Untitled - Center for Financial Inclusion blog

Table of Contents Acknowledgments........................................................... 3 Section I: Introduction................................................... 5 Section II: Principles and Examples............................ 8 Principle 1: Quality of Service.................................................... 8 Principle 2: Transparent Pricing. .............................................. 14 Principle 3: Fair Pricing. ........................................................... 14 Principle 4: Avoiding Overindebtedness. ................................. 17 Principle 5: Appropriate Debt Collection Practices.................. 21 Principle 6: Privacy of Customer Information.......................... 26 Principle 7: Ethical Behavior of Staff....................................... 27 Principle 8: Feedback Mechanisms. ......................................... 30

Section III: Next Steps ................................................. 39 Section IV: Pro-Consumer Checklist ......................... 41 Annex One: List of Interviewees .............................................. 47

Bibliography.................................................................. 49 Other Monographs in This Series............................... 50

Bringing Pro-Consumer Ideals to the Client

Page 2

Acknowledgments The author of this monograph thanks Beth Rhyne for her guidance throughout the research and writing of this report, and Patrick McAllister for his valuable review and feedback. She also thanks Monica Brand, Monisha Kapila, Brian Kuwik and Jacqueline Urquizo for sharing their expertise on operational issues and Rekha Reddy and Renée D. Zahmoul for their editing support. Finally, she thanks Fernando Anker, René Azokli, William Blacutt, Luis Castillo, Germán Contreras, Ayleen Cortés, Kenan Crnkic, Jesús Ferreyra, Julio César Herbas, Claudio Higuera, Kathryn Larcombe, Levan Lebanidze, Marciano Puche, Rodney Schuster, Sutardjo Soeharto, Victor Tellería and Manuel Torres. These microfinance institution executives shared their experiences in bringing important consumer protection ideals to the operational level within their institutions. Special thanks to the Tinker Foundation whose funds contributed to the creation of this document.


Page 3

About the Author Patricia Lee Devaney is an independent research consultant specializing in microfinance and program evaluation. Previously, she served as ACCION International’s Director of Policy and Research, where she specialized in measuring poverty levels and social performance at microfinance institutions. During her five years at ACCION, she authored a chapter in The Commercialization of Microfinance, co-authored Supervising & Regulating Microfinance in the Context of Financial Sector Liberalization and wrote several studies on the poverty outreach of microfinance institutions. Ms. Devaney holds her Bachelor or Arts (BA) from Colby College and her Master in Public Administration (MPA) from the Kennedy School of Government at Harvard University.


Page 4

Bringing Pro-Consumer Ideals to the Client: A Consumer Protection Guide for Financial Institutions Serving the Poor May 2006 Section I: Introduction Pro-consumer ideals, central to the underlying conscience of institutions throughout the microfinance industry, have recently made their way into the forefront of practitioner discourse. Microfinance institutions (MFIs) are increasingly realizing the benefits of incorporating a discrete consumer protection strategy into their organizational philosophies and operations. The increased focus on pro-consumer policies and practices in the microfinance field is driven by a combination of social and market pressures. That is, the social missions of MFIs – to support poor individuals and their families – assume the high level of respect, dignity and fair treatment to the client that is embodied in consumer protection ideals. Additionally, savvy MFIs see consumer protection as a way to build customer loyalty, improve their public image and differentiate their services from those of competitors, resulting in greater numbers of more loyal clients. This monograph is part of the pro-consumer initiatives of ACCION International and the MicroFinance Network. The first stage of this initiative was to develop and adopt a Pro-Consumer Pledge in 2004 among network members. The Pledge defines principles to equip microfinance customers with rights – and knowledge of these rights – while minimizing the operating costs so that MFIs can remain sustainable in the long-term.


