A decade ago, <a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer">digital credit models</a> that catered to low-income consumers were relatively unknown and untested. A lot has changed since then. Data from the <a href="https://ccaf.io/" target="_blank" rel="noopener noreferrer">Cambridge Center for Alternative Finance</a> shows that between 2011 and 2021, the number of digital lenders -- including those catering to low-income consumers -- has grown nearly ten-fold globally. <a href="https://www.imf.org/en/Publications/WP/Issues/2021/03/19/Digital-Financial-Inclusion-in-Emerging-and-Developing-Economies-A-New-Index-50271" target="_blank" rel="noopener noreferrer">Economies in Africa and Asia</a> have significantly driven this growth within the emerging market context. This rapid growth has been accompanied by a rise in consumer protection challenges, which have been studied and <a href="https://www.cgap.org/topics/collections/digital-credit" target="_blank" rel="noopener noreferrer">reported extensively in the East African context</a>.  

Catalytic capital — debt, equity, guarantee, or other instruments that assume disproportionate risk to return — is often seen as an important signaling device to attract further, timely investment in the target. As such, it can facilitate innovation and help organizations and companies build a track record in underserved markets. 
<blockquote class="pullquote--right">Catalytic capital has spurred rapid growth in digital credit, but at the same time, digital credit has created significant concerns over consumer protection.</blockquote>
However, the role of catalytic capital in influencing market-level incentives for digital credit has been less studied. In multiple markets, catalytic capital has spurred rapid growth in digital credit, resulting in an influx of investment. At the same time, digital credit has created significant concerns over consumer protection, and the supervisory capacity of local regulators has failed to keep pace with the risks emerging from the rapid growth of digital credit.  

In our research, we focus on the role of catalytic capital in shaping market incentives as they attract capital to digital credit models. We conclude that the role played by catalytic capital differs depending on the stage of market development. At an early stage, catalytic capital investments can help prove business models, expand services to newer consumer segments, and/or attract capital to underserved geographies. As the supply of capital increases, markets shift to a growth stage. Catalytic capital investors, who are more impact-oriented, need to shift their roles as markets grow to one that addresses consumer risks that accompany an increased supply of capital.  
<h1>A helpful case study: Kenya -- the birthplace of digital credit  </h1>
Our research traces the role played by catalytic capital investments, mapping consumer risks that evolved to missed signals that catalytic capital investors could have used to build guardrails. We hope other markets on a similar growth path as Kenya can use this guidance. 

Consumer risks rising from digital credit can be influenced through investor incentives, and they fall into three broad categories: 
<h3>High interest rates, indebtedness, and default risks</h3>
Financial service providers often cite the high cost of funds in emerging markets as the underlying driver for high interest rates. Catalytic capital investors can play a crucial role in reducing the cost of funds by deepening domestic capital markets. As one positive example, Lendable and other funders, including FSD Africa, set up a fund offering a first-loss default guarantee. This structure mobilizes domestic debt investors, increases transparency, and reduces the cost of funds for end borrowers as the supply of on-lending funds in emerging markets becomes less constrained. 
<h3>Aggressive sales practices, exploitative terms and conditions, and deceptive fees</h3>
As investments in digital credit models rise, there is a need to establish responsible market practices. Catalytic capital providers can play a role in working with industry associations and regulators to establish responsible market practices, and advocacy is one of the most powerful tools they can use. For example, community Investment Management (CIM) is an institutional impact manager that began operations in mature markets and is now expanding to emerging markets. CIM co-founded <a href="http://www.borrowersbillofrights.org/bill-of-rights.html" target="_blank" rel="noopener noreferrer">the Small Business Borrowers’ Bill of Rights</a>, identifying six fundamental financing rights of all businesses. The Small Business Borrowers’ Bill of Rights has now been adopted by the <a href="https://www.aspeninstitute.org/programs/business-ownership-initiative/small-business-borrowers-bill-rights/#:~:text=The%20Small%20Business%20Borrowers%E2%80%99%20Bill%20of%20Rights%20identifies,in%20order%20to%20uphold%20and%20protect%20those%20rights." target="_blank" rel="noopener noreferrer">Responsible Business Lending Coalition,</a> a network of for-profit and non-profit lenders, brokers, and small business advocates. 
<h3>Data privacy issues</h3>
With the emergence of technology-driven business models, using data to innovate is a crucial part of the DNA of digital financial services. Catalytic capital providers have a role in ensuring that companies respect data privacy without constraining innovation. 
<h1>Complementing catalytic capital investments for responsible market development </h1>
While catalytic capital is crucial for innovations and expanding access, not everything is attributable to catalytic capital investors. While catalytic capital may enable market development, as the case of digital credit demonstrates, responsible market development does not automatically follow. Several other factors must be supported to complement investor incentives for responsible market development. Responsible market development needs investments beyond the firm level to enable market information, consumer awareness and capability, regulatory and supervisory capacity, and various other measures that can serve as checks and balances on firm behavior.  

While investors can conduct firm-level due diligence to ensure client protection principles are respected, two of the three legs of the consumer protection stool require grant funding: regulation/supervision and building consumer awareness. Market actors need access to timely information and market research that informs them about potential market risks and which consumer segments might be particularly vulnerable. In addition, market conduct supervision that facilitates consumer protection needs investment that allows actors to test and invest in new tools that can capture consumer risks as they evolve. Therefore, traditional grant funding is needed to support responsible market development along with catalytic capital investments. 

