Towards Authentic Transparency: A Radical Rethinking of Disclosure in Financial Inclusion

> Posted by Caitlin Sanford, Bankable Frontier Associates, and Alexandra Rizzi, the Smart Campaign

“Sandra” from Lima described her experience talking to a loan officer:

“You don’t understand anything [the microfinance staff members] says, because of how fast he talks.  It is almost as if his tongue is twisted. You end up not understanding in the end. [He says] ‘But ma’am I’ve explained it to you, why can’t you understand? I’ve been very clear.’”

New Client Voices research from the Smart Campaign and Bankable Frontier Associates (BFA) finds that although microfinance providers may be complying with disclosure regulations, clients are not adequately absorbing information about their financial products.  A regulatory compliance-based approach to consumer protection in which providers focus on meeting minimum disclosure requirements risks losing sight of the main objective of transparency— that clients understand what they are signing up for. With clients inadequately informed about many aspects of microfinance, even in countries with strong transparency regulations like Peru and Georgia, the Client Voices findings demand a radical rethinking of transparency.  Namely, emphasis should widen from what information is provided to how much clients understand.

In the Client Voices project we solicited input from clients about what they consider good and bad treatment in their interactions with microfinance service providers, and assessed the prevalence of consumer protection problems in Benin, Pakistan, Peru, and Georgia.  We found that clients in all four countries have an inadequate understanding of the basic attributes of their microfinance products.  Although most clients do receive some information about their loan products, overall they report low levels of understanding of their loan terms and conditions, regardless of education level.  In Benin, Pakistan, and Peru, 50 percent, 49 percent, and 43 percent of respondents respectively report that they understood loan terms only somewhat or not at all at the time of taking out the loan. Self-reported understanding of loan terms and conditions is highest in Georgia, where 79 percent reported understanding the terms and conditions.

Photograph taken by client in Benin

The lack of understanding is more alarming with respect to insurance that is often bundled with microfinance loans: 24 percent of clients in Peru did not know whether or not they had insurance with their loan. Among clients who had insurance accompanying a microfinance loan in Pakistan, only 13 percent reported that they knew how insurance works.

“But the problem with these [microfinance providers] is that there are some false charges called “insurance” in addition. Finally the amount to borrow becomes insignificant after such costs are deducted.”

-Female, Cotonou, Benin

In Georgia, many MFIs issue loans in U.S. dollars rather than Georgian lari to protect themselves against devaluation. As a result of exchange rate fluctuations in the past year, the monthly repayment of a client who took a dollar-denominated loan in January 2015 would be more than 25 percent larger by October of that same year.  Our research found that 13 percent of respondents with dollar-denominated loans claimed they were not aware of this risk when they took out the loan, and 52 percent felt the information provided on exchange rates was somewhat to not clear at all.

Photo taken by client in Georgia

“[I took the picture of the] empty wallet to signify monthly expenditures, the increase of dollar rate…”

-Male, Kutasi, Georgia

Whether it is currency fluctuations in Georgia or an unknown fee in Peru, clients are often surprised during transactions with MFIs. Regardless of whether these surprises are due to client misunderstanding or staff malfeasance, they damage client trust. We believe that disclosure practices must widen to encompass both what information is shared with the client as well as ways to check client understanding.

Here is some food for thought on ways to rethink transparency and disclosure:

  • Prior to disbursement, providers could ask clients to describe their understanding of their product, with staff correcting any misunderstandings. Institutions could even apply a short and easy quiz after presenting information to verify that clients have understood key details, such as the term, how often payments should be made, late penalties, the currency of the loan, etc.
  • Providers could present information in innovative ways. For example, Georgian clients report that they really like the short videos that Georgian microfinance providers show. Other ideas include calendars for literate populations, songs, and simple infographics. We call for rigorous research to test which types of disclosure mechanisms actually work.
  • Client protection standards could define best practices in transparency as not just disclosure but checks (and even monitoring) of client understanding of terms and conditions. SMS and interactive voice response technology could be low-cost methods for implementation.
  • Regulators may wish to build verification of client understanding into supervision. This could involve surprise mystery shopping visits to institutions, or questioning clients about high-stakes information. Regulators may consider issuing fines to microfinance institutions if a certain percentage of clients do not know critical information.
  • Insurance bundled with loans may deserve more attention from regulators, as client understanding of insurance—even whether they have a policy or not— is especially low.

Because transparency efforts have focused on complying with disclosure requirements rather than making sure users understand their rights and responsibilities, information that microfinance institutions provide tends to be copious, technical, and complicated.  Current disclosure methods are not resulting in sufficient client understanding.  We look forward to hearing from the industry on how to shift away from “tongue twisted speeches” used to explain financial products.

For more, check out the Client Voices project.

Have you read?

My Turn to Speak: Voices of Microfinance Clients in Benin, Pakistan, Peru, and Georgia

What Do Clients Care About? Results from Benin

Borrowing Blind in Peru: Findings from the Client Voices Project