conduct (CoC) which has found acceptance by MFIs and

their lending banks The COC has detailed guidelines on client protection, interest rate disclosures, maintenance of data privacy and financial literacy and mechanism for redressing grievances The Enforcement Committee of MFIN has been issued formal processes for investigating CoC and regulatory violations, and reporting on it to Board of Directors of MFIN Until now, 62 MFIs have undergone COC Assessment conducted by external consulting agencies The assessments found MFIs in broad conformity of the COC Several of the MFIs have also been assessed against the Smart Campaign principles of client protect and social performance management

Over-indebtedness

The matter of over-indebtedness is one of the most serious problems of the microfinance sector

at the moment This Over-indebtedness was the culprit of the deaths of 200 people in Andhra Pradesh

in 2010 They took their own lives because the pressure put on them to repay their microfinance loans It appeared that many borrowers had been able to take out loans far above their repayment capabilities This issue exerts negative effects on not only customers but also MFIs Therefore, one

of the principles is that: “providers will take adequate care in all phases of their credit process to determine that clients have the capacity to repay without becoming over-indebted” To implement this principle, some countries have developed over-indebtedness regulations specifically for the microfinance sector Tanzania is one of those countries: the Microfinance Companies and Microcredit Activities Regulations (2004) states that institutions engaged in granting individual microcredits are required to conduct an appraisal of the character, payment history and payment capacity of each client Therefore, each entity has a documented loan appraisal procedure to identify the repayment capabilities of clients

A different research conducted in Tulaz can illustrate some best practices in microfinance client protection BOSPO is Microcredit Organization established in Tuzla in 2000 Today, MI-BOSPO is a non-banking microfinance institution that provides loans to micro and small businesses

in rural and urban parts of the country The ongoing MI-BOSPO mission is providing long-term access to financial services for low income women It has one of the largest coverages of North-East Bosnia and Herzegovina through its 12 branch offices and 24 offices

Transparency

In several countries, financial service providers are making efforts to disclose pricing information on products even when not required to do so by law or regulation MFI also believe that this disclosure has helped to spark some competition

The most commonly used ways to disclose pricing are: verbal disclosures by loan officers, posters in branches, and the Internet The Internet is more effective for sharing pricing information with stakeholders other than clients, given the typical microfinance client profile Responding associations also noted that:

• MFIs in Pakistan, India, the Philippines, and Cambodia also present pricing information on the website of Microfinance Transparency However, since Microfinance Transparency has ceased

operations, this information will now only act as a reference point for the countries’ microfinance sector

• Another popular method for disclosing product information in India is through a client’s loan amortization card

• Loan officers in Sri Lanka and Myanmar disclose this information in client trainings before clients sign their loan documents

To more details, here are some strategies applied in MI-BOSPO to ensure principle of Transparency, one of client protection principle

the client signs the loan agreement;

about the fees that these banks charge; and

benefits and risks prior to sale They explain how the MFI calculates installment payments, the consequences of late payment, and how payment will affect the loan

Fair and Respectful Treatment of Clients

This new principle combines all the elements that address how clients are treated indirect interactions with providers Arohan in India is a constant of this principle By dint of implementing this principle, this MFI created their image of efficiency and professionalism and satisfied their customer

For India’s poor, waiting is a way of life They seem to wait all time of their life from waiting

at government offices, waiting for trains, waiting at banks etc In this environment, the microfinance provider Arohan saw an opportunity to distinguish itself “Arohan is here, must be 11am!” was their slogan And indeed, such is the punctuality of its staff that one could literally set the watch based on their arrival Arohan has institutionalized the notion of treating its clients with respect The most visible of these is timeliness, which is listed as one of Arohan’s core values and is included as part

of staff training It is normal for staff to arrive at the location a few minutes early, then wait until the exact appointed time before entering the meeting place or the client’s place of business That the clients react positively to such treatment is self-evident But the benefits to Arohan go beyond a positive brand image On-time arrival by staff is mirrored by that of the clients Coupled with Arohan’s practice of structuring its loan repayments always to be in increments of 50 rupees, its focus on timeliness substantially improves its collections efficiency In an environment where many

of its competitors spend 30-60 minutes during collections, Arohan’s loan officers spend only 15 The image of efficiency and professionalism is a point of pride for the staff as well – Arohan’s expectations for professionalism and timeliness aside, the positive feedback and respect they receive from clients constitute an important motivating factor in its own right

Mechanisms for Complaint Resolution

Ensuring that clients are protected requires that the institution have in place a mechanism for handling client complaints This is a critical feedback mechanism that lets clients resolve specific problems and share their concerns, including when they have been mistreated by a member of the MFI’s staff or don’t understand the terms and conditions of products