As a complement to catalytic capital investments, our research highlights six key lessons that can help support responsible market development: 
<h3>1. Recognize market growth indicators.</h3>
This requires infrastructure investments that can contribute to responsible market development. Catalytic capital investors face four strategic decisions that will shift their role as the market develops: when to exit an investment, who would replace them, how will the investee company continue responsible behavior post-exit, and how to balance financial and social returns at the time of exit. Answers to these questions require agreement on a common set of indicators for market growth. 
<h3>2. Support initiatives that can help source market-level data.</h3>
Surveys that provide information on trends in funding and areas of concentration are crucial to support funding decisions for underserved areas. We need investments in sector-level evidence gap maps and systematic data on the volume of investments made in digital credit by funders and instruments.  
<h3>3. Design Digital Public Infrastructure (DPI) that respects users’ privacy and security.</h3>
This will have a cascading effect on newer business models because those using digital rails tend to build on existing infrastructure. Responsible market development can result from investing in the inclusive design of public infrastructure, respecting users’ privacy and security, and supporting regulations that ensure accountability. 
<h3>4. Invest in industry associations and networks to complement regulatory capacity.</h3>
Industry associations and networks can play the role of effective shadow regulators, often with the ability to monitor and identify emerging risks with market development. However, building this ecosystem requires investments beyond catalytic capital. 
<h3>5. Build regulatory/supervisory capacity.</h3>
Expanding new models requires testing tools that can detect new risks and initiatives that can bring together regulators to learn from “sister” networks in other markets. These initiatives can help augment the capabilities of market conduct supervisors but require traditional grant funding.  
<h3>6. Invest in mechanisms enabling consumer awareness.</h3>
Consumer awareness is crucial to reinforce consumer protection, but extant investment instruments may lack the incentives to support such initiatives. 

The detailed report can be accessed <a href="https://www.centerforfinancialinclusion.org/the-role-of-catalytic-capital-in-digital-markets-successes-pitfalls-and-lessons-learned">here</a>, and a discussion on the role of catalytic capital in digital credit at Financial Inclusion Week can be <a href="https://www.youtube.com/watch?v=7y8x44tLk2I&amp;list=PL30fMMRd3G_4ysbJRWLiVICDCCHEKSTMY&amp;index=5&amp;t=5s" target="_blank" rel="noopener noreferrer">accessed here.</a>

Catalytic Capital and Its Role in Digital Credit

This post was <a href="https://www.findevgateway.org/blog/2020/05/microfinance-coalition-call-action-investors">originally published</a> on FinDev Gateway.

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

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.

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 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

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.

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.

Have you read?

<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

Almost two years ago, the Smart Campaign surveyed financial service providers in Uganda as part of our study, <a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Microfinance Clients Who Default</a> (WHTCWD). In summarizing what they described, we did not mince words, reporting the environment as “Hobbesian” at the time. Providers in Uganda described default as a major issue of concern for them. Borrowers in arrears would skip town or change their name, behaviors enabled by the lack of government IDs and credit bureaus.

MFIs often adjusted for these thin credit envelopes and their high distrust of clients by meting out harsh, inflexible punishments on an immediate basis to those who missed a repayment. For instance, providers, suspecting customers of being at flight risk often seized collateral immediately after missed payments in ways that contrasted sharply with the <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles/certification-standards">Client Protection Standards</a> and best practices <a href="http://smartcampaign.org/storage/documents/20110916_SC_Principles_Guidance_Draft_Final.pdf">guidance</a>. Some providers explained that they had to act quickly because borrowers have multiple loans and if they didn’t seize the collateral quickly, another lender would swoop in, leaving them with nothing. Unfortunately, all of this was occurring in an environment of weak due process and slow legal enforcement, and we heard about instances where lenders were paying off local law enforcement, turning to local councils to pressure defaulters, and even getting clients thrown in jail.

We observed major gaps in the consumer protection regulatory frameworks and supervisory enforcement. At the time of the WHTCWD study, the Bank of Uganda only regulated commercial banks and a few leading MFIs, and its 2011 <a href="https://www.bou.or.ug/bou/bou-downloads/Financial_Literacy/Guidelines/2011/Jun/Consumer_Protection_Guidelines_June_2011.pdf">consumer protection guidelines</a> pertained only to larger deposit-taking providers. The roughly 2,000 NGO MFIs and savings and credit cooperative organizations (<a href="http://www.ucscu.co.ug/">SACCOs</a>) were effectively unregulated and registered as Tier IV institutions, which fell under the purview of the Ministry of Trade, Industry, and Cooperatives. SACCOs, often the only option for the rural poor, particularly in the underserved north, offer loans, including emergency loans, with interest, and savings, and are often additionally capitalized by government ministries and international NGOs for purposes of channeling money to support local development such as agricultural business (e.g. <a href="http://allafrica.com/stories/200710150295.html">Prosperity for All</a> project). These types of organizations represented a large share of microfinance debt and were described in our WHTCWD interviews as among the most frequent client mistreatment offenders.

In the time since WHTCWD, the media have continued to raise sector issues, and SACCO’s <a href="http://ugandaradionetwork.com/story/saccos-fail-to-meet-requirments-to-access-government-funds?utm_content=buffer8d2a8&amp;utm_medium=social&amp;utm_source=twitter.com&amp;utm_campaign=buffer">big losses and financial management issues</a> are <a href="http://www.newvision.co.ug/new_vision/news/1434800/saccos-advised-prioritize-unity">increasingly in the news</a>. For instance, news stories over the last year drew attention to SACCOs <a href="http://allafrica.com/stories/201608220661.html">with high profile fraud</a> and major losses for members in the Rakai and Sembabule districts. State Minister for Microfinance Haruna Kasolo recently <a href="http://www.newvision.co.ug/new_vision/news/1434800/saccos-advised-prioritize-unity#sthash.HmJDZOjW.dpuf">emphasized</a> the importance of SACCOs taking responsibility and staff working together to expose fraud and hold one another accountable.

Yet, the winds of change might be blowing in Uganda. After more than a decade of work, in July 2013 new regulation was passed pertaining specifically to Tier IV non-banking and micro deposit taking institutions (MDIs) including SACCOs, NGOs, and community groups. These laws place them under the control of a new Uganda Microfinance Regulatory Authority (UMRA). UMRA will license and supervise them, but the institutions will not be permitted to collect savings (as deposit taking institutions are in Tier III). Further, we read <a href="http://www.newvision.co.ug/new_vision/news/1433560/govt-close-errant-saccos#sthash.3i2Iih7v.dpuf">statements</a> in New Vision last week indicating that the government would be taking a harder line against SACCO misbehavior. Haruna Kyeyune warned SACCOs that they would be closed down if caught cheating clients.

At the same time, the national ID card system, launched in Uganda in the spring of 2014, is now in its second year of registration and could help improve client records with positive implications for the sector.

