How MFIs are doing on Client Protection – First Reports from the MIX

How do MFIs implement client protection principles?  Until now, we have only been able to guess at the answer to this important question.  But thanks to the MIX, we now have some preliminary data, giving us a first glimpse of what is going on inside MFIs.  

The MIX is testing its Social Performance reporting framework, a self-reporting survey covering social performance issues, such as poverty outreach, labor and community relations, and environmental consciousness.  Question 8 of the survey focuses on client protection and is based upon the Six Principles of Client Protection of The Smart Campaign.  The MIX has received responses from over 200 MFIs so far but has only processed and posted publically the results from the first 53 MFIs.  The information in this post is based on an analysis of these first 53 institutions, which represent 29 countries and about 10 million total borrowers.  The range of MFIs reporting was very wide, from several very large MFIs (Vietnam Bank for Social Policies, 6.8 million borrowers; Compartamos, 1.2 million borrowers) to seven MFIs with fewer than 3,000 borrowers, however responses did not differ based on the size of the institution.

Regionally, Latin America was over-represented, with 43 percent of all responses, while Africa was under-represented with 6 percent.  However, even though these MFIs do not represent a statistical sample, one can see some interesting trends begin to emerge.  When reflecting on the following highlights, please keep in mind that these results are self-reported, and it is likely that the MFIs submitting data are probably among the more highly socially motivated MFIs in the industry.

1. Nearly all of the surveyed MFIs have multiple strategies for avoiding client over-indebtedness. 91 percent of MFIs evaluate repayment capacity and 85 percent have explicit written guidance on borrower debt thresholds.  A majority (57 percent) obtain information on existing client debt levels.

A number of the MFIs (21) reported on the percentage of their borrowers who also borrow from other financial institutions, with the following results: 

Among the countries with a high incidence of multiple borrowing were Morocco, Peru, Bolivia and the Philippines.  Moderate multiple borrowing was reported in Kosovo, Bosnia, Mexico, Paraguay and Jordan.

2. Regarding transparency, all MFIs reporting give their clients a chance to ask questions and get information before they sign a contract, and 94 percent say that they provide contracts with plain language and disclosure of terms and conditions.  However, only two thirds of these MFIs disclose penalty and pre-payment fees before contract signing.  Three fourths of MFIs provide clients with receipts for each transaction and clear account statements on a regular basis.

The MIX survey asked whether interest rates are quoted on declining balances or flat.  While 40 percent of MFIs report interest rates on declining balances, 33 percent quote flat rates, and 5 percent do both.  There were striking regional differences, with the Eastern Europe/Central Asia and East Asia regions reporting on a declining balance basis, while the MFIs from the Middle East and South Asia reported flat rates.  Most Latin American MFIs report using declining balances or both, and only six of 23 MFIs in this region report using flat rates.

3.  Policies and procedures focused on transparency and avoidance of overindebtedness appear more widespread than practices addressing the remaining four consumer protection principles.  While nearly all MFIs have practices addressing the first two principles, there were fewer positive responses on other principles. 

For example, only 53 percent of MFIs reported having a written code of conduct outlining acceptable and unacceptable collections practices, and only 57 percent have a board-approved code of ethics. MFIs do have processes relating to collections and ethical staff behavior, but these take the form of collections procedures and time frames (75 percent) and rule of staff behavior (79 percent).  Most institutions also monitor performance for these two principles; 68 percent monitor collections, while 81 percent use internal audit to check for fraud.

5. Complaint resolution is a less developed area, with only 49 percent of MFIs reporting a complaint resolution and tracking system or informing customers about their right to complain. 

6. For safeguarding the privacy of client data, the main practice is a secure IT system (79 percent), but there is a need for greater explanation to clients about their data rights with clients, as only 55 percent of MFIs currently explain this to their clients. 

7. Many MFIs provide training relevant to at least one aspect of client protection: one third provide financial literacy training to clients and two thirds provide staff training covering various aspects of client protection.

Overall, the results suggest that MFIs have developed a variety of ways to ensure that they protect their clients, but consistent standards and best practices need to be developed and promoted more widely.  The results also point to the need to sharpen the reporting framework questions. As the Beyond Codes portion of The Smart Campaign progresses, it will keep working towards clearer means of measuring client protection performance.

The Center for Financial Inclusion is serving as interim host for The Smart Campaign, a collaborative initiative endorsed and led by leaders in the financial services industry.