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

<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.

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Microfinance Coalition: Call to Action for Investors

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

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

<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

Today there are close to 700 million mobile money accounts registered worldwide — a number that, if it were a population, would rank as the world’s third-largest country. East Africa continues to lead in digital financial innovations as well as account usage, with two-thirds of the combined adult populations of Kenya, Rwanda, Tanzania, and Uganda actively using mobile money. With the proliferation of mobile financial services, particularly among underserved populations, it is vital that users be treated fairly and with dignity. In the momentum to define responsible digital finance and recognize providers of high-quality financial services, the industry must not forget the consumer.
<h1>Client Voices: Why We Listened</h1>
<a href="/about/what-we-do/the-smart-campaign/">The Smart Campaign</a>, a global initiative to create an environment in which financial services are delivered safely and responsibly to low-income clients, has long recognized that client perspectives are often underrepresented in consumer protection discussions. With the Client Voices Project, the Campaign questions whether the industry’s assumptions about what constitutes problematic treatment rightly reflect what clients themselves worry about.

The dual objectives of the project are to solicit input from low-income clients about what they consider good and bad treatment in their interactions with financial service providers and to assess the prevalence of consumer protection problems among these clients, using quantitative surveys. The project is designed to act as a catalyst for financial service providers, regulators, industry associations, consumer advocacy groups, and others to improve client protection in ways that are grounded in client feedback.
<h1>Major Findings</h1>
Based on a survey of over 1,200 people in three districts in Rwanda, this report delves into the experiences of individuals who use digital financial services (DFS), the main client protection issues they are concerned about, and the impact and prevalence of negative experiences. We find that mobile money enjoys a high degree of satisfaction and trust from clients in Rwanda, even though 40 percent of clients report being targeted by fraudulent schemes, which have become increasingly sophisticated.
<blockquote>Customers report wising up to scams and fraud, but with a continuous influx of new mobile money users and fraudsters who innovate quickly, the threat is real and constant. Fraud represents the greatest potential to damage customer trust and engagement with mobile money in Rwanda.</blockquote>
However, there are many ways that DFS operations and practices can be improved to better protect clients and strengthen trust. Client recourse mechanisms, for example, represent an important area for improvement: many clients shared that they feel helpless and unsure about what to do after realizing they have been duped. Additionally, for business models that rely more on the mobile interface than on human interaction, clients increasingly rely on agents for information and guidance. This presents an opportunity to provide better service, as well as a risk for poor client treatment.

We hope that providers, industry associations, support organizations, regulators, consumer protection advocates, and clients can benefit from these findings to create a stronger, more inclusive client protection ecosystem. We offer specific recommendations for many of these stakeholders.

Client Voices: Rwandans Speak on Digital Financial Services

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

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

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

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.

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Webinar: Getting Credit and Policies Right

Default

Interest Rates

P2P Lending

Underwriting

Richard  Greenberg

Microfinance Coalition

Alexandra Rizzi

Elisabeth Rhyne

Alex Kessler

Isabelle Barrès

Eric Noggle

Larry Reed

Dan Kleinbaum

Rajitha  Swaminathan

John Owens

Tess Johnson

Robin Brazier

Danielle Piskadlo

Ana Ruth Medina Arias

Lizzy Bolze

India

Latin America and The Caribbean

South Asia

Kenya

Sub-Saharan Africa

Rwanda

United States

Zambia

Peru

North America

Challenges and Crises

Credit

Credit Provision

Enabling Environment

MSME/SME Finance

Underserved Groups

Women

Microfinance

Consumer Protection

Customer Centricity

Delivery Channels

Digital Financial Services

Financial Service Providers

Nano Loans

Over-indebtedness

Policy, Regulation and Government Initiatives

Product Pricing

Responsible Digital Finance

Digital Credit

Fintechs

Transparency

Agent Banking

Appropriate Product Design and Delivery

Client Treatment

Complaint Resolution

Mobile Banking

Payments

Privacy

Telcos

Impact Investing

Financial Capability

Financial Health

Smart Certification

Governance

Microfinance Institutions

Risk Management

Financial Technology

Blog Post

Webinar

Report

Event

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.

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.

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Responsible Digital Credit

It’s the most wonderful time of the year! We are thrilled to announce that we are <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">now accepting proposals</a> for the 2018 cohort of CFI Fellows.

Building upon the impact of the <a href="http://bit.ly/CFI-Fellows">CFI Fellows Program</a> over the past three years, we’re looking for proposals from researchers and practitioners with demonstrated experience executing high-quality research projects from start to finish. Successful proposals will articulate a thoughtful and feasible response to one of the questions in our research agenda.

This year’s research agenda reflects an exhaustive consultative process, and thanks to <a href="https://cfi-blog.org/2018/04/12/help-us-shape-our-fellows-program-research-agenda/">your help</a>, we’ll be selecting proposals that best address one of the following topics:
<ol>
 	<li><strong>How do financial institutions use mass APIs, open APIs, custom APIs and bespoke partnerships to partner effectively with fintechs to reach the underserved? </strong></li>
</ol>
Financial institutions of all sizes are finding that <a href="http://bit.ly/PartneringFintechs">partnerships with fin</a><a href="http://bit.ly/PartneringFintechs">techs</a> can help them reach underserved customer segments, and increasingly, these partnerships use APIs to create the necessary connections that enable data sharing between fintechs and financial institutions. However, it may be especially challenging for smaller financial institutions to benefit from such connections. How do recent efforts to create more accessible APIs function? Which models are working well? Research should include a comparison between mass APIs, API marketplaces, open APIs, bespoke APIs, and custom partnerships, recognizing that there are opportunities and challenges associated with each.
<ol start="2">
 	<li><strong>How do electronic invoicing (e-invoicing) and other electronic filing mandates enable financial services providers to make better decisions about MSME lending? Have more MSMEs become financially included as a result of these efforts? </strong></li>
</ol>
We’ve seen that e-invoicing is being mandated by governments across Latin America and in selected other countries as a tax compliance initiative (<a href="https://assets.kpmg.com/content/dam/kpmg/us/pdf/2017/10/mandate-for-e-invoicing-adoption-kpmg.pdf">KPMG, 2017</a>) and we expect that this practice may have spillover effects for financial inclusion. Through the collection and analysis of rich transaction data from micro, small and medium enterprises (MSMEs) that electronic invoicing provides, lenders are finding new ways of assessing this customer segment. This research will identify which providers are leveraging this data to improve their lending operations for MSMEs and through what means.
<ol start="3">
 	<li><strong>How can employers in developing countries support the financial health of their employees?</strong></li>
</ol>
Financial health is an increasingly important concept in the financial inclusion ecosystem, but we find that one often overlooked set of actors is employers. Employers have an important stake in the financial health of their employees, as financial challenges can create stress, absenteeism and other problems. This fellowship will explore the research on financial stress and employment to better articulate why employers in emerging markets should care about financial health, the interest of employers in active involvement, examples of good practice and/or tools or resources that employers need to get involved.
<ol start="4">
 	<li><strong>What is the landscape of financial products and services designed to</strong><strong> meet previously underserved consumers’ (physical) health needs? </strong></li>
</ol>
This fellowship will review the current status of health finance initiatives in the developing world or in a region or set of countries. It will identify and analyze the key challenges that existing programs encounter, with reference to the most successful models.