Page 5

Through the nine principles of the Pro-Consumer Pledge, MFIs agree to pursue the following practices: Principle 1: Quality of Service Principle 2: Transparent Pricing Principle 3: Fair Pricing Principle 4: Avoiding Overindebtedness Principle 5: Appropriate Debt Collection Practices Principle 6: Privacy of Customer Information Principle 7: Ethical Behavior of Staff Principle 8: Feedback Mechanisms Principle 9: Integrating Pro-Consumer Policies into Operations Pro-Consumer Efforts in Microfinance: Several MFIs, network organizations and associations have begun to push the consumer protection agenda by clearly defining their pro-consumer principles. The SEEP Network, through its Pro-Client Working Group, has contributed important dialogue and documents to the consumer protection effort. The ACCION International/ MicroFinance Network “Pro-Consumer Pledge” (the focus of this report), FINCA’s “Consumer-Oriented Ethical Statement” and Freedom from Hunger’s “Statement on Ethical Treatment of Clients” are examples of network organizations articulating pro-consumer principles. Prizma, a Bosnian MFI, has worked with Freedom from Hunger to create “Our Commitment to Clients,” a pioneering consumer protection initiative at the MFI level. These few examples are being added to daily as more and more institutions understand the case for addressing consumer protection. The Pro-Consumer Pledge is designed so that consumer protection policies and practices can be self-directed from MFIs and other financial institutions. Its intent is not to promote or guide government regulation, but to take a proactive approach to consumer Bringing Pro-Consumer Ideals to the Client

Page 6

protection. Where regulations already exist – particularly in the areas of transparent pricing, overindebtedness and client privacy – we seek not only compliance with the letter of the regulation but also an embrace of the spirit behind it. This report outlines tangible ways in which MFIs are currently integrating the ideals of the Pro-Consumer Pledge into their operations. Interviews with directors and commercial managers from 15 MFIs affiliated with ACCION and the MicroFinance Network1 revealed that all institutions are pursuing proactive consumer protection in various ways and each has lessons to offer. This guide is intended for any institution – MFI, traditional commercial bank, consumer lender, credit union – that provides financial services to low-income segments of the population. While many of the issues discussed here are relevant to any consumer, much is specific to the particular vulnerabilities of the poor. For a list of interviewees, see Annex One. Section II of this report defines each principle and interprets how it is generally being fulfilled. While there is no prototypical proconsumer institution, several MFIs do stand out as notable models of specific principles, and therefore case examples from ACCION and MFN partners are highlighted to illustrate how the principles are currently being carried out. Section III suggests practical next steps that the community of financial service providers to the poor can pursue to reach their pro-consumer goals. Finally, Section IV presents a best practices checklist for institutions to consult when developing their own pro-consumer initiatives.

1

The following ACCION partner institutions were interviewed for this study: Apoyo Integral (El Salvador), Fundación Mario Santo Domingo (Colombia) and Tchuma (Mozambique). The following MicroFinance Network partner MFIs were interviewed: BRI (Indonesia), Constanta (Georgia), PRODEM FFP (Bolivia) and Prizma (Bosnia). The following institutions were interviewed and are partners of both ACCION and the MicroFinance Network: Mibanco (Peru), FAMA (Nicaragua), PADME (Benin), FINAMERICA (Colombia), Cooperativa Emprender (Colombia), BancoSol (Bolivia), Compartamos (Mexico) and UMU (Uganda) were also interviewed and are members of both networks.


Page 7

Section II: Principles and Examples Principle 1: Quality of Service. MFIs will treat every customer with dignity and respect. Members will provide services in as convenient and timely a manner as possible. This broad principle is central to the survival of each of the MFIs interviewed. Creating positive interactions between clients and staff are at the core of any customer service strategy. To achieve a high-quality experience for customers, institutions should aim to create appropriate policies and procedures, have high-level customer service champions and allocate ample human resources to the effort. Improving operations, using technology, and communicating accurate and understandable information to clients are also critical building blocks to a successful customer service strategy. A successful customer service strategy must be integrated into the core culture and basic processes of the institution. Implementing Principle 1 may entail restructuring fundamental functions and processes at every level of the organization.2 Despite the difficulty in implementing a robust customer service strategy, when done correctly, it is both a pro-consumer practice and a means for client retention motivated by the bottom line. In the end, quality of service will benefit clients, staff and the institution’s profitability. A customer service framework: To ensure consistency and reliability in staff interactions with clients, institutions should standardize policies and systematize

