Richard Greenberg is a Managing Director of the Social Enterprise Finance group at U.S. International Development Finance Corporation (DFC, formerly OPIC). The group leads DFC efforts to place capital in highly impactful and innovative enterprises and funds.

Like other development finance institutions, DFC – which has prioritized inclusive finance for decades to address critical challenges facing the developing world – has been hard at work supporting immediate and longer-term needs of MFIs and other actors so they can continue supporting base-of-pyramid clients during the COVID-19 crisis. In this interview with CFI, Greenberg discusses collaboration with other DFIs, DFC’s social impact initiatives that support its development goals, digitization during the pandemic, and more.
<h3>In April’s COVID-related joint <a href="https://www.dfc.gov/media/press-releases/development-finance-institutions-join-forces-respond-covid-19-developing" target="_blank" rel="noopener noreferrer">statement</a>, the <a href="https://www.dfc.gov/media/opic-press-releases/opic-signs-mou-establishing-dfi-alliance-key-allies" target="_blank" rel="noopener noreferrer">DFI Alliance</a> highlighted that its DFI members would work to address not only current liquidity issues in the financial sector, but also other measures related to essential business activities. How have you collaborated on your inclusive finance objectives since that announcement? Has there been any other inter-DFI coordination? What more could be done in this regard?</h3>
There have been extensive conversations to collaborate and coordinate with other DFIs to ensure we’re deploying our capital as efficiently as possible given the significant impacts of the crisis. The crisis has generated tremendous demand for capital from DFC and other DFIs. Since we are long-term lenders focused on our missions, in times like these, DFIs become even more important in addressing market gaps.
<blockquote>In times like these, DFIs become even more important in addressing market gaps.</blockquote>
Many of the projects that we’re looking at involve multiple DFIs. Sometimes that’s a challenge because our level of participation, our products, our policies and our risk-return requirements may all be slightly different, but these diverse strengths and capabilities are also what make our collaboration so powerful. Our goal is to make sure we can accommodate—and leverage—the differences there may be to arrive at the financing package that best supports the developmental impact we’re seeking.

We have also recently announced that DFIs have collectively <a href="https://www.dfc.gov/media/press-releases/2x-challenge-drives-groundbreaking-45-billion-women-developing-countries" target="_blank" rel="noopener noreferrer">catalyzed $4.5 billion in investment financing</a> to support women through the <a href="https://www.2xchallenge.org/" target="_blank" rel="noopener noreferrer">2X Challenge</a>, surpassing the initial goal of $3 billion. Building on DFC’s <a href="https://www.dfc.gov/our-work/2x-womens-initiative" target="_blank" rel="noopener noreferrer">2X Women’s Initiative</a>, launched in 2018, we encouraged our counterparts from G7 countries to accept the 2X Challenge by prioritizing investments in women. And it’s not just G7 countries: 15 total countries have joined to date.

Another aspect of our collaboration is discussions with DFIs and other investment partners to share market and institutional response information. One of those groups that we have joined is being led by CGAP.
<h3><strong>In addition to the recently <a href="https://yourstory.com/2020/06/funding-alert-northern-arc-us-international-development-finance-corporation" target="_blank" rel="noopener noreferrer">announced</a> $50 million of debt financing for Northern Arc, has DFC provided direct assistance to institutions support base-of-pyramid clients during these difficult times? Could you tell us a bit more about how the Northern Arc support came to pass?</strong></h3>
We’ve had a long-standing relationship with the senior management of Northern Arc (formerly IFMR Trust). They are a pioneer and a leader in wholesale finance in India. They have tremendous expertise and knowledge of the market. The proceeds of our loan to Northern Arc will be used to expand its loan portfolio in areas of importance to DFC, such as women’s economic empowerment, food security, and the WASH sector.
<blockquote>Our goal is be as responsive as we can to what the market needs at this unique time.</blockquote>
Our goal is be as responsive as we can to what the market needs at this unique time, working with established and new clients. For clients that we have previously worked with, we’ve been able to move projects forward especially quickly throughout the crisis. For example, in India, we have closed and disbursed funds to two clients, including <a href="https://www.dfc.gov/investment-story/improving-access-quality-education-india" target="_blank" rel="noopener noreferrer">Varthana</a>, an education finance company that serves low-income families, and <a href="https://yourstory.com/2020/05/funding-alert-caspian-debt-investment-from-dfc" target="_blank" rel="noopener noreferrer">Caspian</a>, an income fund manager that lends to SMEs. The debt <a href="https://economictimes.indiatimes.com/wealth/save/sbi-loan-emi-moratorium-extended-here-are-all-the-details/articleshow/76087915.cms" target="_blank" rel="noopener noreferrer">moratorium</a> in India certainly created additional risk and complexity, but the quality of these entities and the strong relationships we had with them enabled us to keep moving forward.

These are just two examples among <a href="https://www.dfc.gov/media/press-releases/dfc-approves-1-billion-investments-global-development" target="_blank" rel="noopener noreferrer">many others</a> we are supporting in developing countries reeling from COVID-19, such as Banco Industrial in <a href="https://gt.usembassy.gov/dfc-approves-a-200-million-investment-for-guatemala/" target="_blank" rel="noopener noreferrer">Guatemala</a>, whose portfolio includes 30 percent women-owned or women-led businesses, Root Capital for farmers in Latin America and Africa, <a href="https://www.dfc.gov/investment-story/supporting-worlds-smallest-farmers" target="_blank" rel="noopener noreferrer">One Acre Fund</a> supporting farmers in Kenya, and a fund managed by <a href="https://www.dfc.gov/media/press-releases/dfc-approves-nearly-900-million-global-development-projects" target="_blank" rel="noopener noreferrer">WaterEquity</a>, which lends to MFIs to improve access to reliable and clean sources of water.
<h3><strong>What about coordinating with fund managers? What role have they played?</strong></h3>
We have relationships with many of the leading global microfinance fund managers. Some of them have expanded their investment strategy to include SMEs and other financial intermediaries. Shortly after the crisis began, we were contacted by many fund managers with ideas about how to address needs by expanding existing funds, creating new funds, or reorienting funds that were already raising capital but not yet launched.
<blockquote>There are a lot of questions related to the type of capital to be deployed, the timing, and demand versus supply in various markets.</blockquote>
We are working with several of them right now, making good progress on underwriting and collaboration with other DFIs and fund managers to put together the right kind of capital for these funds so they can quickly start to deploy it. Of course, in the context of the crisis, there are a lot of questions related to the type of capital to be deployed, the timing, and demand versus supply in various markets. The base case assumption for most is that there’s going to be significant liquidity needs in the near term, though that will likely vary significantly across markets.
<h3><strong>Geographically, DFC’s microfinance/inclusive finance activities have reached a <a href="https://www.dfc.gov/sites/default/files/2019-08/fy2019_cbj.pdf" target="_blank" rel="noopener noreferrer">diverse range</a> of countries and regions. Are there any countries or regions DFC has prioritized with regards to its support of inclusive finance during COVID? Are there issues unique to specific places, or are challenges mostly universal?</strong></h3>
In terms of regions, DFC is open for business across emerging markets. We focus on low-income and lower middle-income countries. Priority regions include Africa, Latin America and the Caribbean, and the Indo-Pacific.