If you are passionate about financial inclusion, can craft a high-quality research plan that demonstrates a thoughtful approach, and have relevant experience in producing impactful analytic work, we want you to submit a proposal or share this opportunity with a colleague.

For more information (or inspiration), visit <a href="http://bit.ly/CFI-Fellows">our website</a>, view the full <a href="http://www.centerforfinancialinclusion.org/storage/documents/CFI_Fellows_2018_RFP_2018-05-07.pdf">request for proposals</a>, or email <a href="mailto:tjohnson@accion.org?subject=Question%20About%20CFI%20Fellows%20Program%202018">Tess Johnson</a>. We can’t wait to see how you tackle these questions!

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CFI Fellows Program Now Accepting Proposals

<span style="float: none;background-color: transparent;color: #333333;cursor: text;font-family: Georgia,'Times New Roman','Bitstream Charter',Times,serif;font-size: 16px;font-style: normal;font-variant: normal;font-weight: 400;letter-spacing: normal;text-align: left;text-decoration: none;text-indent: 0px">Despite the rise in mobile money in Africa, and globally, the gap between supply and demand for credit in the region remains. Surprisingly, in this milieu, start-ups are at risk of accelerating the pace of over-indebtedness in Africa. The number of start-ups reaching last mile clients is rising. The driver of this is fintechs taking advantage of a business opportunity, and the prospect that if you offer clients much-needed credit at a lower cost than the alternative, they will be better off.</span>

But is this necessarily true? Are these start-ups offering solutions to the credit needs that many small and medium African businesses have, and are clients better off with these solutions? Or is the fintech digital credit hype attracting lenders that offer credit in the wrong places – and for the wrong reasons? What is needed to ensure that digital credit is provided responsibly, for the benefit of clients?
<h4><strong>Start-ups are at risk of accelerating over-indebtedness by supplying credit to clients without conducting appropriate repayment capacity analysis.</strong></h4>
Some estimate that digital technologies have cut the cost of providing financial services by 80-90 percent (<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">McKinsey Global Institute, 2016, PDF</a>). Africa is taking the lead in the rise of mobile technology, and the opportunities are promising. Start-ups in this space are making big strides. Those involved in digital credit either deliver digital credit directly or enable its delivery through downstream product servicing. The number of fintechs – startups offering these services – in Africa is growing daily (<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">Mesropyan, 2016</a>).

Technology well used offers opportunities not previously available. However, two key issues need to be recognized and addressed in order to generate long-term benefits for both clients and providers.
<ol>
 	<li>Provider and client interests must be aligned. If providers profit while clients are experiencing stress in repaying, defaults will catch up with the client or the institution, and the client will no longer be able to borrow. Aligning interests requires providers to think of client benefits as well as their own, from the start.</li>
 	<li>A well-designed loan should match the ability to repay. Well-designed loans are a blessing, for example, helping a small business; yet loans that do not consider clients’ capacity to repay sets them up for failure. Even if they repay in the short term – which is often why default rates stay low – it can be at the cost of extreme hardship, making it a poor predictor of over-indebtedness. It may take some time before the debt stress of clients affects providers.</li>
</ol>
<h3><strong>"Instant": an Opportunity and a Risk for Consumers</strong></h3>
A key attribute digital lenders advertise is speed of access. Where traditional loans could take weeks for approval, with many requirements, this is a plus from the perspective of clients. But the automation and speed raises concerns: are decisions made too quickly, and are risks adequately measured and mitigated, especially from the clients' perspective?

Other aspects of digital credit lead to <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">new risks</a> compared with analog lending: start-to-finish digitization; the move from high to low touch processes; small credit amounts that grow; short-term loans; reliance on alternative data analytics; and decentralized support workforces.
<h3><strong>What Could Go Wrong?</strong></h3>
With analog credit, prevention of over-indebtedness centered on adequate repayment capacity, and on growth not taking place at the expense of quality.

In the digital context, the following major categories of risk have been identified (Center for Financial Inclusion, 2017/2018. See References):
<ul>
 	<li>Limited – if any – debt capacity analysis</li>
 	<li>Products that do not match client needs</li>
 	<li>Lack of credit reporting</li>
 	<li>Automatic renewals</li>
 	<li>Aggressive sales and marketing</li>
 	<li>Disproportionate consequences of late payments that lead to a cycle of debt.</li>
</ul>
<h4><strong>Algorithms are institution centric, not client centric. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting.</strong></h4>
Alternative credit scoring methods – often using elaborate algorithms that predict the probability of repayment – help to include people who have thin credit files and who would otherwise have been excluded. However, these models are a poor replacement for the repayment capacity analysis previously conducted by lenders serving vulnerable excluded populations. While the algorithm may predict whether or not an institution will be repaid, it does not consider clients' situations and needs, and therefore, the sacrifices that clients might have to make in order to repay. Over-indebtedness is not only reflected in default, it is first reflected by the extent of the sacrifices that the client endures to avoid defaulting. Algorithms are institution centric, not client centric. They are meant to learn over time, becoming refined and better predictors; yet they do so at the expense of early clients who enabled the algorithm to become better fine-tuned, as they have a higher probability of defaulting and suffer dire consequences (<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Ngigi, 2016</a>).