2

For a discussion of how to design a customer service strategy, see MicroSave’s Customer Service Toolkit (2005) and “Marketing & Competitive Positioning” by Monica Brand in Transforming Microfinance Institutions: Providing Full Financial Services. Joanna Ledgerwood and Victoria White, eds. (forthcoming August 2006).


Page 8

procedures, and designate high-level managers to support and oversee the entire customer service initiative. Policies and procedures should be articulated with a customer service manual, which may include a map of staff-client contact points; a list of frequently asked questions (FAQs); customer handling procedures; descriptions of each staff role as it relates to customer service; a depiction of feedback loops on client inquiries; and contingency plans in case of unexpected system crashes. Effective implementation of such policies and procedures is contingent upon a high-level champion or group of champions to push the customer service agenda. Several MFIs have designated a manager with the distinct responsibility of protecting and serving customers and monitoring customer service performance. A crossdepartmental committee supporting this champion and dedicated to consumer protection/ customer services issues is ideal. MFI Examples: Customer service champions At BancoSol (Bolivia), the Products and Services Analyst position is responsible for ensuring that the institution’s services are meeting the needs and demands of consumers. Mibanco (Peru) has an internal marketing person, the Quality and Client Services Manager, and a supporting Quality Committee that provide a platform for customer service and consumer protection initiatives. The Quality and Client Services Manager is responsible for “supporting the organization in the development of a culture of internal and external quality, oriented to maintain a leadership position in the market; to develop a quality plan at the Bank, implementing mechanisms that ensure efficiency in client services internally and externally, as is done with products and services.” This position is guided by the institutional Code of Conduct and Ethics. Mibanco’s Quality Committee is a comprehensive team of managers (including the General Manager, Commercial Manager, Bringing Pro-Consumer Ideals to the Client

Page 9

Operations Manager, Human Resources Manager, Marketing Manager, Finance Manager, Process Manager, and Quality and Client Services Manager). The committee’s mission is to pursue projects and strategies to create a culture of quality and continuous improvement. The committee meets frequently – two hours twice per month – to discuss a wide range of topics such as resolving customer complaints, improvements in the client service telephone system, managing lines at branches, training clients on the use of automated teller machines, and client satisfaction. Allocating human resources to customer service: A front line customer service department will further institutionalize the ideals of Principle 1. Several MFIs have created dedicated positions responsible for greeting customers, responding to their inquiries and channeling complaints. Customer service departments are generally housed within Operations or Marketing, although that decision should be based on the individual characteristics of each institution. To maximize the cost-effectiveness of a customer service department, staff can perform multiple functions including sales and promotion in addition to their customer service tasks. While a dedicated team is important, excellent customer service begins internally with satisfied employees and appropriate processes. MFIs must therefore address any existing internal problems, such as a weak organizational culture, before expecting to successfully implement a customer service strategy. MFI Examples: Focus on service quality Compartamos’ (Mexico) client services department includes a total of eight staff members who are located at several of their regional offices. The department is responsible for responding to client and prospective client requests and coordinating client events (such as information sessions and training). Client services staff are trained at the branch offices so that they understand the loan application process and the details of Compartamos’ Bringing Pro-Consumer Ideals to the Client