There are different needs and challenges around the world. The strength and resilience of financial sector institutions and regulation varies considerably, as does extent of digitization which is so important at this time. Countries are getting hit very differently and we need to account for that.
<h3>Has the crisis altered DFC’s approach to funding social impact enterprises beyond microfinance?</h3>
DFC’s <a href="https://www.dfc.gov/what-we-offer-our-products/portfolio-impact" target="_blank" rel="noopener noreferrer">Portfolio for Impact and Innovation (PI2)</a> has launched, which builds on the success of OPIC’s Portfolio for Impact (PI) initiative, introduced in 2014. PI2 is how we serve smaller, early-stage social enterprises that have a highly developmental impact but that lack scale-up capital due to their relative size, novel approach, or limited track record. Initially, financing for each project under PI2 was $1 to $5 million; now, we’re able to go up to $10 million per deal.

In the wake of COVID-19, PI2 takes on even greater importance: we know that it is often small, early-stage ventures that introduce the most innovative solutions to daunting challenges. These creative business models will be exactly what we need to navigate the many new challenges that COVID-19 has brought to emerging markets.
<h3><strong>Has the crisis shifted the perceptions of inclusive finance within DFC?</strong></h3>
Inclusive finance has been a focus of DFC for a long time. We have become one of the most significant capital providers among DFIs to microfinance over the last 10 years. This crisis is demonstrating how inclusive finance is even more essential.

Though our underwriting process is rigorous, we have leveraged information sharing with co-investors to further accelerate the deployment of capital. Additionally, in the management of our existing portfolio, we have been proactive and expeditious in trying to respond to clients who may be struggling as a result of this crisis and may need some relief.
<h3><strong>Has DFC engaged with fintechs and non-microfinance FSPs during this crisis? Are you seeing a rush to digitization among your partners? How, if at all, are your investees working to accelerate digitization for consumer segments who were conducting business primarily offline – and how might this be done <a href="https://www.centerforfinancialinclusion.org/a-covid-digitization-stampede-mustnt-trample-consumer-protection" target="_blank" rel="noopener noreferrer">safely</a>?</strong></h3>
There’s no question that, with the lockdowns, having a digital platform is critical. Some MFIs have already digitized, others less so, and the latter are of course a lot more vulnerable in these conditions.

It’s really important that those MFIs and intermediaries that need to further digitize have the opportunity and support to do that. For example, a fund manager launching a fund for which we expect to provide financing has a specific technical assistance facility that focuses on digitization. They assess an MFI’s digitization needs and can provide finance to facilitate action items. It’s important that we not only provide financing, but provide this kind of targeted support to strengthen financial institutions to which we are lending.
<h3>What about time frames? <a href="https://centerforfinancialinclusion.org/how-should-investors-coordinate-when-time-is-of-the-essence/" target="_blank" rel="noopener noreferrer">CFI</a>, the <a href="https://centerforfinancialinclusion.org/microfinance-coalition-call-to-action-for-investors/" target="_blank" rel="noopener noreferrer">Microfinance Coalition</a>, and others have identified investor medium-term needs as well as short term ones. What do you see as the medium-term needs beyond liquidity? When does the medium term “start”?</h3>
My personal interpretation is the “short term” is the next quarter or two. We’re trying to move very quickly. We don’t want to miss the opportunity to support pressing needs.

We are thinking about liquidity now and solvency issues that might arise down the road. At this time it is difficult to forecast market conditions in the coming quarters. One of our existing partners that lends to MFIs has a view that demand for their funds will slow down temporarily while others are expecting increased demand. Projecting the demand for capital in this kind of volatile market is less certain than it typically would be, so that’s creating some challenges in thinking about the risks versus returns.
<blockquote>We are thinking about liquidity now and solvency issues that might arise down the road.</blockquote>
Unfortunately, it seems likely that some people in the markets we serve who are currently middle income may lose jobs and income that will push them into a lower income level or even poverty – at least temporarily – so that could create more demand for the services from some of the institutions that we fund.

We want to support funds and intermediaries that will manage their capital prudently and avoid taking unnecessary risks. In some cases, this may mean focusing their lending initially to MFIs that are the strongest right now, and then adding institutions to their portfolios that are smaller and more vulnerable – but serve important underserved groups – over time.

&nbsp;

&nbsp;

DFIs, COVID-19 and Financial Inclusion: A Conversation with Richard Greenberg of DFC

India

South Asia

Latin America and The Caribbean

DFIs: COVID-19 and Financial Inclusion

Test of a Lifetime: COVID-19 and Financial Inclusion

Challenges and Crises

Enabling Environment

Credit

Credit Provision

MSME/SME Finance

Underserved Groups

Underwriting

Women

Blog Post

<em>This post was <a href="https://www.findevgateway.org/blog/2020/05/microfinance-coalition-call-action-investors">originally published</a> on FinDev Gateway.</em>

In our <a href="https://centerforfinancialinclusion.org/covid-19-threatens-the-microfinance-sector-and-the-livelihoods-of-those-we-serve-building-a-coalition-for-collective-action/" target="_blank" rel="noopener noreferrer">introductory blog post</a>, we introduced the members of this coalition and highlighted their capabilities to reach the lowest income countries using both traditional approaches and digital channels. In this post, we want to focus on how investors can support microfinance institutions (MFIs) to respond to the needs of the base of the pyramid (BOP) during the pandemic.
<h2>Liquidity: The Most Immediate Constraint</h2>
As with other crises, the most critical and immediate issue that presents both short and long-term risks for our collective response is liquidity. Lockdown measures and shelter in place rules have had devastating effects on the types of businesses that are run by the BOP. This has meant that many are no longer able to make repayments. Furthermore, MFIs themselves have been restricted in their ability to collect loan payments from customers, reducing cash inflows and thus, the ability to disburse new loans. While government policies, such as moratoriums on loan repayments and forced rescheduling, are intended to protect consumers, they also contribute to the liquidity crunch of MFIs.