These developments all suggest that the environment for consumer protection at the low end of the Ugandan market is improving, thanks to commendable work to put regulations and systems in place. The foundation for better consumer protection is becoming stronger. We are eager to hear from those on the ground in Uganda on the differences these developments will make over time. For instance, will national IDs and affordable credit bureau reference checks lead to reduction in the risk of client flight and better institution-client relationships? What will this mean for financial service providers and their operational costs? We have heard concerns about the challenge the government will face in regulating and supervising 2,000 or so new institutions. We’ve also heard complaints that reporting will be burdensome and that the new requirements may lead to some sector consolidation. Finally, some of our partners also expressed the sense that it would be crucial to educate clients directly as well regarding these new Tier IV regulations. After all, SACCOs’ reputation among many clients is poor and one of UMRA’s goals is to improve the sector’s credibility and trust between providers and customers. Even Kyeyune in his announcement said that it will be important to educate citizens about the new Tier IV regulation for positive impacts to be assured.

Have you read?

<a href="https://cfi-blog.org/2015/02/09/taking-it-from-the-top-how-market-infrastructure-sets-the-rhythm-of-default-management/">Taking It From the Top - How Market Infrastructure Sets the Rhythem of Default Management</a>

<a href="https://cfi-blog.org/2015/02/02/two-sides-of-a-default-coin/">Two Sides of a Default Coin</a>

<a href="https://cfi-blog.org/2014/04/11/giving-microfinance-clients-a-voice/">Giving Microfinance Clients a Voice</a>

Changes Afoot for Uganda’s Tier IV Financial Institutions

&gt; Posted by the Smart Campaign

<img class="alignright wp-image-19032" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/08/20-million-photo-0.png" alt="" width="325" height="216" />Momentum for <a href="http://smartcampaign.org/certification">Smart Campaign Certification</a> is accelerating. Today, we’re thrilled to <a href="http://smartcampaign.org/storage/documents/Press_release_-_Smart_Certification_20m_clients-final.pdf">announce</a> that there are now more than 20 million lower-income clients whose financial service provider has been certified as meeting the Campaign’s standards for consumer protection.

Since February 2015, the number of clients served by Smart-Certified financial institutions (FIs) has grown by 6 million, to a total of 21 million, with the certification of an additional 11 institutions. To date, <a href="http://smartcampaign.org/certification/certified-organizations">39 FIs</a>, from 19 countries across Latin America to Africa and Asia, have achieved Smart Certification, including some of the world’s best-known institutions dedicated to serving the poor.

As you might be familiar, the Smart Campaign’s Client Protection Certification Program contains a core set of standards against which institutions are evaluated by independent, third-party evaluators. Smart Certification publicly recognizes those institutions providing financial services to microentrepreneurs with a standard of care that upholds the microfinance industry’s seven <a href="http://smartcampaign.org/about/smart-microfinance-and-the-client-protection-principles">Client Protection Principles</a>. Customers of Smart-Certified organizations can be confident that their financial service provider has policies and processes in place to ensure that they are treated responsibly.

“Twenty million clients is an exciting milestone – recognition of the fact that there’s growing momentum in the industry for client protection,” said Isabelle Barrès, Smart Campaign director. “These organizations are not just paying lip service to the concept of fair treatment, but actually working hard to improve practices,” she added.

In April 2015, having listened carefully to evaluation results and industry feedback, we <a href="http://cfi-blog.org/2015/04/02/smart-campaign-announces-enhancements-to-client-protection-certification-program/">launched</a> certification program revisions to streamline the process while maintaining high standards. These revisions included an appeals and complaints system and a process for renewing certification validity. At the end of 2015, the Campaign will introduce an accreditation system to license existing and new certifiers, and a version 2.0 of the certification standards. Certification 2.0 standards remove duplication and ambiguity, and deepen standards for savings, insurance, and digital financial services.

Even as the coverage of the certification program approaches critical mass, the broader Smart Campaign continues to advance. For the Campaign’s next phase we are excited about working on the following:

<ol>
	<li> Broadening to financial inclusion while remaining active in microfinance. As micro-insurance, savings, electronic payments, and other financial services targeted at the base of the pyramid gain traction, the imperative to extend client protection standards into these areas has become pressing. We have already begun to research client protection in digital financial services and micro-insurance and will incorporate some of the findings in the next round of certification standards.</li>
	<li> Heightened effort in standard-setting and certification. Our external evaluators told us that stakeholders see standard-setting as a core function of the Campaign. We will continue the standard-setting function, extending our efforts on this front to embrace new products and delivery channels. The Campaign will continue to conduct research to underpin standard-setting. Work on pricing and on appropriate product design and delivery is now underway.</li>
	<li> Greater emphasis on market-level activities. Findings from our <a href="http://cfi-blog.org/2014/04/11/giving-microfinance-clients-a-voice/">client voice</a> and <a href="http://smartcampaign.org/tools-a-resources/1030">default</a> research highlight the importance of market-level forces in setting the rules and incentives around client protection practices. It is hard for individual providers to instill best practices if their competitors don’t. There are multiple opportunities to help shift the market context. Among other efforts, we are working with the two Indian Self-Regulatory Organizations (SROs), MFIN and Sa-Dhan, on improving membership grievance redressal mechanisms.</li>
	<li> Turn most FI-level support over to others, while maintaining tools, resources and trained consultants. The Campaign staff will reduce its direct engagement with FIs in the confidence that other organizations and specialists, including many trained by the Campaign, can continue to provide this support. The Campaign will continue to be a resource hub for this effort, through the tools and training library and a limited schedule of trainings of trainers and assessors.</li>
</ol>
For a more detailed update on Certification and the Smart Campaign, please see the recently published <a href="http://smartcampaign.org/news-a-highlights/progress-report-july-2015">Smart Campaign Progress Report</a>.

Have you read?

<a href="http://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>

<a href="http://cfi-blog.org/2015/08/06/three-cheers-for-the-smart-campaigns-certification-summit/">Three Cheers for the Smart Campaign's Certification Summit</a>

<a href="http://cfi-blog.org/2014/12/08/smart-certification-the-view-from-azerbaijan/">Smart Certification: The View from Azerbaijan</a>

Consumer Protection-Certified Financial Institutions Now Serve More Than 20 Million Lower-Income Clients

&gt; Posted by Alexandra Rizzi, Deputy Director of the Smart Campaign, and Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid

<img class="aligncenter wp-image-17200" style="margin-top:5px;margin-bottom:5px" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/02/whtcwd_photo2.jpg" alt="" width="615" height="461" />Imagine you are a new microfinance loan officer in a rural area of your country and extremely proud to have found a stable, well-regarded job. Your sales territory, while requiring significant travel, is familiar - this is where your father’s extended family is from, and in fact, a few of the borrowers in your portfolio are distant cousins. You manage a portfolio of just under 300 borrowers, most of whom you see on a weekly basis.