Page 10

interaction with clients. They are held accountable by chronicling the complaints and inquiries in detailed reports, which are reviewed monthly by management. Mibanco has created an Organizational Development department, staffed by process specialists to review the flow of the loan process and the client experience and suggest ways to improve the underlying processes. Its purpose is to improve efficiencies throughout the organization to enable faster loan disbursement. Smooth operations: Institutions focused on quality of service offer clients a clean, safe, professional and comfortable atmosphere at branch offices and ATMs. The location and layout of branches – including a customer service desk, centrally-located deposit and withdrawal slips, organized lines, and seats for waiting clients – is central to making clients’ experience a pleasant one. Wait time should be minimized, and reasons for service delays should be communicated frequently to clients. All staff should contribute to this atmosphere by being respectful and friendly to clients, being well-informed about financial products, dressing professionally and maintaining a clean and comfortable space where clients may visit. These values should be clearly articulated to staff through the institutional codes of conduct and training (further discussed in Principles 7 and 9).

“Our

individual relationship with each client is of major importance. We show them that the interior of office is very nice and makes them comfortable. We stress that each employee be polite.” - Levan Lebanidze, Constanta Georgia

Increased efficiency through technology: MFI representatives stress the importance of providing quick loan turn-around and an efficient application and disbursement process as fundamental to any pro-consumer initiative. By using technology, MFIs can improve information quality and increase efficiency, which minimizes delays to clients, reduces the Bringing Pro-Consumer Ideals to the Client

Page 11

collection of redundant information and contributes to a smooth application and disbursement process. This leads to more satisfied clients and saves staff time, both of which contribute to the institution’s bottom line. A well-structured management information system (MIS) is critical for an institution to realize efficiencies and to accurately track loan information. When dealing with real-time information, loan officers are better able to assess a client’s true credit needs and ability to repay. Customer-oriented delivery technologies such as Wireless Application Protocol (WAP), point-of-sale (POS) devices, Smart Cards, personal digital assistants (PDAs), and automated teller machines (ATMs) are convenient for clients and provide further cost savings to institutions. MFI Examples: Upgrading service Apoyo Integral (El Salvador) implemented a new accounting and loan tracking software, which enables loan officers to have current information on clients’ loan terms, payment schedules and arrears. Before the system was in place, loan officers did not always have accurate information readily available for their customers. BancoSol uses PortaCredit, which replicates the paper loan application on loan officers’ handheld PDAs. With PortaCredit, loan officers directly input information collected from applicants, make loan calculations, pre-approve loans from the field, and track client payment status. Estimates suggest that loan officers are able to disburse a new loan in nearly half the time it takes using traditional application and disbursement methodology. Loan officers also report that PortaCredit allows them to renew a loan with a repeat client several times faster than before. Mibanco loan officers use WAP, allowing them to immediately receive and transmit client credit information to the MFI database and an external credit bureau through their mobile phones. Loan officers can automatically verify and update client’s personal


Page 12

information credit history from the field and make an on-the-spot credit assessment. Communicating accessible information to clients: Quality service also means presenting information in a way that is accurate and understandable to all potential clients. While pricing transparency (discussed in Principle 2) is an important aspect of this, institutions should provide customers with an overall understanding of policies, procedures, services and treatment that they can expect as a customer. This should take into account both illiterate clients and customers who speak indigenous languages. Institutions should ensure that the promises communicated in their promotional materials match what can actually be delivered. Messages to clients and potential clients should be consistent, based on official manuals or information sheets. Furthermore, as discussed in Principle 8, soliciting and responding to client feedback is an important component of good customer service. MFI Examples: Clear Communication As part of their overall customer service strategy, BancoSol gives each new customer a comprehensive “Welcome Packet,” which introduces the client to the institution and its pro-consumer initiatives, such as pricing information, privacy policies and feedback mechanisms. To notify all clients – including illiterate clients – about the institutions’ commitment to high quality service, BancoSol and Mibanco run television spots at their branches. These television segments inform clients that they should expect good service and respect from the institutions. Constanta (Georgia) is implementing an Interactive Voice Response (IVR) system, enabling clients to check their balances, payment schedules and other loan information by phone.


Page 13

Principle 2: Transparent Pricing. MFIs will give clients complete and understandable information about the true costs they are paying for loans and transaction services and how much they are receiving for savings.