When Fonkoze, a MFI in Haiti, was evaluating its client protection practices, its first step was

to use the Smart Campaign’s most popular tool – the “Getting Started Questionnaire” – to help identify its greatest gaps in client protection The findings pointed to a lack of a client feedback mechanism as a significant issue To a significant degree, this stems from Fonkoze’s broadly distributed client network, with many of its loan officers traveling as much as two hours to clients located in remote areas These loan officers may thus be the clients’ only point of contact with Fonkoze, which places them in a position of power, along with the potential risk for abuse of clients

it entails To Fonkoze, the obvious solution was to roll out a free phone hotline that would provide a direct link to headquarters for even the most remote clients, nearly all of whom had a cell phone Management negotiated agreements with multiple mobile providers to secure a short, easily memorable toll-free number Finally, Fonkoze established a committee composed of senior management to review cases raised through the hotline Rollout was marketed using Fonkoze’s hierarchical network of client groups Having first been presented during the annual meeting, the hotline was presented at regional meetings of center leaders (each center consisted of 25-50 women), then to the groups themselves Loan officers were given business cards with the hotline number to hand out to clients, as were branch tellers Posters were hung in branches, and center leaders were asked to relay the hotline information to the clients An important part of these channels was to educate clients about their rights: For example, clients had a right to know their interest payments, and a right to notify the institutions if they suspected they were being improperly treated by their

loan officers Similar communication was done for internal staff, many of whom had initial concerns that the hotline would undermine legitimate collections efforts, as clients would simply use the hotline to complain about legitimate collections To counter this concern, it helped that the hotline was also open for internal field staff to raise concerns when traditional channels could not be used Having been piloted in six branches over the course of six months, the hotline has already scored some successes Among the first 300 calls, one client complained about suspected fraud by her loan officer, which was subsequently confirmed by Fonkoze; another client complained that she hadn’t received a reimbursement calendar, an operational oversight that served as a reminder to update procedures Other calls may have been prosaic but still useful, and all helped resolve important issues for the clients who called

5 IMPLICATIONS AND CONCLUSIONS

Dealing with over-indebtedness

Preventing over-indebtedness can be done through financial supervisory agency or consumer protection agency that will strictly monitor MFIs’ credit activities MFIs themselves and their associations need to build the needed expertise to deal with the technicalities that come with financial service delivery especially loan administration and the avoidance of multiple borrowing

Improving consumer awareness and financial education

Insufficient financial literacy skills continue to impede households’ understanding of financial contracts and negotiation with financial institutions Therefore, improving consumer awareness and financial education are vital tools for promoting client protection Financial literacy and education are concerned with skills, knowledge and information exchange which manifest in a change in behaviour

The terms and conditions of all financial products, services and contracts need to be spelt out and explained in simple plain language

Legal and supervisory framework

- There should be a clear legal framework and a comprehensive regulatory framework, which establish an effective regime for the protection of consumers of retail deposit and credit products and services

- The legal framework should be developed as a result of a consultative process that involves the industry, relevant authorities, and consumer associations, and it should include provisions establishing the responsibilities, powers, and accountability

- At a minimum, the regulatory framework should include

i Disclosure and transparency;

ii Fair treatment and business conduct;

iii Data protection and privacy; and

iv Dispute resolution mechanisms

Format and manner of disclosure

Any advertisement, sales material, or other form of communication or disclosure by a financial service provider to a consumer (whether written, oral, or visual) should be in plain and easily understandable terms, not misleading, and should use at least the language that is prevalent in the geographic area in question Key documents such as consumer agreements, forms, receipts, and statements (including those provided in electronic format) should be provided in a written form that

REFERENCES

Abdulai Adams1, D D (2020) Client Protection and Microfinance Regulation: Lessons from

Africa Savings and Development

ADB (2017) Microfinance Client Protection In Asia And The Pacific: lessons from ADB– smart campaign training programs

Buyondo, A (2007) Client protection and social performance of microfinance: a study of MFIs

in kampala

Group, T W (2017) Good Practices for Financial Consumer Protection

Kratovic (2015, April 5) MICROCAPITAL BRIEF: thirty microfinance institutions (MFIs) close in Ghana Retrieved from www.microcapital.org:

www.microcapital.org/microcapital-brief-thirty-microfinance-insitutions-mfis-closein-ghana/

Mader, P (2013) Rise and fall of microfinance in India: the Andhra Pradesh crisis in

perspective Strategic Change, 47-66

ManabChakraborty (2017) Client protection in microfinance companies in India Indian Journal of Economics and Development

Nor Maisarah Bakar, R A (2019) Client protection and sustainable performance in

microfinance institution International Journal of Productivity and Performance Management

Parveen (2009) Sustainability issues of interest-free micro finance institutions in rural

development and poverty alleviation The Bangladesh perspective Theoretical and Empirical Researches in Urban Management, 112-133

Parveen, J (2009) Sustainability issues of interest-free micro finance institutions in rural

Sarah Forster and Estelle Lahaye, w H (2011) Implementing the Client Protection Principles

in Microfinance CGAP

SEEP, T (2015) Client Protection in Asia’s Microfinance Industry

Worldbank (2000) Attacking Poverty New York: Oxford University Press