This week, at one of the repayment meetings, you are approached by a client in distress and near tears. She apologizes that she is unable to pay back the outstanding balance on her loan due to circumstances out of her control, and asks for an additional six months to repay. Her fellow group members have been covering for her for the past two weeks and seem to be losing patience with her. Given that this was the woman’s first loan and that your country’s credit bureau covers only five percent of the microfinance market, you have no information on her credit history or current debt burden.

You remember an inexperienced colleague who was convinced by a group to reschedule their loans; unbeknownst to your colleague, the powerful group leader had absconded with the entire group’s money. Ultimately, the other members refused to pay for the leader’s fraud. Rumors about the incident and your colleague abounded and subsequently several other of his groups decided to default en masse. This loan officer, of course, is no longer working at your company. But, you imagine that something similar could easily happen to you too – it is all too easy for your entire, hard-wrought portfolio to disintegrate like a sand castle before your eyes. You wonder what to do next. At this moment, headquarters seems a long way from the realities of the field.

Imagine instead that you are a microfinance client and are struggling to make your weekly payments. At the start of your loan, your business - buying and reselling used clothing in the marketplace - generated enough income for your payments plus a little extra, but now the rainy season has come and sales are down. Each week, the days leading up to the meetings are filled with dread. You make ends meet by reducing how much food you eat, you delayed paying your children’s school fees, and even sold a goat. But now, your husband has contracted malaria and needs meds. The last three weeks have been impossible. While your friends in the group have covered for you, their patience has run thin, and you fear you will not be able to make payments for at least several months. You’ve heard rumors of what happens to clients who cannot pay back their loans – a reputation as a person who can’t be trusted, confiscated assets, late fees, black-listing from future credit, and years of follow-up from your creditor. Your friends say that MFIs are inflexible, even in the case of an emergency. You think your loan officer is a fair person, but dread the encounter at the next meeting. You even wonder if you should go at all. Maybe it would be wiser to go visit your in-laws in the neighboring town for an extended stay.

The Smart Campaign embarked on an exploratory study to better understand what happens to our loan officer, distressed borrower, and thousands of others like them. This week the findings from this research have been released in the CFI publication <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank">What Happens to Microfinance Clients Who Default? An Exploratory Study of Microfinance Practices</a>.

Understanding what happens to clients who default is an understudied area in the microfinance sector. Thus in late 2013, the Smart Campaign and Jami Solli, Founder of the Global Alliance for Legal Aid, embarked on an exploration to help fill these knowledge gaps. The project interviewed 44 microfinance providers, as well as regulators, credit bureaus, researchers, and consumer advocates across three distinct markets – Uganda, India, and Peru.

The knowledge gaps related to default management included what providers actually do to collect loans, as well as what influence (if any) legal and regulatory frameworks have on industry practices. For example, what guidelines or boundaries does a country’s legal framework set on debt collection? Is there a prescribed manner in which MFIs can collect a past due debt? Are their rules on seizure, valuation, and the sale of collateral? Is there a limit to the length of time which a borrower is legally responsible for a debt? What are MFI practices regarding debt collection actions taken after a loan is written off? Are there any insolvency or personal bankruptcy mechanisms available to debtors, either by law, or through voluntary debt counseling centers? If a legal framework does exist, is there active enforcement? Are MFIs aware and in compliance with requirements? Additionally, we noted that there does not appear to have been any industry research on the consequences of default from the client perspective.

So, what happens to our loan officer and distressed borrower? Stay tuned for more from the results of <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank">the paper</a>.

Have You Read?

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

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

<a href="http://cfi-blog.org/2014/01/24/investigating-what-happens-to-clients-who-default/" target="_blank">Investigating What Happens to Clients Who Default</a>

Two Sides of a Default Coin

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

What Happens to Microfinance Clients Who Default?

Jayshree Venkatesan

Microfinance Coalition

Alexandra (Alex) Rizzi

Elisabeth Rhyne

Robin Brazier

Nadia van de Walle

Matt Collin

Mary Hansen

Jami Hubbard

Jami Solli

Kenya

Sub-Saharan Africa

Uganda

Ghana

India

Peru

Belgium

Greece

South Africa

Mexico

Consumer Protection

Credit

Credit Provision

Default

Digital Credit

Interest Rates

Privacy

Challenges and Crises

Enabling Environment

Microfinance

Customer Centricity

Delivery Channels

Digital Financial Services

Financial Service Providers

Nano Loans

Over-indebtedness

Policy, Regulation and Government Initiatives

Product Pricing

Responsible Digital Finance

Fintechs

Transparency

Smart Certification

Agent Banking

Insurance

Client Treatment

Microfinance Institutions

Governance

Aging and Older Adults

Mobile Banking

Women

Alternative Data

Trends

Blog Post

Webinar

Report

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.

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.

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

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

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

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

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

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

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

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

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

Have You Read?

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

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

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

Investigating What Happens to Clients Who Default

&gt; Posted by Jami Hubbard Solli, Senior Policy Advisor, Consumers International UK

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

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

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

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

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

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

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

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

Early Findings

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

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

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

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

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

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

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

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

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

Have you read?