Principle 3: Fair Pricing. MFIs will price their services at fair rates. Their rates will not provide excessive profits, but will be sufficient to ensure that the business can survive and grow to reach more people. While Principles 2 and 3 are distinct concepts, in practice at the MFI level, they address similar issues and are therefore jointly discussed in this paper. Pricing issues are central – yet traditionally avoided – within the microfinance industry because microfinance interest rates are higher than typical commercial rates. However, microfinance services are far more costly to provide than traditional loans, and commercially-focused institutions must charge rates that cover their costs while remaining competitive. Institutions with a pro-consumer focus present their interest rates in the clearest terms possible – as both effective annual percentage rates (APRs) and as disaggregated payments. MFIs have come up with several ways of avoiding the competitive disadvantage that results when they adopt a transparent pricing policy but their competitors do not. Such strategies include coordinating with other MFIs and educating consumers on why higher rates are necessary in microfinance and actually lead to better products. Generally, institutions do not define what a “fair” price is, nor are they clear on the meaning of “excessive” profits. There is consensus, however, that the efficiencies that come about through competition lead to lower interest rates. Therefore, in markets where there is a high level of competition, it may be safe to assume that MFI prices are as fair as possible.


Page 14

Clear presentation of costs (both disaggregated payments and APRs): MFIs commonly present loan information to clients as disaggregated tables detailing the amount and date of each payment according to the specific loan “Transparency is explaining to the terms. While this is a clients exactly how much we’re going good pro-consumer to charge them. It’s in their contract practice because it and in the table of payments (how provides a clear much is interest, principle and depiction of exactly commission). It’s in our best interest what will be required to be as clear as possible with our in repaying the loan, clients.” it does not allow – Victor Tellería, FAMA (Nicaragua) clients to comparison shop. However, if microfinance interest rates are compared directly with commercial bank rates without an understanding of the higher operational costs of microfinance services, MFIs could be (and have been) accused of charging usury rates. There has therefore been limited pressure within the industry (from donors, networks and MFIs themselves) to demand that institutions clearly state their interest rates as comparable APRs.3 But such transparency is critical for consumers trying to decide which, if any, loan to take. Therefore, pro-consumer MFIs should present their interest rates as both comparable APRs and as individual payment schedules. If one-time additional fees are necessary, they too should be clearly stated and calculated into the APRs. In some countries, such as Peru, Bolivia and Colombia, regulations mandate the way in which regulated MFIs must present their interest rates. Pro-consumer MFIs present this information even when it is not required, and surpass it by posting interest rate

3

See Porteous, David and Brigit Helms (May 2005) “Protecting Microfinance Borrowers.” CGAP, Washington, D.C. and McAllister, Patrick (March 2003) “Trust through Transparency.” SEEP Network, Washington, D.C.


Page 15

information in marketing materials and other locations accessible to clients and potential clients. MFI Examples: Clear and Simple Presentation of Costs Institutions such as Apoyo Integral and BancoSol, Bank Rakyat Indonesia (BRI) and PRODEM FFP (Bolivia) present their interest rates on posters or displays as APRs on the walls of all branches. At BancoSol, effective interest rates are included in the Welcome Packet. BRI also includes interest rate information in brochures and on their loan application forms. Because there is an interest rate cap in Colombia, Cooperativa Emprender (Colombia) charges additional fees for their services. To explain these fees and the interest rates, they provide clients with a summary sheet detailing the aggregate cost and disaggregated payments. Interest on declining balances: Historically, financial service providers catering to the poor attempted to make loan terms as simple as possible and therefore charged a flat interest rate. Now that many customers have a sophisticated understanding of interest rates and technology allows loan officers to easily calculate complicated terms, pro-consumer MFIs should consider charging interest on declining balances, which accurately reflects the stated price of the loan. If an institution continues to charge a flat interest rate, the APR should be publicized to consumers. Working with other MFIs: Unless competitors are also transparent, “honest” MFIs risk appearing as if their costs are higher than the costs of other institutions. To resolve this issue, MFIs could join forces with their competitors to standardize how information will be presented to the consumer. This puts everyone on equal footing, fosters competition in prices and gives the sector a reputation of transparency and trust-worthiness.