The promise of well-tuned algorithms saving costs and managing institutional risk is unfortunately skewing attention away from client risks. Over-indebtedness needs to be reframed from a client perspective: can clients afford the loan? Even if they can repay, what sacrifices are they making? Are they at risk of not being a client ever again in the future (which would hurt both the client and the provider)?
<h3><strong>Mitigating Over-Indebtedness in a Digital World</strong></h3>
Over-indebtedness is a multi-stakeholder issue, and is linked to the client protection issues summarized in the <a href="https://www.smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Prevention of over-indebtedness is a particularly tricky one, in that it requires the concerted effort of a wide range of stakeholders.

Providers have a responsibility to ensure that their practices do not lead to an oversupply of credit to clients who are unable to meet their payment obligations, and digital lenders will need to adopt a more client-centric approach to understand the risks of over-indebtedness from a client perspective. Algorithms need to evolve to take this into account.

Digital lenders need to understand the risks of over-indebtedness from a client perspective, and algorithms need to evolve to take this into account. Regulation also must guide good practice for fintech digital lenders<strong>.</strong>

Because only one irresponsible lender is needed in terms of over-indebtedness to negatively affect clients, it is necessary that financial consumer protection regulation evolves to guide the practices of otherwise unscrupulous digital lenders.

Investors can, and should, use their leverage to encourage good practices by digital lenders, as they have for analog lenders. They can reward digital lenders who design and deliver appropriate products, are transparent about terms and conditions, explain to clients the risks of over-indebtedness, adopt fair and responsible practices during repayments, and help clients who cannot, but want to, repay.

Importantly, digital providers can leverage the same technology used to deliver products to educate and empower clients. Clients have rights and responsibilities. Informed consumers are better able to protect themselves and avoid becoming victims of predatory lenders.
<h3><strong>Over-Indebtedness Is Multidimensional and Dynamic</strong></h3>
In the interest of long-term mutual benefits for both providers and clients, providers need to move away from a uni-dimensional definition of over-indebtedness that overly emphasizes repayment as the proxy for whether or not a client is indebted, towards <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/201-over-indebtedness-of-microborrowers-in-ghana-an-empirical-study-from-a-customer-protection-perspective">client-focused definitions of over-indebtedness</a>.

Digital credit providers need to complement credit bureau data with disbursement and repayment data on digital loans so that a fuller financial picture can emerge for digital borrowers.

Over-indebtedness is not a steady state. As the lives of vulnerable clients evolve, so do their needs and challenges. A client who may have received a loan from a responsible lender in the past may suddenly not be in a position to repay. We need to develop ways to monitor whether clients are showing signs of financial stress. Responsible institutions should be able to identify this, and work with clients until it is resolved.

The role of responsible providers goes beyond providing loans to ensuring that clients are supported, if needed. <a href="https://www.microfinanceopportunities.org/">Microfinance Opportunities</a>, in collaboration with <a href="http://socialperformance.net/">Social Performance Solutions</a>, has been developing a stress assessment tool that enables providers to monitor whether borrowers are incurring stress after having received a loan. Such tools are extremely important to have a full picture of over-indebtedness, and a broader suite of tools needs to be available to responsible providers.
<h3><strong>Fintech Protects Against Over-Indebtedness</strong></h3>
Fintech digital credit providers need to unite and agree to collective measures to tackle the problem of over-indebtedness. This will entail defining responsible digital underwriting, leveraging technology, while learning from the past, expanding credit bureau reporting, and agreeing on common practices for the benefit of clients. Some fintechs are already taking the lead, and through the Smart Campaign’s <a href="http://www.smartcampaign.org/about/fintech-protects-community-of-practice">Fintech Protects Community of Practice</a>, they are working together to define and implement responsible practice. The body of evidence around risks is growing. Now is the time to define the guidelines of good practice for fintech digital lenders and identify solutions that work for clients.

<strong>References</strong>

McKinsey Global Institute, “<a href="http://appgfintech.org.uk/wp-content/uploads/2016/11/MG-Digital-Finance-For-All-Full-report-September-2016.pdf">Digital Finance for All: Powering Inclusive Growth in Emerging Economies</a>,” September 2016.

Elena Mesropyan, “<a href="http://fintechranking.com/2016/12/15/63-companies-shaping-africas-fintech-ecosystem/">63 Companies Shaping Africa’s FinTech Ecosystem</a>,” Fintech Ranking, December 2016.

Alexandra Rizzi, Isabelle Barrès, Elisabeth Rhyne, “<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/browse-publications/916-smart-brief-tiny-loans-big-questions">Tiny Loans, Big Questions</a>,” Center for Financial Inclusion at Accion.

John Owens, “<a href="http://www.centerforfinancialinclusion.org/programs-a-projects/cfi-fellows-program/783">Responsible Digital Credit</a>,” Center for Financial Inclusion at Accion. Forthcoming, 2018.

George Ngigi, “<a href="https://www.businessdailyafrica.com/economy/Pain-of-Kenyans-blacklisted-for-amounts-as-small-as-Sh100/3946234-3374120-r0r2bfz/index.html">Pain of Kenyans Blacklisted for Amounts as Small Sh100</a>,” <em>Business Daily Africa</em>, September 2016.

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Start-Ups and Digital Innovation: Are Fintechs in Africa Over-Indebting their Customers?

<em>This is the second in <a href="https://cfi-blog.org/tag/smart-100-blog-series/">a series of blog posts</a> exploring the impact of Smart Certification on the financial inclusion industry.</em>

Smart Certification recently reached the milestone of 100 certified financial institutions, which collectively serve 42 million clients around the world. Among our lessons learned along the way: consumer protection starts with listening.

When the demonetization crisis struck India in 2016, many clients were left with currency that was no longer valid and had no means to repay their loans. They worried that their financial institutions would treat them harshly. Sulthana, who owns a small shop in India, had a different experience with <a href="http://smartcampaign.org/certification/certified-organizations/certified-profiles-ujjivan">Ujjivan</a>, a Smart-Certified small finance bank: “When demonetization happened…we told Ujjivan that we needed a few more days to repay it. They were very considerate and understanding, spoke politely and gave us a few more days [to repay the loan].”

While demonetization was a unique shock for clients and lenders in India, the empathy described by Sulthana reflects the importance that Ujjivan places on respectful communication and customer service. As it has done for many of the certified providers, the certification process helped Ujjivan formalize its client-centric approach. Ujjivan has established a separate service quality department with dedicated customer care representatives at all branches, with the responsibility of proactively seeking customer feedback and resolving complaints.