The longer businesses are shuttered, the greater the likelihood that the BOP will be unable to resume their businesses. Without income coming in, business owners must pay for essential living expenses like rent, food or medical care out of their limited savings. Over time, business owners will deplete these savings or sell off assets, reducing their ability to re-open their businesses without cash injections. Ultimately, a significant number of microfinance clients may default on their loans due to the crisis.
<blockquote>A significant number of microfinance clients may default on their loans due to the crisis.</blockquote>
While savings balances of small deposit holders remain stable or in some cases have even increased, there is lack of clarity as to how this will play out, and things might change quickly if people are unable to resume their income-earning activities again soon. Availing savings to those in need is a critical function that deposit-taking institutions play, and it is an essential aspect of preserving the trust of their clients. Should customers fear that these funds are not available, there is the risk of a run on financial institutions. Thus, liquidity to meet deposit obligations and to maintain capital adequacy ratios is critical for these institutions and for broader macro-stability.
<h2>Rapid Response Liquidity</h2>
To address these issues, most MFIs will need access to fast operational liquidity to cover near-term staff costs and to extend broader grace coverage and relief to clients. It is important to note, however, that borrowing to cover operational expenses is at best a short-term bridge to reopening, and ultimately puts institutions in an unsustainable position if lockdowns and operational impediments persist. Depending on the duration of the crisis, pressures on institutional liquidity may increase over time.
<h2>Near-term and Medium-term Debt</h2>
Beyond the immediate short-term needs, most MFIs depend heavily on debt as a source of funding for their loan portfolios. This creates two distinct sets of problems:
<ul>
 	<li>As risk capital flees less developed markets, institutions are finding it difficult to replace loans that are not being rolled over or extended. This means their ability to offer new loans to clients, or even accommodate existing clients with prolongations, will be constrained.</li>
 	<li>Because the funds needed to repay external loans coming due are trapped in their institutional portfolios, there is also a growing possibility of defaults among otherwise solvent institutions due to liquidity shortages which will further impair their ability to attract new funding.</li>
</ul>
Most financial inclusion-supportive lenders are already keenly aware of these constraints and are working to identify a common approach given the magnitude of the crisis. Because the duration of the crisis is likely to vary from country to country and is changing fluidly, lenders must remain flexible and support the conservative approaches that MFIs are taking to preserve their liquidity while meeting the needs of their existing customers. At a minimum, lenders should be prudent in the measures they take to reschedule or restructure their debt. Where feasible, lenders should avoid highly legalistic (and therefore expensive) restructuring approaches.

The ability of MFIs to continue to serve the BOP will be contingent on how flexible their lenders are with rollover and extension requests and with their willingness to extend or support additional funding once operations have resumed. Moreover, lenders should collectively commit to not penalize MFIs that have rescheduled or restructured debt in good faith in the current environment when they seek future financing. This issue does not appear to have been addressed in either the <a href="http://www.incofin.com/wp-content/uploads/2020-04-24-MIV-Covid-19-coordination-MoU.pdf" target="_blank" rel="noopener noreferrer">memorandum of understanding</a> or the <a href="https://7eab7e50-e834-461b-8539-7e8435e86338.filesusr.com/ugd/361833_613447b8d9e1422584dc4e48ba8f3603.pdf">pledge</a> that were recently issued by a number MIVs and other microfinance stakeholders.

In specific terms, the following facilities will likely be critical for both rollover funding and new funding:
<ul>
 	<li>Rapid-deployment debt facilities to cover funding gaps</li>
 	<li>Local currency facilities</li>
 	<li>Guarantee facilities to attract new lenders</li>
</ul>
<h2>Capital Investments and Subordinated Debt</h2>
For institutions with minimum capital requirements, it is highly likely that additional injections of capital will be needed for two main reasons:
<ol>
 	<li>Interest income will decline in the short-run due to limited operations and loan losses.</li>
 	<li>Even if portfolio quality does not decline dramatically in all cases, there will likely be increased delinquencies as well as a significant amount of loan restructuring to accommodate clients facing their own operating pressures, forcing MFIs to increase their provisioning.</li>
</ol>
These two factors will likely have a highly material impact on capital adequacy as institutions will be using cash to maintain operating capacity, while incurring losses. Should capital injections to rebuild capacity post-COVID not be possible, lenders and regulators will, at a minimum, need to grant waivers to allow institutions to continue operating without it. Over time, both rapid-deployment subordinated debt funds and equity investment funds will be critical.
<h2>All Investors Must Step Up</h2>
How investors respond during this pandemic will determine the extent to which MFIs are able to respond to the needs of their customers. Many investors have already stepped up and are setting important principles and agreements toward responsible collective action. See, for example, the <a href="https://www.inclusivefinanceplatform.nl/wp-content/uploads/2020/04/COVID-19-MS-V3-1.pdf" target="_blank" rel="noopener noreferrer">investor statement</a> that was issued by the members of NpM (The Netherlands financial inclusion platform) and the previously mentioned memorandum of understanding signed by the group of nine MIVs.

We commend these organizations for taking collective actions, and call on all investors in inclusive finance to do their part. In particular, we ask that development finance institutions (DFIs), with their higher risk tolerance and longer-term horizons, support the sector in the ways that many MIVs and other social investors are unable to do.

&nbsp;

&nbsp;

Microfinance Coalition: Call to Action for Investors

Microfinance Coalition

Default

Microfinance

Digital credit has emerged as a new and profitable service offering that has great potential to increase financial inclusion. Yet, if not carefully managed, digital credit also runs the risk of excluding, over-charging, and over-extending customers.

Seven years since the first digital credit product launched, the market in Kenya has grown exponentially and hosts a diverse ecosystem with more than 50 supply-side actors. The phenomenal expansion of digital credit in Kenya serves as a test-bed for the product and offers lessons for digital credit suppliers and regulators around the world.

SPTF and the Smart Campaign commissioned MicroSave Consulting (MSC) to study the dynamics of the digital credit sector on both demand and supply sides. The output of the study was a <a href="https://content.centerforfinancialinclusion.org/making-credit-truly-responsible-webinar/">comprehensive report on the current state of digital credit in Kenya</a>. It looked at the evolving challenges in digital credit and made recommendations for a more responsible and customer-centric delivery of the product.

With participation from Smart Campaign Senior Director Alexandra Rizzi, this webinar:
<ul>
 	<li>Helps participants understand the digital credit landscape in Kenya</li>
 	<li>Assesses the progress and challenges around making digital credit responsible and inclusive</li>
 	<li>Recommends steps towards a more responsible delivery of digital credit</li>
</ul>

Making Digital Credit Truly Responsible Webinar

SPTF

The Smart Campaign

Kenya

Sub-Saharan Africa

Consumer Protection

Customer Centricity

Delivery Channels

Digital Financial Services

Financial Service Providers

Interest Rates

Nano Loans

Over-indebtedness

Policy, Regulation and Government Initiatives

Product Pricing

Responsible Digital Finance

Webinar

All is not well in the country that pioneered mobile credit. A new <a href="/making-digital-credit-truly-responsible">report on digital credit in Kenya</a> from <a href="https://www.microsave.net/">MSC</a>, commissioned by <a href="/about/what-we-do/the-smart-campaign">the Smart Campaign</a> and the <a href="https://sptf.info/">SPTF</a>, shows that with continued dramatic growth rates, the sector also experiences cripplingly high default and delinquency, enabled by poor business practices and weaknesses in both the credit reporting infrastructure and regulatory jurisdiction.

Most notably, the report reveals very high rates of delinquency and default. Among active digital loans, more than a quarter are non-performing. About 2.2 million Kenyans are said to have delinquent loans. In some cases, liberal use of refinancing and rescheduling hides this level of delinquency in lender portfolios. At the same time, the report points out that about half of these non-performing loans are for amounts less than $10. These findings are broadly consistent with results cited by CGAP in 2016, which found that 50 percent of digital borrowers in Kenya repaid their loans late, and 12 percent defaulted.
<blockquote>Despite continued growth of digital credit in Kenya, high delinquency, default and interest rates persist in the market and credit bureaus haven't yet caught up with the digital age.</blockquote>
The report also details shortcomings in credit reporting, given that many digital lenders neither consult nor report to the credit reporting bureau as fully or regularly as they should. The credit reporting bureaus were clearly set up for a pre-mobile era, which suffer from issues related to inclusion of all types of lenders, frequency of uploading data (monthly, when daily is more relevant for today’s short term loans), and ease of connection among all the players in the credit reporting ecosystem. As a result, many lenders are not consistently using credit bureaus—neither ensuring that the information is updated and correct, nor fully consulting it prior to lending.