Page 16

MFI Example: A level playing field Prizma (Bosnia) is working with other Bosnian MFIs to create their own consumer protection standards based upon their own internal document called “Our Commitment to Clients” and the ACCION/ MicroFinance Network Pro-Consumer Pledge. This is meant to protect consumers throughout Bosnia, and create a level playing field among MFIs so that institutions do not lose customers simply because they present their interest rates clearly. Consumer education: Consumer education plays an important role in pricing transparency from both a social pro-consumer perspective as well as a public relations perspective. By educating consumers on the details of interest rates and other costs, MFIs help clients to be their own advocates and borrow responsibly. Additionally, by explaining the rationale behind the costs of microfinance services, MFIs create a market of consumers who understand and will accept the costs (or at least challenge the costs in an informed way), thus avoiding reactionary protests based on emotion or political propaganda. PADME (Benin) and Compartamos hold client education sessions on a variety of topics, including understanding the true cost of a loan. These sessions are described in greater detail under Principle 9. Principle 4: Avoiding Overindebtedness. In order to avoid customer overindebtedness, MFIs will not lend any customer more than the customer can afford to repay. MFI directors report that Principle 4 is the most vital principle to their business, and can be among the most difficult to follow. Increased competition, in addition to driving down costs and increasing options for poor clients, attracts new lenders, some of whose methodologies depend on only minimal evaluation of client


Page 17

credit-worthiness. These lenders may factor in a relatively high level of default compared to traditional MFIs. Despite these fundamental differences between unscrupulous lenders and MFIs, when they co-exist in a market, there is pressure on everyone to over-lend for short-term survival. Even MFIs that resist the pressure to over-lend often end up doing so because of poor, incomplete or non-existent credit bureaus leading to imperfect information about client credit histories. Additionally, loan officer incentives focusing on the volume of loans they disburse may cause them to lend beyond the needs and repayment capacities of their customers. To avoid overindebtedness, many institutions rely on their own internal lending methodologies to determine repayment capacity that focus on cash flow and internal definitions of “overindebtedness.” To overcome the limitations of imperfect client information, many MFIs are coordinating with other institutions to share information on the borrowing histories of clients and potential clients. Finally, institutions that use a credit scoring methodology are able to better detect which clients statistically have a greater risk of over-borrowing. Lending policies: Traditional MFI lending methodology is designed to minimize client overindebtedness by focusing on the client’s ability to repay through an on-site evaluation of the cash flow of the client’s microenterprise and household (taken together) along with an assessment of their character. Additionally, because loan officers typically live in the neighborhoods in which they work, they are likely to be aware of potential problems of overindebtedness of specific clients. Some institutions will not grant a loan to a client that already has an existing loan with another organization. Others have a policy that a client’s debt service may not be beyond a given threshold (e.g., 30 percent of monthly income). Bringing Pro-Consumer Ideals to the Client

Page 18

New or informal credit bureaus: As suggested with transparent pricing (Principle “PRODEM’s internal policy 2), MFIs could reduce the is to run every credit through occurrence of client the Superintendency of overindebtedness by Banks’ credit bureau. coordinating with other MFIs However, it does not include in their markets. Participating NGOs, so a group of MFIs in established credit bureaus, established a second credit if available, is an obvious bureau to include NGO client first step. An ideal credit information.” bureau will include all – Fernando Anker, PRODEM, financial transactions of all Bolivia customers, not only the late payments and defaults of problem borrowers. This allows institutions to base credit decisions on an accurate depiction of how much debt each applicant already has, thus reducing client overindebtedness. When a national credit bureau is unavailable or ineffective, some MFIs have worked through a local or national network to create their own microfinance-specific credit bureau. Others have established informal channels in which loan officers share the names of troubled clients with their counterparts at competing MFIs. While a formalized, mandatory credit bureau is most effective, these less formal alternatives can be a temporary solution to manage the risk of over-lending. In such cases, practitioners should be mindful of the potential for client privacy breaches (see Principle 6). Furthermore, in such an unregulated system, it can be difficult for “black-listed” clients to dispute their status.