By promoting <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">principles</a> such as fair and respectful treatment of clients, transparency, and mechanisms for complaint resolution at financial institutions around the world, the Smart Certification program works to ensure that clients are heard and kept at the center of the financial inclusion industry. The Smart Campaign conducts research to determine what people really care about and identify risks that disproportionately affect low-income clients. Through projects like the <a href="http://smartcampaign.org/tools-a-resources/1089">Client Voice</a> and <a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Clients Who Default</a>, the Campaign studies what risks and challenges clients face as they gain access to fast-changing financial services. This knowledge informs the design of the Smart Certification standards and industry best practices for responsible financial inclusion.

In its Client Voice research to-date, the Smart Campaign asked clients in four countries (<a href="http://smartcampaign.org/tools-a-resources/1087">Peru</a>, <a href="http://smartcampaign.org/tools-a-resources/1076">Benin</a>, <a href="http://smartcampaign.org/tools-a-resources/1088">Georgia</a> and <a href="http://smartcampaign.org/tools-a-resources/1077">Pakistan</a>) to describe their experiences with financial providers. The results showed that clients shared similar complaints across geographies:
<ul>
 	<li>Clients had an inadequate understanding of the basic attributes of their products, such as loan terms and conditions.</li>
 	<li>Clients said they had unpleasant experiences with financial institution staff members, who often treated them poorly and with disrespect. One client from Pakistan said, “They don’t think that we can genuinely have problems… They don’t try to understand.”</li>
 	<li>Mechanisms for filing a complaint at the studied institutions were lacking.</li>
 	<li>Clients were making unreasonably large sacrifices to repay their loans. For instance, borrowers in Ghana reportedly skipped meals, sold their possessions, or took their children out of school when they were about to default. Clients who actually default are often pushed into taking more desperate measures, like some in Uganda who fled town or changed their names.</li>
</ul>
These findings demonstrate that when financial service providers do not prioritize client protection their customers can suffer, which jeopardizes the sustainability of their business. Smart Certification aims to mitigate client harms by listening to clients and supporting institutions to create good communication channels with their clients.

Hearing directly from clients provides information that enables policy makers and product designers to improve their offerings. The findings of the Client Voice research in Peru had a major impact on the Superintendency of Banking, Insurance and Private Pension Funds of Peru (SBS), the country’s primary financial regulator SBS, leading them to <a href="https://cfi-blog.org/2017/11/13/how-smart-campaign-research-is-influencing-client-protection-policy-in-peru/">adapt the market’s regulatory framework</a> to better meet the needs of clients:
<ul>
 	<li>Clients told us that they didn’t understand how credit bureaus or credit reporting worked; SBS worked with the credit bureau system to develop a simplified credit report that motivated users to look up their credit information.</li>
 	<li>We found that 40 percent of respondents in Peru didn’t understand their loan terms; SBS started testing ways to clarify the information on loan terms and conditions, and required insurance companies to explain the scope and characteristics of product coverage to potential clients.</li>
 	<li>A quarter of clients in Peru reported that microfinance providers discriminated against those of lower socioeconomic status. SBS implemented new regulations on market conduct, incorporating detailed responsibilities and obligations for financial institutions to improve their business practices and advance equal treatment of clients.</li>
</ul>
Smart Certification raises the client voice within financial institutions by promoting timely and responsive mechanisms for client complaints and problem resolution. In this way, clients’ concerns are better heard and institutions get the feedback they need to improve their products and services. Smart Certified institutions affirmed the benefits of this feedback loop <a href="http://smartcampaign.org/tools-a-resources/1149">in a recent survey</a> with 86 percent attesting that achieving certification helped them better understand client risks and allowed them to better serve their clients. This is sorely needed when access to financial services worldwide is growing, but <a href="https://qz.com/1260139/india-has-the-highest-number-of-inactive-bank-accounts-in-the-world/">usage is stagnant</a>.

Empathy matters. In the Smart Campaign’s direct conversations with clients, they tell us that they value transparent and respectful service above all else. Empathy and compassion for a borrower who is struggling to make a payment, like Ujjivan client Sulthana, go a long way in increasing client retention and loyalty. So as we celebrate what 100 Smart Certifications means for the industry, let’s not forget what it means to the clients the industry serves.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/05/16/100-smart-certifications-a-milestone-for-responsible-financial-inclusion/">100 Smart Certifications - A Milestone for Responsible Financial Inclusion</a>

<a href="https://cfi-blog.org/2016/09/28/fintechprotects-prioritizing-responsible-agent-management-at-oxigen/">#FintechProtects: Prioritizing Responsible Agent Management at Oxigen</a>

<a href="https://cfi-blog.org/2015/03/26/smart-certification-kashf-foundation-takes-the-lead-in-pakistan/">Smart Certification: Kashf Foundation Takes the Lead in Pakistan</a>

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Where Does Consumer Protection Begin? Start with Listening

<em>The following is part of a <a href="https://cfi-blog.org/tag/abf-blog-series/">blog series</a> spotlighting views from participants in the </em><a href="http://www.centerforfinancialinclusion.org/programs-a-projects/abf"><em>Africa Board Fellowship</em></a><em> (ABF).</em>

Two experiences with interest rate caps – in Kenya and Zambia – demonstrate the power of political forces to shape financial inclusion policies and may hold lessons for MSME lenders in other countries.

In a recent unpublished study, the <a href="https://responsiblefinancialinclusion.org/">Partnership for Responsible Financial Inclusion</a> (formerly the Microfinance CEO Working Group) examined commonalities in the origins of interest rate caps in these two countries. In both cases, signs were clear that the general public was upset about the current state of loans and interest rates. Approaching elections increased the will among political leaders to make regulatory changes that would appeal to the public.

In Zambia, a populist president, Michael Sata, was the surprise victor in 2011’s elections. In his first days in office, Sata announced his priority of cutting the cost of credit for Zambians, a move in opposition to the country’s dominant banks. His remarks sent the domestic currency into a spiral. Inflation soared, and interest rates rose. These events helped create a sense of urgency for both consumers and legislators, propelling the caps through the legislative process. In 2012, Sata led the government in successfully passing his proposed law, which capped commercial banks’ loan interest rates at 18.25 percent.