Pricing is also an issue. The market leader, M-Shwari, which accounts for about two-thirds of all digital loans, charges an annual percentage rate (APR) of 90 percent. The low-price option provided by Kenya Commercial Bank is a fairly reasonable 44 percent APR, but the high end of the price range includes providers charging APRs well into the hundreds. Granted that these are small, short term loans where interest payments are not expected to be sustained for an entire year. Nevertheless, the promise of digital to bring down prices does is not yet in sight.

Other issues noted in the report include non-transparency regarding portfolio quality, identity theft, misuse of client data, multiple borrowing and loan bicycling by clients, and client use of loan proceeds for sports betting.

The picture that emerges suggests that the still-exploding market of very small, “nano” loans needs to be brought into more orderly operation. Consumers and providers are operating in risky ways. The current state of the market is not beneficial for either.
<blockquote>Raising the bar for blacklisting customers and public awareness about defaulting on loans are among our recommendations for improving digital credit.</blockquote>
One issue specific to this nano-loan market concerns the reporting of very small non-performing loans to credit bureaus, with negative consequences, such as curtailing of access to credit, for hundreds of thousands of borrowers. MSC, the Smart Campaign and SPTF recommend that regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau (whether US$2, $5 or $10 – the report actually recommends a cutoff of 5% of the monthly per capita GDP). It also recommends that the government launch a public awareness campaign about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

The regulators, credit reporting agencies and lenders in Kenya are aware of these concerns and working to improve the situation. A new association of digital lenders (Digital Lenders Association of Kenya) has been formed to create consumer protection standards and the central bank is exploring ways to upgrade the credit reporting ecosystem. The Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Kenya’s unprecedented dynamism in mobile money, digital credit and financial inclusion is envied across the world. If authorities and providers can bring the participants in these sectors into a better-functioning marketplace, Kenya will benefit greatly from the innovation the country continues to spawn.

Red Flags in Kenya’s Nano-Credit Market

Keeping Clients First

Digital Credit

Fintechs

Transparency

<span class="hotkey-layer ">Digital credit has emerged as a new and profitable service offering that has a great potential to increase financial inclusion. Yet, if it is not carefully managed, digital credit runs a great risk to exclude, over-charge, and create over-indebtedness.</span>

<span class="hotkey-layer ">During the first half of 2019, The Smart Campaign and the Social Performance Task Force (SPTF) commissioned Microsave Consulting (MSC) to study the current state of digital credit in Kenya and formulated recommendations for how to make digital credit delivery safer and more customer-centric. We propose that </span>regulations be put in place such that delinquencies and defaults among loans below some fixed amount not be reported to the credit bureau so as not to unduly burden consumers. We also call for increased public awareness campaigns about how credit bureaus work and the consequences of default so consumers will better understand the risks involved in borrowing.

More generally, the Smart Campaign recommends that both lenders and regulators consider adopting the <a href="http://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/digital-credit-standards">digital credit standards</a> and <a href="https://www.smartcampaign.org/tools-a-resources/1210-handbook-on-consumer-protection-for-financial-inclusion">model regulations</a> covering issues ranging from transparency, to the fair use of algorithms, to protection of customer data.

Making Digital Credit Truly Responsible

Agence Francaise de Developpement

Report

Smart Campaign team members <a href="/bio/isabelle-barres">Isabelle Barres</a> and <a href="/bio/alex-taylor">Alex Taylor</a> will lead a lunch session on Wednesday, April 3, 2019 to share the <a href="/help-us-shape-standards-for-responsible-digital-lending">draft digital lending standards</a> and discuss the future of Smart Certification for digital credit providers.

On Thursday, April 4, 2019, Isabelle Barres will present on a panel entitled <em>Evolving Practices for Responsible Digital Financial Services</em>.

Panel Description:

Regulations and supervisory frameworks in DFS are often nascent or fragmented, with industry associations evolving to help DFS players to mitigate DFS risks. This session will highlight the latest industry practices, along with innovators that have adapted their business to manage new risks, while scaling digital financial services. Examples by product and business models may include: payments, mobile, solar energy, digital identity, among others. What are the latest movements in responsible digital inclusion and how can signatories and investors apply evolving practices today?

Responsible Finance for Digital Inclusion: Investing for Impact

Impact Investing

Event

In this session, we spoke with our incoming CFI Research Fellows, Dan Kleinbaum and Larry Reed, who will be exploring research questions over the coming months that we think are especially important to the financial inclusion space today.
<ul>
 	<li>How do financial institutions use mass APIs, open APIs, custom APIs and bespoke partnerships to partner effectively with fintechs to reach the underserved?</li>
 	<li>How can banks and other financial institutions provide a set of accounts and services for G2P recipients in a profitable way?</li>
</ul>

Webinar: Meet the 2019 CFI Research Fellows

CFI Research Fellows Program

Financial Capability

P2P Lending

Telcos

Low-income women, especially minority women, continue to be the group most excluded from traditional financial systems in the United States. Many don’t have bank accounts or credit histories. These are major challenges – and reasons why we are sharing our insights with a view toward “getting inclusion right” for this vulnerable population right here in one of the wealthiest countries in the world.

Nearly <a href="https://www.fdic.gov/news/news/speeches/spmay2317.html">27 percent</a> of households in the United States, or 90 million people, are unbanked or underbanked—and many of these households are poor and led by women. Despite accounting for a growing share of new businesses, women receive only <a href="https://microbiz.org/wp-content/uploads/2014/07/21st-Century-Barriers-to-Womens-Entrepreneurship.pdf">4 percent</a> of all small business loans from conventional financial institutions.

These numbers have not improved much over recent years, and they are unlikely to change dramatically unless we give women, particularly those living in poverty, a chance. The deck is overwhelmingly stacked against them. To break out of this vicious cycle of poverty, women need tools to both save and borrow money, and to build their credit histories. Only then can they gain meaningful control over their lives and their futures.

Grameen America’s lending model does this by drawing on and building women’s social capital—an extremely valuable resource—to connect them to sources of financial capital.

Most financial institutions and traditional lenders require collateral. But this is a huge barrier for people with extremely limited resources. As a result, their ability to start or grow their businesses is severely curtailed. <a href="https://www.grameenamerica.org/">Grameen America</a> focuses on this population, women living below the poverty level, and our approach is different from that of traditional lenders.

We see immense value in women’s social capital. Our group-lending model is built not on traditional collateral, but rather on trust and a social contract that holds the members accountable to each other. There is joint responsibility. Moreover, the relationships the women form with each other and their shared values—and often their shared sense of identity—strengthens them individually. They have a sense of belonging, and because they are part of this social network, they have access to information that they wouldn’t have otherwise. They gain support and build greater confidence, along with stronger financial footing, through the group model.

