Microfinance is a critical tool for low-income households to escape poverty and for micro enterprises to sustain their business. In Asia and the Pacific, the microfinance market has been growing backed by strong demand and intensive policy support.
However, growth with low credit discipline may encourage excessive credit supply and over-indebtedness of borrowers. For instance, lack of transparency in loan pricing and alleged abusive debt collection by microfinance institutions triggered a microfinance crisis in Andhra Pradesh, India, which raised its head in 2010. Financial consumer protection is thus an essential ingredient to deliver quality and sustainable microfinance services.
Microfinance client protection has been drawing increasing attention from policymakers, regulators, microfinance service providers, borrowers, and civil societies, as well as global communities such as the G20.
The Smart Campaign, implemented by the Center for Financial Inclusion at ACCION International, plays a leading role in developing and promoting a set of client protection principles for microfinance institutions to address 7 issues: (i) appropriate product design and delivery; (ii) prevention of over-indebtedness; (iii) transparency; (iv) responsible pricing; (v) fair and respectful treatment of clients; (vi) privacy of client data; and (vii) mechanisms for complaint resolutions. Although a number of microfinance institutions have endorsed the Smart Campaign to protect their clients, there remain many institutions having yet to do so in Asia and the Pacific.
In 2015-2016, ADB and the Smart Campaign carried out training programs on microfinance client protection in Azerbaijan, India, Kyrgyz Republic, Lao PDR, Myanmar, and Papua New Guinea. The objective was to provide practical guidance for microfinance institutions to ensure that clients are treated in a fair and transparent manner, and are able to fulfill their debt.
The microfinance markets in each of these six countries are all growing but have different profiles in size and depth (see table) as well as different challenges. In Azerbaijan, for instance, dollarization of microcredit is a critical cause of client over-indebtedness. In India, the Andhra Pradesh crisis was caused by poor governance and discipline within the industry that allows households to take multiple loans with high interest rates that they could not repay. In the Kyrgyz Republic, rural clients have limited financial education and a risk defaulting after having taking out multiple loans from smaller financial institutions that undermine consumer protection.
Each government has its own strategy to boost consumer protection in microfinance based on its understanding of current market conditions. In India, the Andhra Pradesh government enacted the Microfinance Ordinance in 2010 to protect microfinance borrowers, and at the national level the Reserve Bank of India has set the Fair Practice Code. The Kyrgyz Republic implemented the Microfinance Development Strategy 2011-2015 which promoted consumer protection rights. Lao PDR has established a taskforce to prepare the legal framework for microfinance consumer protection. Myanmar enacted the Microfinance Law in 2011 and instructions including consumer protection. Papua New Guinea launched a consumer protection working group in its 2014-2015 National Financial Inclusion and Financial Literacy Strategy.
Consumer protection in microfinance is not only about fair treatment and safeguard of clients’ individual rights, but also relates to the governance of microfinance institutions. It has a direct bearing on the ability of the industry to achieve its fundamental social mission of poverty reduction, while ensuring sustainability of operations. Microfinance institutions must deliver demand-driven, quality services to these clients, so as to reach more low-income people and develop the industry in a health way. ADB’s 2012 Special Evaluation Study on Microfinance Development Strategy called for increased support to consumer protection to make microfinance demand side-oriented and more beneficial to borrowers.
Advanced technology has been diversifying microfinance services available for low-income people, while a new risk set –such as cyber risk and money laundering– has come out. This requires further sophisticated client protection measures and education for microfinance institutions. The training programs helped participating microfinance institutions acquire appropriate knowledge and skills on client protection to provide traditionally underserved clients with high-quality services. The next step is to secure more focused training at the national level to adapt these institutions to rapidly changing technology in the industry, and how it will affect client protection.
Table 1: Microfinance markets in 6 countries
Source: MIX market database. Reported only; accessed on 24 November 2016.