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

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

<a href="http://cfi-blog.org/2013/05/17/gabriel-davel-proposes-tests-for-credit-bubbles/" target="_blank">Gabriel Davel Proposes Tests for Credit Bubbles</a>
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<hr align="left" size="1" width="33%" />

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

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

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

</div>
</div>

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

&gt; Posted by Jami Hubbard Solli, Senior Policy Advisor, Consumers International UK

<a title="F es por Falta de Pago" href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/10/f-es-por-falta-de-pago.pdf" target="_blank">Spanish Version »</a>       <a title="D comme défaillance" href="http://centerforfinancialinclusionblog.files.wordpress.com/2013/10/d-comme-dc3a9faillance.pdf" target="_blank">French Version »</a>

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

<a href="http://www.dsnews.com/articles/with-10m-borrowers-at-risk-of-default-cfpbs-primary-focus-is-mortgages-2012-02-13" target="_blank" rel="attachment wp-att-12543"><img class="alignright wp-image-12543" style="border:0" alt="" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/09/loan-default.jpg" width="300" /></a>As a late-comer to microfinance in 2005, I bustled from the Boulder training, to the Blue Book conferences, to the MicroCredit Summits (and back), trying to understand the dynamics of microcredit. At all these events, I heard proclamations of very high repayment rates, which sparked curiosity about what happened to that small percentage of borrowers who couldn’t (or wouldn’t) repay their microloans. This topic wasn’t presented at any conference I attended.

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

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

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

We posted approximately 20 questions on Survey Monkey and held our collective breath, anticipating a potentially low response rate, because the questions touched upon sensitive issues. We were pleasantly surprised, though, to receive more than 300 replies (198 from Anglophones, 59 from Francophones, and 74 from Spanish speakers). We are grateful to all who took the time to complete the survey, in particular those who went above and beyond the call of duty, like a practitioner in the DRC who wrote an essay on applicable microfinance laws and regulations.

Early Findings

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

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

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

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

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

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

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

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

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

Have you read?

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

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

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

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

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

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

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

</div>
</div>

"D" Is for Default

&gt; Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign

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

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

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

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

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

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

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

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

Have you read?

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

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

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

Help the Smart Campaign Understand How MFIs Manage Defaulting Clients

&gt; Posted by Alexandra Rizzi, Deputy Director of the Smart Campaign, and Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid

<a href="http://www.smartcampaign.org/tools-a-resources/1030"><img class="alignright wp-image-17283" style="border:0 solid #000000" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/02/whtcwd_cover.png?w=490" alt="" width="300" height="389" /></a>When clients are facing loan default, they’re often in the most precarious financial position of their lives. As we <a href="http://cfi-blog.org/2015/02/02/two-sides-of-a-default-coin/" target="_blank">detailed</a> on this blog last week, navigating the default process can be exceedingly complex for clients. It can be complex for providers, too. No doubt, on both ends the stakes are high. In a new Smart Campaign research report released last week, <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank">What Happens to Microfinance Clients who Default?</a>, we examined how providers behave at this juncture and the factors informing these practices.

The research team selected three very different markets to compare – Peru, India, and Uganda.¹ An analysis of three markets does not represent the entire sector. However these three countries represented great diversity in legal and regulatory systems, market infrastructure, in particular credit reporting, and use of group versus individual loans, among other factors. These three countries are also locations where the Smart Campaign has cultivated supporters and partners, which persuaded providers to share information on sensitive debt collection practices.

In total, we conducted interviews with 44 providers. In addition to MFIs, the most helpful interviews were with credit bureaus. Fonts of information, they helped us understand the topography of market debt as well as the information MFIs have when making decisions. And, as we came to understand, information was a critical determinant to what actions MFIs took when a client defaulted.

What did we learn? Among the dozens of data points on how MFIs treated clients in default (some good, some bad, some ugly), the influence of market conduct regulation and supervision, as well as credit reporting on practices stood out as defining features. In Peru, the market is regulated by two entities with overlapping consumer protection mandates: the SBS (the banking regulator) and INDECOPI (the general consumer protection agency). Interviewed MFIs were very aware of these regulators and the rules and sanctions against bad practices. For example, the team was told that the incidence of humiliating collection practices such as hombrecitos amarillos (“little yellow men” formerly painted by debt collectors on the side of debtors’ homes) had dropped precipitously because of regulatory sanctions.

In India, while the Reserve Bank of India’s (RBI) Fair Practice Code and the Industry Code of Conduct specify acceptable and unacceptable collection practices, MFIs did not appear to be influenced by the threat of monitoring or sanctions as they had been in Peru. The situation will hopefully change as the Microfinance Network (MFIN) begins to supervise and monitor the sector in its new role as a self-regulatory organization (SRO) with delegated regulatory powers.

In Uganda, the Bank of Uganda published guidelines in 2011 on financial services consumer protection.  Unfortunately, the guidelines are only applicable to regulated providers. The team found that supervision of these guidelines and of providers’ practices is weak and enforcement low to non-existent.  The lack of legal protection and sanctions allows bad market conduct and aggressive collections measures to proliferate and increases mistrust between clients and providers.

In addition to regulation and supervision, the influence of credit information systems on MFI practices was also powerful. Quality credit information not only helps providers make informed underwriting decisions, it also appears to influence collections behavior. Specifically lenders felt that the perceived value of a good credit report gives clients a strong motivation to repay, thus lessening the burden of a potential collection on the provider. Comparing the three markets, the study observed differences in the speed and intensity of MFIs’ reactions to delinquency, partially driven by the existence of credit information systems which contribute to the security of the lender.

In Peru, the credit bureaus cover all regulated microfinance institutions and a large number of the unregulated. The quality of data is generally high, though there were some instances where unregulated NGOs indicated that the regulated institutions ignored their reports of default. In Peru, the response times to early-stage delinquency were not immediate, with some providers stating that their normal procedure is for the loan officer to telephone or text the borrower about a week after a missed payment.

On the opposite end of the spectrum in Uganda, a single, expensive credit bureau covers a small percentage of the market and a national identification system does not exist. As a result, it is difficult for lenders to verify even basic information about clients. Ugandan MFIs respond very quickly to delinquency, with an almost immediate in-person visit to the debtor. Two former MFI executives mentioned that due to multiple lending, coupled by a dearth of information on the borrower, loan officers adopt a "race to the bottom of the pyramid" to collect before the other MFIs’ loan officers arrive.  MFIs cited the risk of debtor flight, where borrowers who can’t pay run away to another town, as justification for their swift reaction. One would imagine that the fear of aggressive reaction by MFIs might also fuel borrower flight – deepening the spiral of mistrust, and the potential for harm.

India falls between Peru and Uganda, as credit bureaus are a new and important part of the sector. In just four years, MFIN has corralled its membership to report more frequently – from monthly to weekly – and the use of credit reports is now standard practice. In India, the research team found that response times to delinquency are not immediate, but this is driven by the use of group liability, which was cited by 21 out of 22 MFIs interviewed. While group liability can act as a buffer before the intervention by a loan officer, there were indications that the laissez-faire approach overlooked abusive behavior within groups.