In 2013, the interest rate caps were also imposed on microfinance lending. The maximum rate was set at 42 percent for a select group of microfinance institutions and 30 percent for other non-bank financial institutions. Following Sata’s death in 2014 and the election of his replacement, the interest rate caps were removed in 2015. The government’s approach in this area now focuses on pricing transparency.

Zambia’s interest rate caps were not particularly effective. To compensate for lower interest income, the banks began to charge more fees, keeping effective prices more or less the same for consumers. The caps did not create an effective solution, and ultimately banks, microfinance institutions and regulators agreed on ending the caps. Instead, strong regulations on pricing transparency were put into law.

A similar story has been unfolding in Kenya, which introduced an interest rate cap of 4 percent above the Central Bank of Kenya Policy Rate for regulated financial institutions in September 2016. The measure was viewed as a populist move. However, in the short time since the law’s enactment, signs <a href="http://africanbusinessmagazine.com/african-banker/kenya-interest-rate-cap-coming-off/">suggest</a> it is doing more harm than good to the overall economy, including the exclusion of “higher risk” borrowers like MSMEs, decreased levels of lending, and lower profits and stock values among banks. It seems the government is now looking to remove the caps given the impacts on the economy and financial services sector.

However, there have been some positive outcomes for the Kenyan financial inclusion industry – such as more innovations, especially in digital lending, because the banks are restricted in lending, creating an opening for non-bank lenders. Some Kenyan banks have also started to buy MFIs in order to lend through them in smaller amounts. The caps have caused banks to diversify their product offerings more – to insurance and leasing.

We interviewed two alumni of the CFI’s Africa Board Fellowship (ABF) to share their experiences about the politics and practice of interest rate caps.

<img class="wp-image-25583 alignright" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa.png" alt="" width="387" height="500" /><em>Jacqueline Musiitwa is the Executive Director of FSD Uganda and a board member of Microcred Zimbabwe and the Central Bank of the Republic of Zambia. </em>

<strong>ABF:</strong> Can you share your perspective on the decision to implement, and subsequently remove, the interest rate caps in Zambia?

<strong>Jacqueline Musiitwa</strong>: "The Zambian experience seems to be similar to Kenya’s case – a populist approach with the hopes of encouraging lending to the masses. Then, quickly learning that the opposite actually happens: interest rate caps cause banks to stop lending, and the people don’t benefit. The first thing the current governor of the Central Bank did in office was reverse the caps. Increasing lending was a top priority. The Central Bank also had conversations with banks at that time about keeping interest rates low. The Central Bank learned that rate cap regulation hasn’t worked well historically, so they wanted to figure out how to work together with banks to find a solution.

Stepping back, the question is: how do banks charge interest in a way that makes sense for the population being served? Some people are unbanked for fear of charges. The Central Bank in Zambia is looking at how to get banks outside their comfort zone to serve new clients. How can they create a system of mutual trust?

Ultimately, you take a few steps forward and then a few steps back. Public trust in banks has everything to do with the safety of savings. In Zambia, the numbers were going well in terms of signing clients up at non-banking financial institutions and then in December 2016, a bank closed for three months during which time shareholders injected money into it. Clients reacted with: ‘You see, this is why we are going to put our money under the pillow’. The bank is now back but now there is still a fear of depositing in banks, so it is hard to get people to increase savings.

Regulators wrestle with how to communicate market stability when there is even just one weak link. You saw it with banks in Kenya. Dubai, Imperial, and Chase banks all went down in Kenya, and the reaction was the same. People either don’t trust banks or move to the biggest banks. Zambia is pushing through a law for a deposit protection scheme."

<em>The full interview with Musiitwa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/jacqueline_musiitwa_interview.pdf"><strong>here</strong></a>.</em>

<img class="alignleft wp-image-25584" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan-mbowa.png" alt="" width="317" height="476" /><em>ABF Alumni Ivan Mbowa, CEO of Umati Capital, offers a perspective on interest rate caps from his experience in Kenya.</em>

<strong>ABF:</strong> Kenya’s government introduced an interest rate cap for banks, but not for non-bank financial institutions like Umati. How has Umati been affected?

<strong>Ivan Mbowa</strong>: "At Umati we’re seeing a lot more interest in our services. About half of our clients are new to formal finance. They could never get money from a bank in the first place. The other half are coming to us for additional financing, because they don’t have the collateral to get more from banks.

The funny thing is that the clients don’t always understand the nuances between a non-bank financial institution and a bank, so when they see our rates, the first impression is, ‘You guys are just flouting the law—it’s supposed to be capped.’ We have to explain that the cap doesn’t apply to Umati. A good outcome has been that there seems to be a lot more awareness and questioning from clients on, 'What is the cost of your product?'

It’s also been easier to make the argument that even if you can access bank credit, it’s good to be multibanked, so that the next time there’s a freeze or a crunch, you’re not fully exposed. Savvy clients understand that working with Umati can be a hedging mechanism."

<em>The full interview with Mbowa can be read <a href="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/ivan_mbowa_interview.pdf"><strong>here</strong></a>.</em>

In one more example, the West Africa Economic and Monetary Union (WAEMU) implemented more stringent caps in 2015, reducing the cap from 27 percent to 24 percent for MFIs and from 18 percent to 15 percent for banks. In the time before the new cap was implemented, the trend in bank interest rates had been downward, as a result of competition. According to reports from ABF Fellows on the ground, the lower caps did not have a very big impact on banks, especially considering all the fees they were generating. However, caps have inhibited lending to micro and small enterprises because, for the most part, banks were already limited in their lending to this customer segment. Private investors who are interested in serving micro and small enterprises have avoided the region, given that the caps lengthen the time to break even for a fledgling greenfield financial institution. Several studies indicated that many MFIs have been unable to achieve adequate scale and efficiency in their respective business environments to be profitable and sustainable.

