Part 4: What is the industry doing to protect borrowers?

15 February 2011 at 12:00 2 comments

In the past few months, the Indian microfinance industry has been in the spotlight. A few Kiva Fellows wanted to learn what the issues there are, and what can be done to prevent them in the future. We have presented our findings in a series of blog posts over the past few days. Given the inherent complexities, the multiple viewpoints and an ever changing political and legal landscape, our work is only intended to provide a top-level summary of the situation as it stands now. If you are interested in learning more about microfinance in India, we encourage you to explore these issues beyond what is presented, and to draw your own conclusion.

This is the fourth in a series of posts:

  1. Current state of microfinance in India
  2. The issues, players and outcomes
  3. Borrower protection practices at Kiva partners
  4. What is the industry doing to protect borrowers?

What is the industry doing to protect borrowers?

In part three of this series, Bridget outlined a number of steps that microfinance partners take on a micro level to prevent over indebtedness of clients.

One of the biggest challenges in the industry is oversight and regulation on a macro scale. Whilst in countries like the US there are regulations to protect borrowers, this is often not the case in many of the countries where Kiva has field partners. Kiva can’t choose not to work in countries without credit agency regulations as these are often the places where the need for enabling access to credit for the poor is greatest.

So what can be done?

As the microfinance industry matures, a number of bodies have grown to try and tackle the issue of client protection. The Consultative Group to Assist the Poor (CGAP), has outlined a number of key principles which should be taken into account by any body acting in the sector. These “Client Protection Principles”  form a baseline from which each MFI should act with regards to Client Protection. CGAP provides a due diligence questionnaire for investors to use in evaluating new partners in terms of client protection.

Alongside this, the SMART campaign encourages MFIs, funders and individuals involved in microfinance to sign up to advocate the six key Client Protection Principles-  uniting them in the common goal of keeping clients as the driving force of the microfinance industry.

SMART says: “Protecting clients is not only the right thing to do, it’s the smart thing to do.”

One of the tools which Kiva uses to assess its partners on client protection is the CERISE Social Performance Indicator Tool (SPI). Kiva uses this to ensure that their partners aren’t doing what some of the poorly run organizations in India have been doing. The tool uses the key principles as outlined in the SMART campaign.

How can social performance be assessed?

The SPI Tool aims to provide an audit of the current state of a variety of practices at the MFI. These include how the MFI targets clients, how poverty levels are measured and what collateral (if any) the MFI asks for, for example. The tool also assesses the products delivered by the MFI, what additional benefits or wrap-around services are offered to the clients by the MFI (eg business training, emergency funds) and how staff are incentivised.

As part of the process, the MFI is presented with a number of questions relating to the Client Protection Principles (CPP) outlined by the Smart Campaign and CGAP.

Some of the areas covered are:-

  • Finding out if the management regularly monitors levels of borrower over-indebtedness and uses that information to improve products, policies and procedures.
  • Whether the MFI offers multiple loan products or flexible ones that address different business and family needs.
  • Whether the MFI checks a Credit Registry or Credit Bureau for borrower debt levels and repayment history where available. When not available, the MFI should check internal records and consult with competitors for the information on clients.

Transparency is a key issue here too- the SPI assesses whether prices and terms of products are fully disclosed to the client prior to sale, including interest charges, penalties etc, and whether those can change over time.

Other issues taken into account include:-

  • Responsible pricing, reasonable rates of return (that benefit the client as well as the MFI)
  • Client understanding and consent; a clear loan contract should be in place which shows an amortization schedule with principal, interest and fees listed as well as the number and due dates of installment. Debt collection practices should also be made clear.
  • Staff training and communication with clients is also assessed in the SPI audit- this involves ensuring that they understand the product, the terms of the contract and their rights and obligations. This must take into account literacy limitations such as using local languages and reading the contracts out loud to the illiterate.

This tool is used across the microfinance industry and as of last year, Kiva is carrying out a Social Perfomance Audit for every single active partner (carried out by Fellows in the field).

How much responsibility is taken on a country level?

