Progress and Evolving Risks in Peru’s Advanced Consumer Protection Environment

> Posted by the Smart Campaign

What do microfinance clients in Peru think about their experiences with financial services? A few weeks ago the Smart Campaign released its Client Voices reports, a four-country research investigation that directly asked microfinance clients about their experiences. After previously spotlighting Benin, Georgia, and Pakistan on this blog, today we’ll take a look at findings from the fourth country in the project, Peru.

The research was carried out by Bankable Frontier Associates (BFA) and IPM Research. A qualitative research phase was first conducted, which included focus group discussions, individual interviews, and a photography exercise to allow clients to visually describe how they view good and bad treatment. The quantitative survey that followed included a sample of 1,000 current and former microfinance clients.

What did the clients say? In Peru, a well-regulated market, a different set of problems emerged from those we found in less-protected Benin and Pakistan. While severe abuses have been curtailed, emerging problems in Peru tended to arise from aggressive competition for customers.

Overall, clients in Peru are satisfied with their providers, suggesting that they’re benefitting from the industry’s well-regulated, competitive market and effective credit reporting system. Less than 10 percent of respondents rated their experiences with microfinance providers as either “bad” or “very bad”. In an exercise where respondents ranked various formal institutions in terms of how they treat clients, microfinance providers scored above commercial banks.

Heavy debt burdens were found to be a cause for concern. The average household dedicates 26 percent of monthly income to debt payments. In rural areas, this figure rises to 35 percent. Thirty-four percent of clients have made at least one late payment, and 9 percent have defaulted or failed to pay a loan at least once. Despite existing debt, clients report receiving many offers for new credit products, with 10 percent reporting feeling pressured to take out a loan. Aggressive sales tactics contribute to the perception that providers are in some cases trying to take advantage of clients. Clients also have loans from a number of different sources, both informal and formal.

“[The woman from the bank] kept following me everywhere. I was working, and she kept coming to my house offering me a credit card that I didn’t want. She kept asking for my number for activating the credit card. At the end, I was very tempted because my daughter was turning 15, and I wanted to [throw a party].” – Female, Peri-Urban Lima

Some clients view credit lines as a benefit to be shared. A combined 18 percent of clients have either taken out a loan for someone else or used a loan that was in another person’s name. Having a loan in another person’s name is associated with increased late payments, suggesting this behavior is risky for clients and institutions alike. Providers cannot control what clients do with the money they borrow, but it is important that financial institutions and regulators are aware of this behavior, as it may have implications for the credit reporting system. This concerning trend was also prevalent in Georgia.

“My sister-in-law needed money. I borrowed it for her, but I did not enjoy that money…I gave all the money to my sister-in-law thinking that she would pay back, but she didn’t. One day I went to the bank, and my brother told me that I was bad on their system.” – Female, Urban Juliaca

Centralized credit reporting to credit bureaus creates a strong incentive for repayment, and clients reported only minimal client protection problems in collections. In contrast, client mistreatment during collections is a big issue in Benin and Pakistan. Before the installation of the credit bureaus in Peru, intimidating collection practices were common, but today they have all but disappeared, thanks partly to reliance on credit reporting, which ensures that clients will repay if they possibly can, in order to avoid a black mark against them with all lenders. However, clients still do not have a good understanding of how the credit bureau works. They don’t seem aware that credit bureaus keep positive information in addition to negative, nor do they seem to understand fully the consequences of having a negative record, or the path to rehabilitation.

Researcher: “For how long [does one’s negative record stay in the credit registries]?

Respondent: “Five years, I think… 10 years… For life… Once you have paid, you must wait a lot of time to be trustworthy again.” – Male, Urban Cajamarca

As we found in all of the studied countries, transparency in Peru could be improved. Although 65 percent of current clients reported that they understood their loan terms well, they also report low levels of understanding in the case of bundled products, especially those that include insurance. And 23 percent of current clients reported that providers did not explain the terms and conditions of the loan before signing. As in the other Client Voices countries, only 25 percent of clients knew the interest rate on their current loans.

“Often you go to them [the staff] and don’t understand anything they say, because of how fast they talk. It is almost as if they have their tongues twisted. You end up not understanding in the end. [Then they say] ‘But ma’am I’ve explained it to you, how come you don’t understand? I’ve been very clear.’” – Female, Peri-Urban Lima

Microfinance clients in Peru have many options for recourse, but, like the clients in other countries in the Client Voices project, the majority don’t know about these channels. Seventy-one percent report that their providers did not inform them where to complain. Among those who wanted to complain, many did not do so, either because they did not know how, or because they thought the response would be slow.

“To whom are you going to complain? There is a book for complaints. You fill yours along with your [national ID card] you sign, but they never call you. They make that book vanish!” – Female, Lima Peri-Urban

For more details and additional findings, read the Peru report from the Client Voices project.

Have you read?

Client Protection in Georgia: A Responsible Market with Opportunities for Improvement

What Do Clients Care About? Results from Benin

What Do Clients Care About? Results from Research in Pakistan