Given the diverse outcomes interest rate caps can have, we’d love to hear more from our readers about their experiences with interest rate caps.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/02/01/are-banks-the-future-of-banking-africa-board-fellows-deliberate/">Are Banks the Future of Banking? Africa Board Fellows Deliberate</a>

<a href="https://cfi-blog.org/2017/10/20/the-board-should-not-be-the-last-to-know-why-mfis-need-independent-internal-auditors/">The Board Should Not Be the Last to Know: Why MFIs Need Independent Internal Auditors</a>

<a href="https://cfi-blog.org/2017/10/04/how-can-microfinance-institutions-in-the-middle-east-and-north-africa-manage-risk-and-meet-client-demand-governance-is-key/">How Can Microfinance Institutions in the Middle East and North Africa Manage Risk and Meet Client Demand? Governance Is Key!</a>

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The Politics (and Varied Experiences) of Interest Rate Caps

<em>&gt; Posted by <a href="http://ifmrlead.org/anisha/">Anisha Singh</a> and <a href="http://ifmrlead.org/suraj-nair/">Suraj Nair</a>, Senior Research Associate and Research Manager, IFMR LEAD</em>

Patel, 62, father of two, spends an hour learning how to use mobile money wallet A from his daughter. The interface, navigations and services offered are all quite new to him. The next day, he tries to pay for a taxi but finds the taxi provider only accepts mobile money wallet B. He’s quite confident he should be able to use wallet B as the knowledge of how to use A is still fresh in his mind. However, he struggles with navigating the new platform and is unable to locate certain payment options. He’s also apprehensive to try out different keys as he wants to be careful not to transfer money incorrectly. Giving up, Patel pays in cash and waits for his daughter to return home to teach him how to use mobile money wallet B.

In India, in both urban and rural settings, among men and women, this challenge is all too common, especially among older adults. <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">New research</a> from IFMR LEAD and J.P. Morgan finds that while digital literacy is a massive obstacle to financial inclusion, so is applying already gained skills to unfamiliar products; digital literacy does not necessarily transfer well from one platform to another.

<a href="http://businessworld.in/article/Digital-India-A-Stepping-Stone-Towards-Digital-Economy-Financial-Inclusion/20-02-2017-113183/">Ongoing efforts</a> toward increasing adoption are in vain without ensuring the usability of products and services. Usability centers on the product’s interface and how intuitive and convenient it is. Accordingly, supply-side efforts have focused on building interactive interfaces with the latest features to streamline and digitize everyday payment needs. On the other side of the coin, perhaps most important of all, is consumer digital and financial literacy. The Reserve Bank of India and the Indian Government have taken certain measures to enhance digital literacy, such as the National Digital Literacy Mission (NDLM), which provides digital literacy training to citizens across the country, and the National Centre for Financial Education (NCFE), which works to expand financial education in schools, workplaces, and the general population through awareness-building and trainings.

Despite these measures, Patel’s inability to successfully transfer digital skills between platforms is mirrored by many across the country today. This challenge is amplified when extended beyond mobile money wallets to between different types of digital applications.

A <a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/">recent pilot</a> aimed to assess transferability of skills for smart-phone owners with varying levels of mobile money usage. The pilot assessed transferability across age groups, gender, urbanicity (rural and urban) and levels of income volatility. Participants were provided extensive training on one mobile wallet (including on how to create an account, send money, collect money, and scan and pay), with the ability to freely navigate the application themselves, and then tested on their ability to perform core platform functions. Afterwards, participants were introduced to a new mobile money platform and asked to perform the same functions.
<h2>What did we find?</h2>
Building digital literacy skills by on-boarding users to one particular application is not adequate, the pilot uncovered. Participants in the 40+ age bracket, across gender, urbanicity, and income volatility levels found it difficult to transfer their knowledge from one digital platform to another. Participants in younger age brackets found it relatively easier, but still struggled with certain functionalities such as transferring money and scanning to pay. This has significant implications, not just for the individuals involved but also for the goal of a less-cash and digital India.
<h2>What should be done?</h2>
Digital literacy training initiatives, whether through common services centers, community gatherings, or other human touch agents, should consider imparting wider ICT skills rather than product or even device-based knowledge. Imparting digital literacy the way it is approached today for existing technologies such as mobile wallets runs the risk of losing effectiveness with the constant roll-out of newer features, technologies, and products. Additionally, training for older population segments should make more resources available to enhance their confidence and comfort with digital technologies, thus encouraging them to experiment with new features.

Of course, training requirements are easier to talk about than to implement, especially when considering a wide-ranging population such as that of India. All the more, service providers need to incorporate usability and digital literacy-building into product design. Training can be built into the product and customer experience. Whilst maintaining unique interfaces, each application can include short tutorials upon installation highlighting navigation patterns and features, as well as more detailed and accessible tutorials and FAQ sections. Ultimately, more digitally capable customers will mean more active customers.

Beyond the provider level, product development guidelines can be formulated to ensure basic transactional aspects are consistent across all mobile money and other digital application interfaces. In terms of standardization, whilst developing applications in regional languages is important, specific icons can be developed and used consistently across platforms to depict the basic transactions. This also helps to ensure that individuals with low literacy or who are unable to read in English can still navigate their way around and perform transactions successfully across different applications.

Finally, for all interventions, investments into understanding what consumers prefer and find easiest to use in terms of product design would go a long way.

<em>For more details on this research and its findings, please visit the </em><a href="http://ifmrlead.org/process-mapping-and-evaluation-of-digital-financial-services-in-india/"><em>IFMR LEAD website</em></a><em>.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/12/18/how-successful-are-banking-agents-in-bringing-digital-financial-services-to-new-customers-in-india/">How Successful Are Banking Agents in Bringing Digital Financial Services to New Customers in India?</a>

<a href="https://cfi-blog.org/2017/11/27/whats-in-it-for-me-increasing-the-value-proposition-of-fintech-for-merchants-in-india/">What's In It For Me? Increasing the Value Proposition of Fintech for Merchants in India</a>

<a href="https://cfi-blog.org/2016/05/17/for-successful-financial-inclusion-in-india-build-customer-financial-capability/">For Successful Financial Inclusion in India, Build Customer Financial Capability</a>

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The Flip Side of Digital: Are Customers “Interoperable”?

In recent years, Peru has called for our attention not only for being at the top of the Global Microscope’s international country rankings for the <a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">most conducive environment</a> for financial inclusion, but also for its historic collaborative effort to establish a <a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">fully-interoperable nationwide digital payments platform</a> (Bim) to support the supply of financial services. But buckle up, there is more.

