> Posted by Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid
[getty src=”186885399?et=NLbLXYPuRkVyd9VL8jS1ZA&sig=2-s9roviGofRMFIw5SyLs9pWGGujAgjAi34JWx6ID-Y=” width=”506″ height=”339″]
As we acknowledge World Consumer Rights Day, celebrated on March 15th each year, recent news from South Africa on over-indebtedness reminded us of the findings from the What Happens to Microfinance Clients Who Default? project. The South African Human Rights Commission (SAHRC) just reported that 50 percent of the country’s credit-active population is debt-impaired (meaning they are more than three months behind on bills and/or have a debt-related judgment), and another 15 percent of the population is debt-stressed (one to two months behind on bills). Essentially, more than half of South Africa’s population is over-indebted.
In reacting to this situation, the SAHRC has taken an approach drawn from a human rights-based framework. They have recognized freedom from oppressive, unsustainable debt levels is a human right. Similarly, in Greece, the birthplace of democracy, the government determined that under particular financial circumstances a fresh start is a human right. To address Greece’s growing problem of over-indebtedness, in 2010, Parliament passed a law which gives individuals the right to personal bankruptcy. The implementation of this legislation was also an attempt to harmonize the law with Article 5 of the Greek Constitution which protects citizens’ social and economic well-being. According to the new law, over-indebted individuals now have the possibility to restructure their debts, reducing both interest rates and total amounts owed. The prerequisite is that the individual’s inability to repay needs to be considered a permanent condition.
In the countries we analyzed for the Center for Financial Inclusion’s What Happens to Microfinance Clients Who Default? research (Peru, India, and Uganda), there is no similar legal recognition of the right to a fresh start available to those at the base of the pyramid, nor did we find effective MFI or other government infrastructure widely available to microfinance borrowers in debt distress. Perhaps Peru comes closest to this because its consumer protection authority, INDECOPI, offers debt mediation services with creditors on behalf of debt-stressed individuals. Participation in the process is voluntary and costs individuals approximately US$1,500. If an accord is not reached, the parties can continue with a standard bankruptcy filing. Cost and other factors make the mediation service unlikely to be of use to the majority of interested microfinance borrowers. If debt mediation services were available at a more affordable price and perhaps offered under the auspices of Peru’s banking superintendent (SBS), debt relief or a fresh start could become a possibility for debt-stressed micro-borrowers. The involvement of the SBS could give the mediators more clout with creditors that might otherwise be reluctant to participate.
In India we found a program promoted by the Reserve Bank of India (RBI) in 2009 for banks to create financial literacy and credit counseling centers (FLCC) to help in preventative and “curative” counseling for distressed, low-income borrowers. In theory these centers could help distressed borrowers negotiate a debt management plan, subject to approval by one or more creditors. Unfortunately an evaluation showed that the FLCCs were underutilized, the banks lacked incentives to promote them, and ultimately the target clients were not reached. In Uganda, we found no evidence for institutional or market-level processes in place to counsel or rehabilitate microfinance clients.
Why such a dearth of opportunities? The reality is that someone must pay for these services and they are difficult to design in a way that is affordable for both the mediation provider and the users of the system, especially for small value loans. As we noted in the paper, Belgium has mandated that financial institutions contribute to the running costs of its debt mediation program. Participating Belgian financial institutions must contribute according to their percentage of defaults in the market in the prior year, which is used as a measure of each institution’s responsibility for contributing to over-indebtedness in the market. This is an interesting approach because it 1) incentivizes financial institutions to take measures to prevent over-indebtedness, and 2) makes institutions accountable for rehabilitating those who have become over-indebted.
From a client protection perspective, when the industry knows that a percentage of its clients will fail in their efforts to repay, there should be a process for debtor rehabilitation that respects the debtor’s need for a financial future. Of course we recognize that some microfinance clients may never have intended to repay. This blog post does not relate to the fraudsters. But shouldn’t clients with good intent deserve the chance to work towards a clean slate? These opportunities are not offered by the microfinance industry nor are standard bankruptcy procedures feasible for clients at the base of the pyramid. For World Consumer Rights Day, my plea is to make debt rehabilitation a standard offering in the microfinance industry and something we achieve in 2015.
Have You Read?