> Posted by the Smart Campaign
For a brief moment on Monday, all eyes in Tbilisi, Georgia were on the Smart Campaign and its findings on the well-being of microfinance clients. The Campaign presented its Client Voices report in a high-profile event at the Georgian Parliament. Joining the event were 12 Members of Parliament from both majority and minority factions of the Government; leadership from the Central Bank, Ministry of Finance and Ministry of Agriculture; a multitude of microfinance practitioners; press and three television stations. This was the first time government representatives of the majority party, minority party, executive branch, industry, and Central Bank all got together to talk about how microfinance clients are treated. Needless to say, it was immensely encouraging to witness this demonstrated interest in the fair and responsible treatment of microfinance clients in Georgia.
The Client Voices project is a four-country research investigation that directly asked microfinance clients about their experiences and treatment. Along with Georgia, the studied countries are Benin, Pakistan, and Peru. Georgia was selected because its market hosts strong and representative institutions conducive to consensus building, and the industry’s decision-makers are currently working to update its regulatory and legal framework. The launch of the Client Voices report positioned the market to act on the project’s recommendations.
The event was co-hosted by the Business and Economic Center (BEC), a non-partisan, not-for-profit institution that works to facilitate understanding and discussion among MPs around financial, economic, and business topics. Following opening remarks by Natia Katsiashvili, Executive Director of BEC, and Giorgi Volski, MP and Chairman of the majority Georgian Dream faction (think Majority Leader in the U.S. House of Representatives), the main findings from the Client Voices project were presented. Here are a few of the key findings:
- Georgian Clients Are Generally Happy with their Lenders: Clients were generally satisfied by how MFIs treated them. Only 5 percent said they had a “bad” or “very bad” experience with MFIs. Compared with the project countries of Pakistan and Benin, aggressive and overt client abuse is rare.
- Client Understanding of Loan Terms and Conditions Is Lacking: Twenty-eight percent of clients did not know the interest rate on their loan, and another 22 percent could not recall the total amount to be paid on their loan.
- Overindebtedness Is an Issue: Households with active credit report a median monthly debt-to-income ratio of 37 percent of monthly income allocated to debt repayment. Thirty-seven percent of clients have taken a loan from another source to pay a debt to an MFI, and 21 percent reported reducing food consumption to repay a debt.
- Clients Are Not Well-Informed on Credit Bureaus: Clients are not aware of how CreditInfo Georgia, the only Georgian credit bureau, works. Many MFI clients fear the negative repercussions of paying late and do not have a clear idea of how credit histories are recorded and used. As a result of this fear, clients may be making extreme sacrifices to comply with tight repayment schedules.
- Risky Behavior: Taking Out Loans for Others: Ten percent of loans were taken out in someone else’s name, usually by another household member or family member. A relatively higher proportion of these respondents have had a negative record with CreditInfo Georgia. They may have chosen to borrow via another formal borrower because they are unable to borrow themselves.
- Complaints Mechanisms Are Lacking: Only 4 percent of respondents said that they have ever had a reason to complain to an MFI. This suggests that treatment by MFIs is generally positive. However, only 38 percent were told where to complain, and the vast majority of these were directed to a loan officer or group leader, which may deter clients from voicing concerns.
The most fervently debated topic was the dollarization of loans. MFIs in Georgia receive investments denominated in U.S. dollars, so their incentives are to give out dollarized loans. Many MFIs also issue dollar-denominated loans to hedge against currency risk. However, this risk is passed entirely to borrowers. Generally, clients don’t understand what this means and are not fully aware of the high risks associated with taking loans in U.S. dollars. They often take dollarized loans out of ignorance or pressure from the loan officer. As the currency fluctuates, they end up paying back far more than they expected. Out of those surveyed in the Client Voices project in Georgia, 30 percent of clients have a U.S. dollar-denominated loan outstanding, and 13 percent of these did not realize the risks prior to taking the loan.
Between January and October 2015, the Lari depreciated 27 percent compared with the U.S. dollar. Just recently, this practice caused widespread defaults next door in Baku, as Azerbaijan’s currency devaluation led to mass defaults. During the event discussion, the case of Azerbaijan was mentioned as a warning of what could happen if this issue wasn’t controlled in Georgia.
To respond to this problem, a focus on transparency was suggested. If clients have to bear the risk of dollarization they should know and fully understand what they are getting into and what the consequences can be. Additionally, some countries have chosen to limit dollarized loan disbursal, and some MFIs have relied on foreign-exchange swaps to enable them to lend in local currency.
Given the political divisions that exist in Georgia, it is notable that representatives came together from across Georgia’s political spectrum, including the ruling Georgian Dream faction, the Free Democrats, and the United National Movement. There were a number of people asking when Parliament is going to act on client protection, and what changes they’re going to make. A new client protection bill is long overdue.
The Client Voices report was featured on prime-time Georgian TV Monday evening with an interview of the Smart Campaign’s Eastern Europe and Central Asia Lead, Daniel Balson, on Maestro TV, which you can watch, here: http://bit.ly/1Uv0hck
For more, including additional findings, read the Georgia report from the Client Voices project.
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