This model itself is a form of social collateral. The women we serve may not be able to provide financial collateral, but they do have reputations within their communities. Their peers deem them responsible, disciplined, and reliable, and therefore they are accepted into the Grameen group. And by being a member of the group and getting and repaying their loans, their social capital grows as does their financial independence. They gain much by the solidarity they share, and by participating in the program, they are able to grow their businesses, save money, and ultimately break out of poverty.

Most banks believe that low-income women are among the riskiest borrowers. However, Grameen America has proven time and time again that this is not the case; we have served over 108,000 women over the last ten years, and they have maintained a repayment rate of over 99 percent. We have found that low-income women are highly dependable and trustworthy, and they can be highly effective entrepreneurs when given the opportunity. They are in fact one of the wisest investments we can make.

Aracely -- a member in Omaha, Nebraska -- recently said, “Other companies don’t believe in poor people, but Grameen does. They helped me start my business, changing my life in the process.” We have seen that when low-income women are entrusted with microloans and other financial services and support, they can start to build better lives for themselves—and building their social capital is crucial to achieving this.

Leveraging Social Capital to Expand Women’s Financial Opportunities

United States

North America

Financial Inclusion Week

In celebration of its 10th anniversary, the Center for Financial Inclusion at Accion asked 10 leaders in the financial inclusion community to set out their agenda for Getting Inclusion Right. The resulting essays and webinar series creates a roadmap to take financial inclusion into the next decade.

You are invited to join CFI on <a href="https://attendee.gotowebinar.com/register/5224822474483746561">Thursday, October 18, at 10 am EDT</a> for this second virtual event, featuring <a href="https://content.centerforfinancialinclusion.org/people/simone-di-castri/">Simone di Castri</a> and Ariadne Plaitakis of Bankable Frontier Associates (BFA) on getting policies right and <a href="https://www.linkedin.com/in/buhle-miranda-goslar-a0ba1830/">Buhle Goslar</a>, Chief Customer Officer of Jumo, on getting credit right.

You can listen to the <a href="https://www.centerforfinancialinclusion.org/webinar-getting-inclusion-right">first virtual event</a> of this series featuring Garance Wattez-Richard of AXA on getting insurance right and Elisabeth Rhyne, Managing Director of CFI, on getting inclusion right from the customer’s perspective. It was held September 18.

Over the coming weeks you will have a chance to read or hear from Tim Adams of the Institute of International Finance on why financial inclusion matters, Shameran Abed of BRAC on the digital divide, and Mark Pickens of Visa on payments. We will also look at the ecosystem with Chris Skinner of the Finanser, data privacy with Katharine Kemp of the University of New South Wales, and the role of investors with Jonathan Whittle of Quona Capital.

Together, these 10 leaders lay out a “true North” for the financial inclusion sector that is both visionary and practical as we work to create tangible benefits for the financially excluded and underserved.

Don’t miss your chance on October 18 to tune into this live conversation with these leading figures as they discuss and respond to your questions about key challenges and opportunities for getting policies and credit right—we look forward to having you <a href="https://attendee.gotowebinar.com/register/5224822474483746561">join us</a>!

You can keep up with 10th anniversary events, webinars, essays and blog posts on Twitter at #gettinginclusionright, on our website's <a href="https://www.centerforfinancialinclusion.org/series/getting-inclusion-right">series page</a>, or by searching "Getting Inclusion Right" in Google.

&nbsp;

Webinar: Getting Credit and Policies Right

Getting Inclusion Right

All over the world, small loans to individuals and very small businesses are increasingly made using digital channels, whether online, via a mobile device or through an agent. However, trust, confidence and responsible lending practices need to be in place to ensure this industry is successful and its customers are protected and empowered.

In <a href="storage/Responsible_Digital_Credit_FINAL_2018.07.18.pdf"><em>Responsible Digital Credit</em></a>, CFI Fellow John Owens outlines the digital credit landscape and the risks customers face, and examines the best practices, standards and initiatives that exist or should be implemented to improve consumer protection in digital lending. Ultimately, John argues, it will take a village to ensure that digital credit clients are protected<span style="font-size: 11pt; font-family: 'Calibri', sans-serif;">—</span>including govenrments, regulators, industry players, advocates and consumers themsleves. He sees three key activities: 1) industry self-regulation, 2) certification of digital credit providers, and 3) directly empowering consumers, as key to the future of what responsible digital credit looks like.

This report is published jointly with the <a href="http://www.smartcampaign.org/">Smart Campaign</a> and was made possible by support from Mastercard Foundation and other partners.

&nbsp;

Responsible Digital Credit

Mastercard Foundation

Alex Taylor

Alexandra Rizzi

Christy Stickney

Dan Kleinbaum

Elisabeth Rhyne

Eric Noggle

Isabelle Barrès

John Owens

Larry Reed

Rajitha  Swaminathan

Richard  Greenberg

Dominican Republic

Ecuador

Ghana

Peru

Uganda

Client Treatment

Entrepreneurs of MSMEs

Governance

Microfinance Institutions

Smart Certification

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

The majority of Kenyans have mobile money accounts; their activity demonstrates digital financial services’ potential. Accion helps Kenyan innovators harness emerging technologies to create new financial services.

In this report, Christy Stickney, CFI Fellow and independent consultant, highlights the characteristics of owners of small and medium-sized enterprises (SMEs) whose businesses have overcome significant hurdles and grown from their micro size.

Christy has utilized qualitative research to identify and analyze clients of MFIs whose borrowing had increased significantly over time from the portfolios of three leading microfinance institutions in Latin America – MiBanco (Peru), Banco Solidario (Ecuador), and Banco ADOPEM (the Dominican Republic). As part of the research, Christy conducted 55 in-depth client interviews and consulted with institution staff. She identifies and describes in detail a select group of "growth entrepreneurs" (GEs) who operate higher growth businesses, have overcome significant growth hurdles, and express a clear vision for future business growth. Christy argues that this category of emerging SMEs holds great potential for future growth and job creation.

Christy also provides recommendations for financial institutions (including microfinance institutions [MFIs]), FinTech companies, governments, and other financial ecosystem actors to support growth and greater financial inclusion for emerging SMEs and growth entrepreneurs.

&nbsp;

&nbsp;

&nbsp;

Emerging SMEs—Secrets to Growth from Micro to Small Enterprise

What Happens to Microfinance Clients Who Default examines how default unfolds and affects microfinance clients in Peru, India, and Uganda – three very different countries that represent the global diversity of microfinance. Since default is a particularly important issue for client protection, the study was launched to explore how microfinance institutions (MFIs) treat clients who are unable to repay their loans. It was motivated by a lack of information on the client-facing actions MFIs take when a borrower moves into default.

The study confirms that the quality of treatment clients receive during collections depends importantly on good practices within individual financial institutions, but it also found that treatment depends even more on the local environment. Humane collections can happen when a country has good regulators, a credit bureau that works well, and a culture that upholds fulfillment of debt obligations. When these features are weak missing, lenders are pushed by the demands of the market into harsh practices.