The country’s regulator, the Superintendency of Banking, Insurance and Private Pension Fund of Peru (SBS Peru), has taken client protection very seriously, and despite already having very robust systems (on grievance redress and dispute resolution, for example), it continues to lead with groundbreaking policy changes based on evidence and research to ensure that regulation is aligned with the needs and capabilities of the end client. The Smart Campaign is proud to have collaborated with the SBS on these policy changes.
<blockquote>“The risk is to regulate by anecdotes and not by evidence.” - Mariela Zaldivar, Deputy Superintendent, Insurance and Private Pension Fund of Peru (SBS Peru)</blockquote>
<a href="http://smartcampaign.org/tools-a-resources/1087">Client Voices</a> was a research project of the Smart Campaign that directly asked clients in four countries (Peru, Benin, Georgia and Pakistan) about their experiences with financial providers and what they thought constituted good and bad treatment. In Peru, the project was made possible through strong support from the SBS, which was involved from the very beginning, providing substantive inputs to all project phases. However, their engagement did not stop there. The SBS is also committed to implementing the client protection recommendations arising from the project.

Here is how the SBS turned the major findings of the research into an opportunity for policy improvement in the area of financial consumer protection.
<h2>Understanding Credit Bureaus and Credit Reporting</h2>
<em>High-level finding </em>– Client Voices found that clients did not understand how credit bureaus work, or the consequences of having a negative credit record. Clients seemed to be unaware that credit bureaus now keep positive as well as negative information. To combat these shortcomings, the SBS took the following steps:
<ul>
 	<li><strong>Presenting credit histories as a potentially positive asset</strong>: Through their media campaign and financial education training programs, the SBS is raising awareness to help clients understand that they can build and invest in their credit histories through good repayment behavior. The credit bureau does not just offer negative outcomes or punishment for nonpayment. “Clients need to be aware that credit histories can result in positives like facilitating access to better interest rates,” says Mariela Zaldivar, Deputy Superintendent of SBS Peru.</li>
 	<li><strong>Non-payment warning</strong>: In the country’s 2012 transparency regulation, the warning to clients about negative reporting in the credit bureau in the case of non-payment was suppressed. The new regulation on market conduct - published in August 2017 - has reestablished this warning for clients as a preventive measure. Now, clients receive this non-payment warning in their contract summary sheets, where most relevant terms and conditions of loans are explained.</li>
 	<li>
<div class="mceTemp"></div>
<strong>Simple and accessible credit report</strong>: In 2015, Peru’s credit bureau system developed a simplified credit report to motivate users to look up their credit information. Today, credit reports are accessible virtually (web or app) and there has been a media campaign to encourage people to use the report. Credit ratings are presented with an easy-to-understand red, yellow and green light coding, and legal jargon has been minimized. “In the past 30,000 reports were accessed every year. Since our recent changes, over 1.5 million reports are accessed per year,” states Mariela Zaldivar. For this development, the SBS was recognized with the Best Practices in Public Management Award organized by the non-profit <a href="http://www.premiobpg.pe/es/">Ciudadanos al Día</a>, which encourages efficient, successful and innovative public programs that benefit citizens.</li>
</ul>
<h2>Understanding Loans and Insurance Products</h2>
<em>High-level finding</em> - Approximately 40 percent of respondents in Peru did not fully understand their loan terms. Clients were especially confused about the insurance policies linked to their loans. They did not know what insurance products they currently had or how they worked. Overall, we estimated that about 30 percent of all clients in Peru were not aware that they even had insurance tied to their loans, let alone what the insurance covered. The SBS addressed these findings with the following:
<ul>
 	<li><strong>Loan terms and conditions</strong>: In incorporating the results of the Client Voice report, the SBS started testing how to prioritize the information provided to clients in their contract summary sheets. The new regulation on market conduct reduced the potential items to be included in the summaries, from 12 to 7, in order to promote clarity and simplicity of the information. Moreover, the following items are published in a highlighted, salient way: 1) how much you pay, and 2) what happens if you do not pay on time. Contracts cannot be eliminated, but more client-centered summaries are being implemented.</li>
 	<li><strong>Marketing of insurance</strong>: In 2017, a <a href="http://busquedas.elperuano.com.pe/normaslegales/aprueban-el-reglamento-de-comercializacion-de-productos-de-s-resolucion-no-1121-2017-1498132-1/">new regulation</a> for insurance commercialization was approved. Under this regulation, companies are required to explain the scope and characteristics of product coverage to potential clients. Providers are also required to have insurance agents, which are bank employees whose role is to be the link between institutions and insurance companies, to promote better coordination between them. The insurance agent is in charge of training the staff on insurance and is responsible for sales and post-sale services.</li>
</ul>
<h2>Market Conduct</h2>
<em>High-level finding</em> - Clients are generally satisfied with microfinance services in Peru. However, 26 percent of clients report that microfinance providers do not treat clients equally, discriminating against those of lower socioeconomic status. To advance equal treatment of clients, the SBS took action by:

<strong>Market conduct regulation</strong>: In order to strengthen the Consumer Protection in Financial Services System, earlier this year the SBS changed its legal regulatory framework on market conduct. It now incorporates new <a href="http://ima01.gestion.pe/doc/0/0/2/4/3/243991.pdf">detailed responsibilities and obligations for financial institutions to improve their business practices</a>. It outlines requirements for how financial providers interact with their clients in three main areas: 1) offering of products and services, 2) transparency of information, and 3) claims management. The attention-grabbing fact here is that the board of the institution is now held responsible for the interaction with the client throughout the lifecycle of the product. Positive and responsible interaction with the client becomes an institutional goal and must be clearly outlined in an annual work program, presented by a full-time market conduct officer, and approved by the board each year.

It has been exciting to witness how the SBS uses evidence to help it establish effective consumer protection policy in Peru. The Smart Campaign encourages actors in the financial inclusion sector, both policymakers and providers, to keep learning from research that reveals the voice of the client.