What should the industry do with these findings? The Smart Campaign has articulated standards for acceptable collections practices, but the challenge lies in applying them in individual markets. These issues need to be discussed and addressed at the market-level with, among other interventions, stronger credit information infrastructure as well as better regulation and supervision. Unfortunately in many markets, even explicit and appropriate regulation can become meaningless without supervision. Programs such as the Smart Campaign’s <a href="http://smartcampaign.org/certification" target="_blank">Certification Program</a> as well as India’s <a href="http://www.m-cril.com/CodeConductAssessment.aspx" target="_blank">Code of Conduct Assessment</a> can be powerful signals of good practice as a form of regulatory supervision. Whatever the path, these market-level gaps must be bridged as they leave too many openings for mistrust and misinformation to lead to undue harm to borrowers in distress.

Have You Read?

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

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

<a href="http://cfi-blog.org/2014/01/24/investigating-what-happens-to-clients-who-default/" target="_blank">Investigating What Happens to Clients Who Default</a>

[1] Thanks to the in-country interviewees who shared sensitive information with us and to Smart Campaign Client Voice Task Force members who provided suggestions on the research design and commented on findings - Jessica Schicks, Rafe Mazer, Alex Fiorello, Andrea Stiles, Christopher Linder, Elisabeth Rhyne, JD Bergeron, and Jesila Ledesma.

Taking It from the Top – How Market Infrastructure Sets the Rhythm of Default Management

South Africa is a global hub for fintech innovation. Accion supports and advises South African innovators using technology to help entrepreneurs expand their businesses and families protect their homes around the world.

&gt; Posted by Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid

[getty src="186885399?et=NLbLXYPuRkVyd9VL8jS1ZA&amp;sig=2-s9roviGofRMFIw5SyLs9pWGGujAgjAi34JWx6ID-Y=" width="506" height="339"]

As we acknowledge <a href="http://www.consumersinternational.org/our-work/wcrd/" target="_blank">World Consumer Rights Day</a>, celebrated on March 15th each year, recent news from South Africa on over-indebtedness reminded us of the findings from the <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank">What Happens to Microfinance Clients Who Default?</a> project. The South African Human Rights Commission (SAHRC) just reported that 50 percent of the country’s credit-active population is debt-impaired (meaning they are more than three months behind on bills and/or have a debt-related judgment), and another 15 percent of the population is debt-stressed (one to two months behind on bills). Essentially, more than half of South Africa’s population is over-indebted.

In reacting to this situation, the SAHRC has taken an approach drawn from a human rights-based framework. They have recognized freedom from oppressive, unsustainable debt levels is a human right. Similarly, in Greece, the birthplace of democracy, the government determined that under particular financial circumstances a fresh start is a human right. To address Greece’s growing problem of over-indebtedness, in 2010, Parliament passed a law which gives individuals the right to personal bankruptcy. The implementation of this legislation was also an attempt to harmonize the law with Article 5 of the Greek Constitution which protects citizens’ social and economic well-being. According to the new law, over-indebted individuals now have the possibility to restructure their debts, reducing both interest rates and total amounts owed. The prerequisite is that the individual’s inability to repay needs to be considered a permanent condition.

In the countries we analyzed for the Center for Financial Inclusion’s What Happens to Microfinance Clients Who Default? research (Peru, India, and Uganda), there is no similar legal recognition of the right to a fresh start available to those at the base of the pyramid, nor did we find effective MFI or other government infrastructure widely available to microfinance borrowers in debt distress. Perhaps Peru comes closest to this because its consumer protection authority, INDECOPI, offers debt mediation services with creditors on behalf of debt-stressed individuals. Participation in the process is voluntary and costs individuals approximately US$1,500. If an accord is not reached, the parties can continue with a standard bankruptcy filing. Cost and other factors make the mediation service unlikely to be of use to the majority of interested microfinance borrowers. If debt mediation services were available at a more affordable price and perhaps offered under the auspices of Peru’s banking superintendent (SBS), debt relief or a fresh start could become a possibility for debt-stressed micro-borrowers. The involvement of the SBS could give the mediators more clout with creditors that might otherwise be reluctant to participate.

In India we found a program promoted by the Reserve Bank of India (RBI) in 2009 for banks to create financial literacy and credit counseling centers (FLCC) to help in preventative and "curative" counseling for distressed, low-income borrowers. In theory these centers could help distressed borrowers negotiate a debt management plan, subject to approval by one or more creditors. Unfortunately an evaluation showed that the FLCCs were underutilized, the banks lacked incentives to promote them, and ultimately the target clients were not reached. In Uganda, we found no evidence for institutional or market-level processes in place to counsel or rehabilitate microfinance clients.

Why such a dearth of opportunities? The reality is that someone must pay for these services and they are difficult to design in a way that is affordable for both the mediation provider and the users of the system, especially for small value loans. As we noted in <a href="http://www.smartcampaign.org/tools-a-resources/1030" target="_blank">the paper</a>, Belgium has mandated that financial institutions contribute to the running costs of its debt mediation program. Participating Belgian financial institutions must contribute according to their percentage of defaults in the market in the prior year, which is used as a measure of each institution’s responsibility for contributing to over-indebtedness in the market. This is an interesting approach because it 1) incentivizes financial institutions to take measures to prevent over-indebtedness, and 2) makes institutions accountable for rehabilitating those who have become over-indebted.

From a client protection perspective, when the industry knows that a percentage of its clients will fail in their efforts to repay, there should be a process for debtor rehabilitation that respects the debtor’s need for a financial future. Of course we recognize that some microfinance clients may never have intended to repay. This blog post does not relate to the fraudsters. But shouldn’t clients with good intent deserve the chance to work towards a clean slate? These opportunities are not offered by the microfinance industry nor are standard bankruptcy procedures feasible for clients at the base of the pyramid. For World Consumer Rights Day, my plea is to make debt rehabilitation a standard offering in the microfinance industry and something we achieve in 2015.

Have You Read?