Default is particularly challenging because it pits the lender’s need for institutional survival against the difficult circumstances of the defaulting customer. The intent of this study is to inspire MFIs to reconsider their treatment of clients in default, and specifically to define acceptable parameters for humane treatment of clients during the default process. Clients who are facing default may very well be in the most precarious financial position of their lives. Therefore, the obligation falls squarely on MFIs to handle these clients with care.

Smart Campaign researchers talked with managers and staff from microfinance institutions in Peru, India, and Uganda –markets with diverse legal systems, market conduct regulators, credit bureaus, and local actors. The research team dug deeply into three markets to challenge the notion that MFI responses to default are universal or standard.

The Smart Campaign recommends the following actions to improve client protection practices related to loan collections and default:
<ul>
 	<li>Regulators, donors, and banking associations should work together to ensure that quality credit reporting systems exist and cover base-of-the pyramid clients</li>
 	<li>Regulators should monitor and enforce market conduct norms for collections and reward financial institutions that perform well.</li>
 	<li>Lenders that use group-lending methods must take responsibility to ensure that intra-group dynamics do not result in abuse of struggling clients. Lenders and regulators should develop greater clarity on the use of restructuring and flexible debt relief.</li>
 	<li>Mediation and debt counseling mechanisms are needed that work for base-of- the-pyramid clients.</li>
</ul>
&nbsp;

&nbsp;

What Happens to Microfinance Clients Who Default?

Mary Hansen

<em>&gt; Posted by <em>Laura Galindo and </em>Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign</em>

A few days ago <a href="http://cfi-blog.org/2014/01/22/cleaning-up-debt-collection-in-the-u-s/" target="_blank">a post on this blog</a> detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of <a href="http://www.consumersinternational.org/" target="_blank">Consumers International</a>, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.

<img class="alignright  wp-image-13798" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2014/01/istock_000018619711small.jpg?w=490" width="300" />Once a client becomes seriously delinquent and moves into default, the possibilities for serious consequences for the client arise. Yet little is known about how microfinance institutions treat clients at these later stages. What alternatives do providers offer to clients who are in protracted arrears? How are clients treated when they are defaulting on multiple loans? What do clients experience during this difficult and stressful stage? And after the default, are client debt obligations resolved? Is there a concerted effort to rehabilitate or re-include defaulters?

In September, the Smart Campaign kicked off a research project to explore what happens to clients who default. The project focuses on how microfinance practitioners treat defaulting clients. It is scanning for best practices around the world – like debt mediation projects in Europe and middle-income countries – and examining practices in detail through interviews with practitioners and regulators in Peru, India, and Uganda. Interviews were also conducted with credit bureaus, debt collections agencies, consumer advocacy/protection groups, and researchers specialized in those markets. These countries were chosen, in part, because of their variation in credit bureau infrastructure and the hypothesis that this would have significant impact on provider practices.

This post is to report that we are two-thirds of the way through the field interviews, having visited Peru in November and India in December. Interviews in Peru were conducted by Jami Solli, the lead consultant for the project, along with Laura Galindo of the Smart Campaign. Analysis was based in part on the early findings of a global survey (described in the “D is for Default” <a href="http://cfi-blog.org/2013/10/11/d-is-for-default-now-available-in-french-and-spanish/">blog post</a>), which helped the team understand common practices and trends, and determine the right questions to ask. More than 30 key players were interviewed from representatives of small, rural NGOs with average loan sizes of US$300 to large banks giving $25,000 lines of credit via a credit card. Target clients, too, differed – from the potato-growing contract farmer to the small restaurant owner who needs to buy a new oven.

In December, Jami visited India along with members of the Smart Campaign India team and Deputy Director Alexandra Rizzi. The team conducted face-to-face interviews with 31 market actors, hopping from Delhi, to Varanasi, Kolkata, Mumbai, Bangalore, and Chennai. During interviews, the focus was understanding the implications of default and whether all defaults are treated alike by providers. (For example, do defaulters who are ill or suffered a natural disaster receive more sympathetic treatment?) Additional topics included whether and when rescheduling is offered; whether and how collateral is seized; and the time period over which debt is actively collected.

The research team has been thrilled by the positive and open response from actors in Peru and India and are hoping for similar treatment in our last country, Uganda.

Information from individual providers will be kept confidential, and while it is still too early to publish any results without further comparative analysis, a sneak peak to aspects of the conversations from these three deep-dives will be shared through this blog.

<em>Image credit: iStock<a href="http://smartcampaign.org/component/taxonomy/term/list/37/12" target="_blank">
</a></em>

<strong>Have You Read?</strong>

<a href="http://cfi-blog.org/2013/09/26/d-is-for-default/" target="_blank">"D" Is for Default</a>

<a href="http://cfi-blog.org/2011/11/14/cfi-publishes-over-indebtedness-of-microborrowers-in-ghana-report-by-jessica-schicks/" target="_blank">CFI Publishes 'Over-Indebtedness of Microborrowers in Ghana' by Jessica Schicks</a>

<a href="http://cfi-blog.org/2011/09/06/consequences-of-overindebtedness-lessons-from-india/" target="_blank">Consequences of Over-Indebtedness: Lessons from India</a>

Investigating What Happens to Clients Who Default

Jami Hubbard

<em>&gt; Posted by Jami Hubbard Solli, Senior Policy Advisor, Consumers International UK</em>

<a href="http://www.dsnews.com/articles/with-10m-borrowers-at-risk-of-default-cfpbs-primary-focus-is-mortgages-2012-02-13" target="_blank"><img class="alignright" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/09/loan-default.jpg" width="300" height="199" /></a>

<em>We originally published </em><a href="http://cfi-blog.org/2013/09/26/d-is-for-default/" target="_blank">"D" Is for Default</a><em> a few weeks ago in English. We're pleased to now share the post in French and Spanish, made possible by the Smart Campaign's Nadia van de Walle and Laura Galindo, respectively. Read the post in <a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/10/d-comme-dc3a9faillance1.pdf" target="_blank">French here</a>, and in <a href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/10/f-es-por-falta-de-pago.pdf" target="_blank">Spanish here</a>.</em>

What really happens to microfinance clients who do not repay their obligations?

As a late-comer to microfinance in 2005, I bustled from the Boulder training, to the Blue Book conferences, to the MicroCredit Summits (and back), trying to understand the dynamics of microcredit. At all these events, I heard proclamations of very high repayment rates, which sparked curiosity about what happened to that small percentage of borrowers who couldn’t (or wouldn’t) repay their microloans. This topic wasn’t presented at any conference I attended.

There has been industry research done on why clients default, as well as interesting work highlighting the gap between providers’ and borrowers’ perceptions and experiences related to over-indebtedness.¹ However, there is very little work done that details the actions taken by practitioners when a borrower doesn’t repay, nor on the experience for defaulting clients in the short-term, or over time.