As I mentioned earlier, credit regulation varies hugely depending on the location of the MFI. For example, within the US one of the pieces of regulation that borrowers are protected by is the Fair Debt Collection Practices Act, enforced by the Federal Trade Commission.  This act “requires that debt collectors treat you fairly and prohibits certain methods of debt collection.”  There is also bankruptcy law. Bridget, KF13 at ACCION Texas-Louisiana notes “I’m told that if a borrower files for bankruptcy, then ACCION can’t even talk to them or they’re in violation.”

There are also laws such as the one in Texas which makes it illegal to collect someone’s homestead from them.  ACCION doesn’t accept people’s homes as collateral in Louisiana either, even though they legally could.  They’ve chosen not to risk putting someone out on the street.

Working within countries that do have regulated credit management certainly makes client protection easier, but a large proportion of MFI’s are acting within unregulated areas.

Within Ghana, where I have been living and working for the past three months, whilst the Bank of Ghana acts as a regulatory body for the formal banks, there is no universal regulatory body for credit management within microfinance. It is an ongoing issue for the MFIs in Ghana- when I asked a loan officer at Christian Rural Aid Network how he finds out if a client has taken a loan with a rival MFI, he simply told me “If the loan officer from Sinapi Aba (another Ghanaian MFI) is visiting the client too, we know that the client has been taking loans from both of us”. It is quite frightening to think that credit regulation is down to pure chance.

It is not all bad news, however. Networking bodies like GHAMFIN and the Ghana Cooperative Susu Collectors Association exist to educate and promote communication between MFIs, and as we speak CRAN and a few other MFIs are in discussions to set up their own private credit checking process between their clients.

It is the responsibility of each MFI in Ghana to write their own protection and debt collection principles. George Tokpo, Microfinance Director at CRAN told me “Being clear about client protection is key to everything we do. Our core value says “Paramount are the people we serve” and we need to live by  this value every day. It is a matter of integrity for CRAN, and it also gives us a competitive advantage when we are clear with clients.”

I hope that you have found this series on the current issues the industry faces an interesting introduction. As Tran noted in post number one, we urge you to continue your own research further via the links provided throughout if you would like to learn more.

By Jacqueline Gunn, KF13 Christian Rural Aid Network, Ghana and currently in transit (and a 45 degrees celcius heat drop) to KF14, HOPE Ukraine

Entry filed under: blogsherpa, Christian Rural Aid Network (CRAN), Ghana, KF13 (Kiva Fellows 13th Class). Tags: , , , , , , , , , , .

Hey, Soul Sisters! A Post about Nothing


  • […] Part 4: What is the industry doing to protect borrowers? Country: Ghana, Ukraine / Fellow: Jacqueline Gunn (KF13, KF14) Even though she’s in transit between Ghana and Ukraine, Jacqueline weighs in on borrower protection in this on-going series about the state of microfinance. […]

  • 2. John Alex  |  16 February 2011 at 04:20

    the author will be happy to note, Sa-Dhan an association of MFI’s have formed a Tamil Nadu Chapter and most of the MFI’s have signed the Code of conduct, which fortunately is akin to the Malegam recommedations