<a href="http://cfi-blog.org/2015/02/09/taking-it-from-the-top-how-market-infrastructure-sets-the-rhythm-of-default-management/" target="_blank">Taking It from the Top - How Market Infrastructure Sets the Rhythm of Default Management</a>

<a href="http://cfi-blog.org/2015/02/02/two-sides-of-a-default-coin/" target="_blank">Two Sides of a Default Coin</a>

<a href="http://cfi-blog.org/2013/10/11/d-is-for-default-now-available-in-french-and-spanish/" target="_blank">"'D' Is for Default" Now Available in French and Spanish</a>

On World Consumer Rights Day: the Right to Financial Rehabilitation for the Over-Indebted

Most of Mexico’s people lack access to a formal bank account. Accion has worked in Mexico for decades to create a thriving and competitive financial sector that embraces innovation and protects its clients.

&gt; Posted by Center Staff

<a href="http://www.wsj.com/ad/multipliers"><img class="aligncenter wp-image-17656" style="border: 1px solid #000000; margin-bottom: 10px;" src="https://centerforfinancialinclusionblog.files.wordpress.com/2015/03/wsj.png" alt="" width="620" height="271" /></a>Over the past year, financial inclusion leaders and advocates have bolstered airtime for banking the unbanked. In August, The Guardian <a href="http://cfi-blog.org/2014/08/20/the-guardian-launches-online-financial-inclusion-hub/">launched</a> a hub for financial inclusion content. In recent months, The New York Times <a href="http://cfi-blog.org/2015/02/04/keeping-score-the-client-protection-principles-vs-the-u-s-subprime-auto-loan-market/">produced</a> an extensive reporting series on the consumer ills of the U.S. subprime auto loan market. In January, U.S. President Obama publicly <a href="http://cfi-blog.org/2015/02/11/indian-government-usaid-and-international-organizations-partner-in-indias-next-steps-towards-financial-inclusion/">commended and partnered</a> with India in its robust inclusion efforts. Also in January, Bill Gates <a href="http://cointelegraph.com/news/113341/bill-gates-takes-digital-currency-advocacy-to-primetime-tv">spoke</a> about mobile money on The Tonight Show Starring Jimmy Fallon. Today, The Wall Street Journal added its considerable weight with the launch of <a href="http://www.wsj.com/ad/multipliers">Multipliers of Prosperity</a>, a micro-site sponsored by MetLife Foundation that explores the challenges faced in advancing financial inclusion.

The site sources from players throughout the industry, sharing thought pieces and infographics as well as a video from yours truly. The aim of the site is to spotlight what’s working in the quest to extend quality services to the 2.5 billion unbanked individuals, what isn’t, and how innovations in technology, regulation, and business models can be harnessed. Here are a few of the site’s new posts:
<ul>
 	<li>A Snapshot of Financial Health in 3 Countries</li>
 	<li>6 Ways Banks Can Boost Profits from Woman-Owned Businesses</li>
 	<li>Steps India Must Take to Achieve Financial Inclusion</li>
 	<li>3 Ways to Make Mobile Money Work Worldwide</li>
</ul>
Along with contributing a video, the CFI shared posts on two of our new reports, Aging and Financial Inclusion: An Opportunity, and What Happens to Microfinance Clients who Default?

To visit Multipliers of Prosperity, <a href="http://www.wsj.com/ad/multipliers">click here</a>.

Have you read?

<a href="http://cfi-blog.org/2014/03/18/new-video-highlights-regulatory-challenges-and-opportunities-for-financial-inclusion/" target="_blank" rel="noopener noreferrer">New Video Highlights Regulatory Challenges and Opportunities for Financial Inclusion</a>

<a href="http://cfi-blog.org/2015/03/16/on-world-consumer-rights-day-the-right-to-financial-rehabilitation-for-the-over-indebted/" target="_blank" rel="noopener noreferrer">On World Consumer Rights Day: the Right to Financial Rehabilitation for the Over-Indebted</a>

<a href="http://cfi-blog.org/2015/02/20/moving-to-action-on-aging-and-financial-inclusion/" target="_blank" rel="noopener noreferrer">Moving to Action on Aging and Financial Inclusion</a>

‘The Wall Street Journal’ Launches Multipliers of Prosperity

&gt; Posted by Center Staff

<a href="http://cfi-blog.org/category/financial-inclusion-2020/"><img class="alignright wp-image-8784" style="border: 0 solid #000000;" src="https://centerforfinancialinclusionblog.files.wordpress.com/2012/11/fi2020_antilogo2.jpg?w=300" alt="" width="326" height="72" /></a>2015 was a year full of great reads (and listens). As we enter 2016, we wanted to take a look back at last year and what we were most excited to explore.  Through our work writing the <a href="http://www.fi2020progressreport.org/">FI2020 Progress Report</a>, which assesses global progress in five key areas of financial inclusion, we benefited from important research from many in the financial inclusion field.  As part of this effort, we were eager to update our <a href="http://www.centerforfinancialinclusion.org/fi2020/resource-library">FI2020 Resource Library</a> with the most informative reports and research outputs.  We encourage you to check it out – and in the meantime to review the highlights listed below.  The organizations responsible for these reports cover a wide array of stakeholder types, from support organizations, to telecommunication companies, to financial service providers – proof that progress in financial inclusion is being driven by many.

<a href="http://www.smartcampaign.org/tools-a-resources/1030">What Happens to Microfinance Clients Who Default?</a> (January)
The Smart Campaign
Author: Jami Solli
This report looks in-depth at the enabling environment, the practices of providers, and customer experiences in Peru, India, and Uganda, to understand what happens when microfinance clients default on their loans. We were especially interested in the paper’s findings that demonstrate that effective credit bureaus give financial service providers the confidence to treat customers who default more humanely.

<a href="http://www.cgap.org/sites/default/files/Working-Paper-Money-Resolutions-Sketchbook-Jan-2015.pdf">Money Resolutions: A Sketchbook</a> (January)
CGAP
Author: Ignacio Mas 
This working paper explores the underlying logic for how people make money resolutions, including how people organize their money and make decisions about financial goals and spending. The paper focuses on peoples’ approaches to making financial decisions – rather than evaluating the decisions themselves – identifying the inner conflicts they face in the process.