The knowledge gaps on default management include what providers actually do, as well as what influence (if any) legal and regulatory frameworks have on industry practices. For example, what guidelines or boundaries does a country’s legal framework offer on debt collection? Is there a prescribed manner in which MFIs can collect a past due debt, including how to go about the seizure, valuation, and the sale of collaterals? Is there a limit to the length of time which a borrower is legally responsible for a debt? What are MFI practices regarding collection post write-off? Are there any insolvency or personal bankruptcy provisions available to debtors, either by law, or through voluntary debt counseling centers? More importantly, if the legal framework does exist, is it enforced? Are MFIs aware and in compliance with requirements? And, lastly, there does not appear to have been any industry research on the consequences of default from the client perspective.

The Smart Campaign is very interested in these topics, as are many practitioners we have been in touch with. Thus, this month, to kick-start a larger investigative project, CFI invited endorsers of the Smart Campaign to take part in a survey that asked MFIs about practices related to default. We believe that collection, analysis, and dialogue around such information can help the industry improve how it handles clients in arrears, and perhaps how to salvage, versus sever, relations with clients who have defaulted.

<img title="More..." alt="" src="http://centerforfinancialinclusionblog.wordpress.com/wp-includes/js/tinymce/plugins/wordpress/img/trans.gif" />We posted approximately 20 questions on Survey Monkey and held our collective breath, anticipating a potentially low response rate, because the questions touched upon sensitive issues. We were pleasantly surprised, though, to receive more than 300 replies (198 from Anglophones, 59 from Francophones, and 74 from Spanish speakers). We are grateful to all who took the time to complete the survey, in particular those who went above and beyond the call of duty, like a practitioner in the DRC who wrote an essay on applicable microfinance laws and regulations.

<i>Early Findings</i>

The survey illustrated significant diversity in how MFIs deal with defaults, beginning with when collections procedures are triggered (for many, it coincides with the first missed payment), what form those collection efforts take (group pressure, taking individual or group savings, seizing collateral or guarantors’ assets, offering debt rescheduling/restructuring, or using the courts to collect overdue debts), and whether debt collection is outsourced (yes, in 29 percent of the respondent institutions).

One somewhat surprising result was that 27 percent of respondents treat default as a strict liability offense, meaning those borrowers who have defaulted due to illness or natural disaster are treated the same as those with perhaps less sympathetic motives - for example, losing money at cards or fraud. Spanish-speaking respondents were more likely than their Francophone and Anglophone peers to distinguish based on reason for default. For the majority of MFIs that do treat unintentional defaulters differently than those deemed to have intentionally failed to repay, steps for unintentional defaulters include giving more time, restructuring loans, granting bridge loans, and one MFI mentioned it may consider debt forgiveness.

It appears that the majority of the respondents offer restructuring options to clients who have defaulted.² However, a deeper analysis is required to understand at what point this option is offered (for example, after savings, collateral, or guarantors’ assets are seized, or before?), whether rescheduling is discretionary, and if a standard operating procedure exists, is it incorporated into staff training manuals and is it explained to clients.

The vast majority of MFI respondents continue to collect on debts after they have been written off as defaults, with some 85 percent indicating that they keep debt files open post write-off. About 40 percent keep client files for more than seven years. About a third of respondents maintain files on defaulting clients for one to three years. Thus, we are interested to see what ongoing actions if any MFIs take to collect debts over the years, and whether a country’s legal framework provides any guidance on how long debts are valid. For example, are there contractual time bars or prescriptions on the collection of debts beyond a number of years? Is there an existing credit bureau with related legislation?

Another issue we’d like to better understand is whether there are commonalities among MFIs in how they approach collateralization of loans. Almost 75 percent of respondent MFIs are taking collateral, and, nearly 92 percent of those polled responded that they have specific policies on what is acceptable as collateral. In some states, legislation dictates what is possible. Again, we’d like to know how the type of collateral, be it obligatory savings or physical assets, plays a role in a default. More importantly, is there a fair balance between protecting the MFI’s risk, and the risk to a client to lose these items and relationships in a default?

And, finally what socio-economic impact does the default have on the debtor and her family over time -- particularly when collaterals are lost or guarantors must pay? Is it possible to re-integrate a defaultor into the financial services sector? Are MFIs likely to re-lend to someone who has defaulted and if so, under what terms? Or, is microfinance as it is practiced now a one strike and you’re out game?³<a title="" href="/Users/jriecke/Desktop/D%20is%20for%20Default%209.25.docx#_ftn1">
</a>

As you can imagine, the initial survey raised many more questions. We are excited to have the opportunity to explore this important issue, and fortunate that so many MFIs are interested to explore the unchartered waters of default and its implications for clients. Stay tuned for more on this subject from <a href="http://www.smartcampaign.org/" target="_blank">the Smart Campaign</a>.

<em>Jami Hubbard Solli began working on microfinance regulatory issues in 2005 when she joined the International Development Law Organization (IDLO). Jami established IDLO’s department on microfinance regulation and consumer protection. In 2011, Jami joined <a href="http://www.consumersinternational.org/" target="_blank">Consumers International, UK</a> as a senior policy advisor on financial services consumer protection and access to justice issues. She is a member of <a href="http://www.smartcampaign.org/about-the-campaign/campaign-steering-committee" target="_blank">the Smart Campaign’s Steering Committee</a>, the International Bar Association, and the founder of the Global Alliance for Legal Aid (GALA) which supports access to justice for the poor in developing countries. </em>

<em>Image credit: <a href="http://www.dsnews.com/articles/with-10m-borrowers-at-risk-of-default-cfpbs-primary-focus-is-mortgages-2012-02-13" target="_blank">DSNews</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/08/22/help-the-smart-campaign-understand-how-mfis-manage-client-default/" target="_blank">Help the Smart Campaign Understand How MFIs Manage Defaulting Clients</a>

<a href="http://cfi-blog.org/2013/08/05/when-access-to-finance-means-the-difference-between-life-and-death/" target="_blank">When Access to Finance Means the Difference Between Life and Death</a>

<a href="http://cfi-blog.org/2013/05/17/gabriel-davel-proposes-tests-for-credit-bubbles/" target="_blank">Gabriel Davel Proposes Tests for Credit Bubbles</a>
<div>

<hr align="left" size="1" width="33%" />

<div>

[1] Jessica Schicks, <i>Over-Indebtedness of Microborrowers in Ghana: An Empirical Study from a Consumer Protection Perspective</i>, Centre for EU Research in Microfinance, Nov. 2011. <i>Available online at <a href="http://www.centerforfinancialinclusion.org/">www.centerforfinancialinclusion.org</a> publi</i><i>cations.</i>

[2] Almost 78 percent of the respondents offer restructuring, however, the question regarding <i>how often restructuring had actually been done in the last year</i> elicited a wide variety of responses from ‘one time’ to ’80 percent.’

[3] The author recognizes she needs to learn cricket terminology which may be more appropriate in an article on microfinance than using baseball terminology. In baseball, after three failed attempts at bat called ‘strikes,’ the player at bat has failed.

</div>
</div>

"'D' Is for Default" Now Available in French and Spanish

<em>&gt; Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign</em>

<a href="http://youth-initiative.org/gallery/gallery-microfinance-fishing/" target="_blank"><img class="alignright  wp-image-12109" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/08/gallery-microfinance-fishing.jpg" width="350" /></a>

Defaulting on a loan can have very serious consequences for both financial providers and low-income families, but to-date the microfinance industry has not gathered systematic information on how financial institutions serving the poor treat defaulting clients.