<em>Learn more about Client Voices and its broad array of recommendations to advance consumer protection at <a href="http://smartcampaign.org/tools-a-resources/1075">the Smart Campaign website</a>.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2016/02/22/borrowing-blind-in-peru-findings-from-the-client-voices-project/">Borrowing Blind in Peru: Findings from the Client Voices Project</a>

<a href="https://cfi-blog.org/2017/01/30/modelo-peru-unique-model-unique-challenges-bright-future/">Modelo Peru: Unique Model, Unique Challenges, Bright Future</a>

<a href="https://cfi-blog.org/2017/02/07/modelo-peru-whats-next-for-the-groundbreaking-mobile-money-platform/">Modelo Peru: What's Next for the Groundbreaking Mobile Money Platform?</a>

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How Smart Campaign Research Is Influencing Client Protection Policy in Peru

The recent <a href="https://www.nbcnews.com/tech/security/massive-equifax-data-breach-could-impact-half-u-s-population-n799686">security breach of credit reporting agency Equifax</a> exposed birth dates, social security numbers and credit card information of up to 143 million consumers. The hackers will likely sell this personal information which could result in financial and medical identity left, and fraudulent credit card activity and tax reporting, along with a slew of other activities. Earlier this week <a href="https://www.nytimes.com/2017/09/26/business/equifax-ceo.html?mcubz=3">Equifax announced</a> their CEO, Richard Smith will be retiring and could walk away with $18 million in pension benefits. The Massachusetts Attorney General, Maura Healey <a href="http://www.npr.org/2017/09/14/550949718/after-equifax-data-breach-consumers-are-largely-on-their-own">called it</a> “the most brazen failure to protect consumer data we have ever seen.” As a result, the Federal Trade Commission, members of Congress and multiple states’ authorities are looking into criminal investigations. However, the burden of this breach will fall primarily on individual consumers to ensure they are protected, and only <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">10 percent</a> of the potential 143 million affected have even checked the Equifax site to see if their information was compromised. (You can check to see if you may have been impacted <a href="https://www.equifaxsecurity2017.com/am-i-impacted/">here</a>.)

The precautionary recommendations put forth have been to: 1. Check your credit score regularly (which can only be done for free once a year); 2. Freeze your credit; and 3. Purchase credit monitoring services. (Freezing your credit means establishing a “lock” that prevents opening new forms of credit in your name, while monitoring your credit is the process of periodically reviewing your credit reports for accuracy and changes that might be the result of fraudulent activity.) The irony of these suggestions is that you have to rely on the three major credit bureaus (Equifax, Experian and TransUnion) to perform these consumer protection activities. How can we know we are safe from fraud when our recourse requires trusting the entities that have been compromised? What’s more, why should we pay additional fees to correct the credit bureau’s mistake?

The Equifax breach affects consumers at all levels of the socioeconomic landscape, and unfortunately those with fewer financial resources and capability will be affected the most. Correcting identity theft can be a time consuming and financially burdensome endeavor. For many it is challenging to come up with emergency cash to cover legal fees to prove identity theft or restore credit, recover stolen assets and pay for additional credit monitoring services. And sadly, we haven’t seen strong consumer protection support on behalf of the credit bureaus and formal financial service providers in the wake of this breach -- support like educating the public about monitoring credit, providing more than one free credit report annually or offering free/discounted credit monitoring for more than one year. Thomas Hinton, CEO of the consumer advocacy non-profit American Consumer Council, <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">said</a> he “is deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.”

Such massive security breaches erode the public’s trust in the financial system, particularly among the unbanked already skeptical of entering the formal financial fold. The <a href="http://www.usfinancialdiaries.org/issue">U.S. Financial Dairies</a> showed that many Americans don’t trust the financial system because of unexpected bank fees – like overdraft fees – and because banks provide little or no social support, which many people get with informal group lending and savings options.

This isn’t the first major data breach in U.S. history and it won’t be the last. Last year when Yahoo was in negotiations to be bought by Verizon, it came out that <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">1.5 billion</a> user accounts were compromised between 2013 and 2014. And we can’t forget the 2013 Target breach that compromised credit/debit card and contact information of up to <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">110 million</a> customers.

So, what can be done? How can anyone feel comfortable about the protection of personal information?

Financial service providers are looking to biometric data as a secure identification source for financial services. Over the past seven years, <a href="https://uidai.gov.in/about-uidai/about-uidai.html">the Unique Identification Authority of India (UIDAI)</a> has issued over <a href="https://uidai.gov.in/about-uidai/about-uidai.html">one billion</a> Unique Identification Numbers (UID), also known as Aadhaar numbers, which are verified and authenticated with biometric data via finger prints or iris scans. This identification system is a part of <a href="http://indiastack.org/about/">India Stack</a> that uses four distinct technology layers – including simplified payments addressing and interoperability – to provide digital financial services across governments and businesses in India.

The technology already exists to use finger print and facial scans to unlock our phones or log into personal banking apps, and there is even the potential of using <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">ear scans and heart beat identification</a> as biometric identification sources. But so far biometric identification is fairly unregulated, some consider the security to not yet be airtight and there are additional privacy concerns with using bodily identifiers. Hackers are already finding ways to spoof biometric identification. Recently, the security firm Vkansee was able to <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">break into Apple’s Touch ID system</a> with a small piece of play doh. But we will see rapid improvements in Apple’s security, particularly with the new iPhone X Face ID technology.

In the case of India’s Aadhaar scheme, there is robust opposition to the program, with concerns including the perceived ease of forging fingerprints, the program’s potentially inadequate digital security, and its ubiquity. Some opponents of the program believe that if the Aadhaar numbers are widely integrated and linked between previously-siloed databases, it expands the opportunity for citizen profiling and surveillance. In August, India’s Supreme Court <a href="https://www.theatlantic.com/technology/archive/2017/09/aadhaar-worlds-largest-biometric-database/538845/">issued a ruling</a> enshrining the fundamental right to privacy. The anti-Aadhaar movement in the country celebrated the ruling, asserting that the program is in conflict with this fundamental right. Soon the Supreme Court will indeed assess if Aadhaar does violate Indian citizen’s privacy rights.

Regardless of how our information is authenticated, it is becoming increasingly important for consumers to protect and regularly track their financial information. Consumers should be concerned about the potential threats and take appropriate action by checking their credit score and monitoring credit card activity. But we can also realize that, at least as of now, security breaches are mostly out of our hands.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/05/01/how-secure-is-data-used-in-digital-credit/">How Secure Is Data Used in Digital Credit?</a>

<a href="https://cfi-blog.org/2017/05/05/demonetization-brought-out-the-best-in-indian-microfinance-clients/">Demonetization Brought Out the Best in Indian Microfinance Clients</a>

<a href="https://cfi-blog.org/2017/06/28/why-do-privacy-policies-matter-for-digital-credit/">Why Do Privacy Policies Matter for Digital Credit?</a>

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In the Wake of the Equifax Breach, Are Biometrics the Answer?