<a href="http://www.cgap.org/sites/default/files/Working-Paper-Money-Resolutions-Digital-Simulations-Feb-2015_0.pdf">Money Resolutions, Digital Simulations</a> (February)
This companion paper to Ignacio’s paper above examines how a digital financial service platform could support the financial decision-making practices used by the poor. It focuses on two practices in particular, money animation and liquidity farming, and puts them in the context of addressing customer needs in a digital service context.

<a href="http://www.perc.net/wp-content/uploads/2015/03/ResearchConsensus.pdf">Research Consensus Confirms Benefits of Alternative Data</a> (March)
Policy &amp; Economic Research Council (PERC)
In this report, PERC finds compelling evidence to support the use of fully reported non-financial payment histories in consumer and commercial credit decisions as an on-ramp for credit invisible consumers in the United States.  

<a href="https://www.accenture.com/us-en/insight-future-fintech-banking.aspx">The Future of Fintech and Banking: Digitally Disrupted or Reimagined?</a> (March)
Accenture 
Authors: Julian Skan, James Dickerson, Samad Masood
Investment in fintech companies grew by approximately 200 percent in 2014, compared to 63 percent growth in overall venture-capital investments, confirming that this sector will continue to be an important player. The digital revolution in financial services has arrived, but it remains unclear what the impact on current banking players will be. This report brings together the views of 25 influential financial services executives involved in innovation, and maps out the activities that will be necessary to allow them to disrupt their own business model rather than watch competing models overtake them.

<a href="http://www.gsma.com/mobilefordevelopment/programmes/mobile-money/insights/industry-reports">Annual State of the Industry Report</a> (March)
GSMA
The report highlights the important developments taking place in mobile money, mobile insurance, mobile savings, and mobile credit for industry practitioners. This year we were especially interested by the insights that emerged from experiments in interoperability.

<a href="http://microfinanceceoworkinggroup.org/client-protection-principles-model-law-commentary-financial-consumer-protection/">Client Protection Principles: Model Law and Commentary for Financial Consumer Protection</a> (April)
Microfinance CEO Working Group
The Model Law creates a legal framework for financial client protection based on the Smart Campaign’s Client Protection Principles. The Model Law is intended to be used as a tool for legislation development, as an assessment vehicle for understanding client protection regulation, and to help craft codes of conduct or guidelines from within the industry.

<a href="http://www.worldbank.org/en/programs/globalfindex">The Global Findex Database 2014</a> (April)
The World Bank
After three years, the World Bank released its second Global Findex database which tracks access to financial services globally.  It reports that the number of financially excluded people globally dropped from 2.5 billion in 2011 to 2 billion in 2014 – displaying that we may be on track for universal access by 2020.  We were excited to dive deep into the data in our <a href="http://www.centerforfinancialinclusion.org/fi2020/mapping-the-invisible-market/by-the-numbers">By the Numbers</a> report which focuses on quality beyond access.

<a href="http://www.cgap.org/publications/doing-digital-finance-right">Doing Digital Finance Right</a> (June)
CGAP
Authors: <a href="http://www.cgap.org/about/people/katharine-mckee">Katharine McKee</a>, <a href="http://www.cgap.org/about/people/michelle-kaffenberger">Michelle Kaffenberger</a>, <a href="http://www.cgap.org/about/people/jamie-zimmerman">Jamie Zimmerman</a>
This report draws on evidence from consumer research in 16 markets to identify the risks faced by consumers of digital financial services, the consequences of those risks, and how they can be addressed—specifically from the perspective of vulnerable customers.

<a href="http://www.helpage.org/global-agewatch/">Global AgeWatch Index 2015</a> (September)
HelpAge International
As we aim to address the needs of all underserved population segments, it is imperative that we focus on aging persons.  In this report, HelpAge International ranks countries on quality of life for older people based on access to pensions, healthcare, employment, and higher education.

<a href="http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2015/10/2015_GSMA_Spotlight-on-Rural-Supply-Critical-factors-to-create-successful-mobile-money-agents.pdf">Spotlight on Rural Supply: Critical Factors to Create Successful Mobile Money Agents</a> (October)
GSMA
While focused primarily on two markets, Mali and Chad, this GSMA publication underscores the importance of developing an agent network for work specifically in rural areas. The report broadly highlights liquidity management, selection criteria, and agent network management.

<a href="http://onpoint.wbur.org/2015/11/17/unbanked-uber-big-finance-debit-cards">The Uberization of Money</a> (Podcast) (November)
On Point with Tom Ashbrook
The new model for banking and investing is one in which middlemen direct consumers to the best products rather than consumers approaching providers on their own – similar to Uber directing riders to cars. While we have not seen great evidence of this trickling down to base of the pyramid customers, we are excited about its possibilities to address customer needs. The podcast, built on reports from The Wall Street Journal, The Boston Globe, and The Atlantic, explores the promises—and pitfalls—of this new trend in financial technology.

<a href="http://www.centerforfinancialinclusion.org/publications-a-resources/global-microscope">The Global Microscope 2015</a> (December)
The Economist Intelligence Unit
The Global Microscope 2015 assesses the regulatory ecosystem for financial inclusion by evaluating 12 indicators across a range of developing economies around the world. This year's Microscope is the ninth edition of the study and the second that looks beyond microfinance, evaluating countries across the wider landscape of financial inclusion.

Financial Inclusion 2020 (<a href="http://www.centerforfinancialinclusion.org/fi2020" target="_blank" rel="noopener noreferrer">FI2020</a>) is a global multi-stakeholder movement to achieve full financial inclusion, using the year 2020 as a focal point for action. This blog series will spotlight financial inclusion efforts around the globe and share insights from key thought leaders in financial inclusion, with a specific focus on quality beyond access.

Have you read?

<a href="http://cfi-blog.org/2015/10/14/cfi-and-mix-launch-the-fi2020-inclusion-visualizer/">CFI and MIX Launch the FI2020 Inclusion Visualizer</a>

<a href="http://cfi-blog.org/2015/12/14/fi2020-week-e-magazine-themes-highlights-and-calls-to-action/">FI2020 Week E-Magazine: Themes, Highlights, and Calls to Action</a>

<a href="http://cfi-blog.org/2015/10/13/the-data-story-in-the-fi2020-progress-report-on-credit-reporting/">The Data Story in the FI2020 Progress Report on Credit Reporting</a>