While many assume that financial institutions treat defaulting clients in similar ways, anecdotally there appear to be big differences across countries and between providers. Many questions exist around what policies and practices kick into motion after a client defaults and what could drive differences in practice across or even within countries (i.e. regulation vs. culture vs. educational levels of loan officers vs. how an MFI prices for risk etc).

To begin to address this knowledge gap the Smart Campaign is launching an exploratory project to map out default management practices among providers in several key markets in order to analyze trends and determinants, and to extract good practices. But before jumping into the key markets, as an initial step the Campaign has created a <a href="http://www.surveymonkey.com/s/F8QDTNH" target="_blank">basic survey</a> for its endorsers, partners, and other interested parties to take so that we might first learn more about default management.

Since its founding the Smart Campaign has always been a collaborative initiative working to advance thinking (and action!) around client protection through the involvement of stakeholders from across the microfinance industry. For example, the <a href="http://smartcampaign.org/certification/certification-standards" target="_blank">30 certification standards</a> were finalized after over two years of careful consultation and piloting with an <a href="http://smartcampaign.org/certification/certification-frequently-asked-questions-faq/certification-task-force-members" target="_blank">industry taskforce</a> that included raters, financial institutions, networks, and donors. In addition, many of the <a href="http://smartcampaign.org/tools-a-resources" target="_blank">tools showcased on the Smart Campaign’s website</a> are directly derived or based off of actual microfinance institutions’ tools and best practices. When it comes to Codes of Ethics, for instance, the Campaign website has over <a href="http://smartcampaign.org/tools-a-resources/44" target="_blank">30 example Codes</a> from Campaign endorsers, spanning parties as diverse as Kashf Foundation in Pakistan, ACME in Haiti, and the Tanzanian Association of Microfinance Institutions.

The Campaign firmly believes that industry momentum and improvement around the sometimes challenging issues inherent in client protection will only come through consistent and thorough stakeholder engagement. <a href="http://www.surveymonkey.com/s/F8QDTNH" target="_blank">This survey</a> is in the same vein. Only through rigorous feedback and input from providers can the Campaign work towards understanding the state of practice around default management and make recommendations, however preliminary, on the best way forward. If you are a financial service provider lending to low-income clients, please fill this survey out and help the Campaign in its endeavor to broaden industry knowledge around this very important topic. Also if you have opinions or ideas for the market-level "deep-dives" that will happen later in the project, please share your thoughts by <a href="mailto:comments@smartcampaign.org" target="_blank">emailing us here</a>.

And to sweeten the deal, 10 respondents to this survey will be drawn at random and will receive a free "Smart Campaign Kit" with client protection materials including post-cards, Smart-Campaign-emblazoned thumb drives, and more. To access the survey, <a href="http://www.surveymonkey.com/s/F8QDTNH" target="_blank">click here</a>.

<em>Image credit: <a href="http://youth-initiative.org/gallery/gallery-microfinance-fishing/" target="_blank">YIPC</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2013/08/05/when-access-to-finance-means-the-difference-between-life-and-death/" target="_blank">When Access to Finance Means the Difference Between Life and Death</a>

<a href="http://cfi-blog.org/2013/05/16/a-challenge-to-flat-earth-thinking-in-microfinance/" target="_blank">A Challenge to Flat-Earth Thinking in Microfinance</a>

<a href="http://cfi-blog.org/2012/09/28/can-providers-take-more-responsibility-for-client-protection-the-smart-campaign-says-yes/" target="_blank">Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes.</a>

Help the Smart Campaign Understand How MFIs Manage Defaulting Clients

<em>&gt; Posted by Sergio Guzmán, Lead Specialist, The Smart Campaign, CFI</em>

<i><a href="http://www.pbs.org/newshour/extra/speakout/us/july-dec12/Saloni_09-18.html"><img class="alignright  wp-image-8094" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/10/microfinancegroup1.jpg" width="270" /></a><a href="http://www.smartcampaign.org/">The Smart Campaign</a></i><i> will soon launch its Certification Program on client protection for microfinance institutions (MFIs). In this second post in a series, Sergio Guzmán uses his experience from the field to shed light on standards that are often overlooked by MFI managers</i> <i>but that are a crucial part of client protection. </i>

When I talk with microfinance practitioners about interest rates they often say, “Clients don’t care about the interest rate; they care about the installment amount and how quickly you can disburse the loan.” Also, I’ve often heard from providers the following gem: “The most expensive loan is the one you never take out.”

In my experience, it’s absolutely true that clients are very concerned with how expensive loans are going to be relative to their monthly income, and it’s also true that when seeking a loan, clients want the money now if not sooner. But providers should not let those client traits become an excuse for non-transparency in price structure and calculations.

Let me explain:

In many countries with Annual Percentage Rate (APR) regulations , I have seen providers present clients with a monthly nominal rate. “So that clients understand better,” they say. This of course is sometimes a marketing ploy, since 3 percent a month might seem cheaper than 36 percent a year. However, if all costs have been incorporated into that 3 percent figure, it does not violate acceptable practice.

What does violate standards is when providers confuse clients about total costs by charging fees and then stating a monthly charge that omits them; that is to say, instead of the above 3 percent monthly interest rate, a provider advertises a 2.5 percent monthly rate, not mentioning additional fees (credit bureau check, insurance, disbursement fee, administrative fee, paper fee, among others) that would have to be counted in calculating a fully transparent APR. The argument that these fees are not included in the advertised interest rate because they are not strictly interest charges is a half-truth at best, and designed to obscure the facts from clients. Chuck Waterfield illustrates this superbly in his webinar: <a href="http://www.mftransparency.org/resources/understanding-the-price-curve-in-microfinance/">Understanding the Price Curve in Microfinance</a>.

The Smart Campaign standards require interest rates to be presented in a manner that <b>avoids confusing clients about the total costs of the loan</b>. The presentation of pricing should also include a format that would in theory allow a client to make a direct comparison to competitors. APR, when calculated to incorporate all fees effectively capture additional costs charged by providers and aggregate them to an understandable annual fee that can be compared across providers.

Providers should move away from using fees as a way to reduce the stated interest rate. Let’s say it straight: tactics like this aim to trick the client. After all, if providers try so hard to make their prices look cheaper, doesn’t that suggest  that clients ARE price sensitive and they DO care about interest rates?

<em>Image Credit: <a href="http://www.pbs.org/newshour/extra/speakout/us/july-dec12/Saloni_09-18.html">PBS</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2012/10/11/straight-talk-on-client-protection-whats-internal-audit-got-to-do-with-it/">Straight Talk on Client Protection - What's Internal Audit Got to Do with It? </a>

<a href="http://cfi-blog.org/2012/09/28/can-providers-take-more-responsibility-for-client-protection-the-smart-campaign-says-yes/">Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes</a>

<a href="http://cfi-blog.org/2012/09/19/new-smart-note-responding-to-complaints-at-tameer-bank-pakistan/">New Smart Note: Responding to Complaints at Tameer Bank, Pakistan</a>

Straight Talk on Client Protection – Hiding Fees When Quoting Interest Rates