    Read the client freindly policy of Equitas
    Background: Equitas has disbursed micro-credit to over 1 million members under the JLG model. Equitas has consistently adopted customer-friendly practices; both prior to disbursement and during the loan tenure. In instances where members are unable to repay their instalments, the field staff in consulation with the Branch Managers were required to deal with the same on a case to case basis including granting further time for payment. This note aims to lay down the same policy in writing, to be adopted by the field staff in those instances where members are not in a position to pay their fortnightly instalment, and ensure that our response in such circumstances is uniform across the branches
    Policy Statement: Equitas will stand by the following principles:
    1. Credit discipline – The credit discipline among members will be encouraged and facilitated.
    2. Empathy – Equitas will empathize with the members in case any of them have a problem repaying their istalments, understand the problem and thereafter take suitable steps in line with the unique situation of the member.
    3. Flexible support – Where appropriate, Equitas will facilitate reasonable flexibility in repayment for members who are unable to repay due to genuine reasons. In extreme situations of permanent impairment in the ability of the member to continue her repayment, Equitas would take a call to give a much longer time frame to repay as well as absorb part of the loan outstanding as a write off, such decisions being done at the Area Manager level and above
    Proposed Approach:
    1. Issues impacting repayment will be classified as short-term or long-term.
    a. Short-term – Any issue due to which a member is temporarily unable to service her instalments for a month or less will be considered a short-term issue. However, if such temporary reasons impact more than 5 members in a centre, then it will be treated as a long-term issue.
    b. Long-term – Any issue due to which a member is unable to service her instalments for more than a month, the problem will be treated as a long-term problem.
    2. In case of a short-term issue, the other members in the centre will be encouraged to pitch in, as per the joint liability group norms. In such situations the rest of the members of the group would be encouraged to pay the instalment and collect it from the affected member in the next couple of weeks.
    3. In case of a long-term issue, the staff are empowered to provide relief to the members, as per the table below:
    Scenario Classification Field staff response
    Migration 1. If the member has either moved to her native place due to pregnancy OR if the member has moved to another place, but is expected to return within a month; it will be treated as a short-term issue.
    2. If the member has moved to another place and is not expected to return within a month or her shifting was sudden and the rest of the group does not have an idea of where she has moved, it will be treated as a long-term issue. 1. In case of short-term issue, the RO should encourage the other members to pitch in.
    2. In case of long-term issue, the Migration Policy will apply. Under this policy, the staff would discuss with the rest of the centre and exercise discretion to provide some support to the centre. The support could be in the form of either:
    a. waiving upto 50% of the loan outstanding while the rest of the 50% is repaid by the group members by an equal contribution in lump-sum
    b. waiving the last half of the instalments. (For example, if the migrated member had 18 instalments due; the centre will pay for the first 9 instalments and the rest will be waived off)
    Natural disaster (Floods, fire etc) or Demolition of house by government authorities RO will consult with the BM to assess the damage due to the natural disaster as either short or long-term impact depending on how long the member will take to get back to her routine life including her ability to earn her normal daily/weekly income. 1. In case of short-term issue, the RO should encourage the other members to pitch in.
    2. In case of long-term issue, the RO should inform the BM. The BM may meet the centre members and exercise his discretion on allowing the member to postpone payment of 2 fortnightly instalments within the loan tenure. The BM should file a report on the same day in pre-defined format and submit it to Operations.
    3. The BM may recommend CM’s approval to provide greater relief to the member. The CM, if satisfied after a visit, may postpone 4 fortnight instalment with a loan tenure extension of 2 months. Such extension would carry no additional interest
    Death (spouse or child) N.A Currently Equitas does not offer an option to members to take life insurance for spouse. In such instances,
    BM should visit the member and file a report. The BM may authorize waiver of half the remaining instalments. (For example, if there are 15 instalments remaining to be paid as on the date of the death of member’s spouse or child, then the first 8 instalments thereon will be waived).
    Equitas proposes to offer spouse life insurance to members on an optional basis for disbursements from January 2011 onwards. Subsequent to this, wherever a group has chosen to take life insurance for the spouse, then the principle outstanding would be deducted from the insurance claim amount and the remaining would be paid to the member

    In case of death of member’s minor child (less than 18 years of age), the BM may authorize waiver of 25% of the remaining instalments.

    Chronic Illness
    (member, spouse or child) This clause will apply only if the person affected is not expected to get back to normal earning capacity for a continuous period exceeding 6 months because of this chronic illness. Area Manager to conduct physical verification and, if satisfied, recommend write-off of the loan.

    4. 10% of the above reports filed in a month in every branch will be verified by the independent Risk Audit team.
    5. Apart from these issues, if the BM deems fit, any instance of customer default or hard-ship may be highlighted to the AM for approval of waivers. An AM may exercise discretion to waive off a few instalments; a portion of the principal outstanding or the entire principal outstanding. Such waivers should be pre-approved by the RM and are subjected to a maximum of Rs 20,000 per month for every AM.
    6. Anything beyond the above needs to be raised to the President – Operations who would take a call at his discretion

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