Page 19

MFI Example: Coordinated efforts Constanta and other MFIs in Georgia recently created the Georgian Association of Microfinance Institutions. The first order of business for the network is to exchange client information among members. It also focuses on sharing best practices and in coordinating efforts to inform Georgian microfinance legislation. PADME and other microfinance institutions in Benin created Consortium ALAFIA in 1999. ALAFIA has developed a networkwide code of conduct and is in the pilot stages of developing a credit bureau among its members. In addition to the national credit bureau, PRODEM participates in the credit bureau of FINRURAL, an association of microfinance institutions. Because of flaws in the formal credit bureau, Tchuma (Mozambique) informally checks on client credit records with other institutions. Institutions swap information about clients in arrears to prevent them from taking on additional debt. This is done mainly at the loan officer level, since many of the loan officers from different organizations have known each other for years. Credit scoring: Credit scoring helps MFIs improve their loan evaluation processes while lowering the labor costs of authorizing and collecting loans. By implementing the credit scoring methodology that detects highrisk loans, institutions such as BancoSol, Cooperativa Emprender and Mibanco minimize the problem of over-lending, leading to more efficient operations, better portfolio quality and fewer over-indebted clients.


Page 20

Principle 5: Appropriate Debt Collection Practices. While debt collection practices must include energetic pursuit of defaulters, MFIs will treat customers with dignity and will not deprive customers of their basic survival capacity as a result of loan repayment. Consumer protection is particularly relevant during the debt collection process. Because a low default rate is critical to their survival, institutions must put pressure on clients to repay, while ensuring that physical force, humiliation, collections at inappropriate hours, and other inappropriate intimidation strategies are never used.

“One

of our core values is respect. This is an important part of collections. The law is specific about what is permitted. You can’t collect things that don’t correspond with the loan; you can’t collect a bed or other life-style assets; you can’t collect on Sunday. But underlying all of this is the fundamental notion of respect to the client.” – Jesús Ferreyra, Mibanco (Peru)

To combat abuses, first and foremost, institutions should foster an underlying culture of professionalism, service and respect for the client through the examples set by branch managers and through training (as discussed in Principle 1).

Additionally, comprehensive policies and procedures should clearly articulate the process of dealing with late payers and delinquent clients. These policies and procedures should begin as early as the loan application stage when determining a client’s collateral. They should reflect any relevant laws dictating what collateral is allowable and include clear policies against taking personal effects such as a bed, pots and pans, or a stove.


Page 21

If a client does enter into arrears, institutions should follow clear procedures that gradually increase the level of pressure to repay while maintaining a professional and service-oriented relationship. Typically, the loan officer will make a visit after the payment is one day late to determine the reason for the delinquency (i.e., is the client unable or unwilling to pay and why?), to reiterate the benefits of making payments on time, and to obtain a verbal commitment from the client to repay. This initial visit will be followed by subsequent visits by the loan officer in the following weeks, each with an increasing level of pressure through formal notification letters and charging late payment fees. If this fails, the loan officer may be joined by a second loan officer or the branch manager, who provides an additional level of pressure and formality to the process. After repeated visits, if the client still does not repay, the loan officer and manager may consider rescheduling the loan under the formal guidelines of the institution. However, if rescheduling the loan is not a viable option, typically after 90 days, the case will be referred to the institution’s collections department. The collections officer makes further attempts to collect the loan, and begins preparation for the confiscation of assets. To maximize the institution’s control over the behavior of its collections department, it should be kept inhouse as opposed to outsourcing the function to a third party. If the collections department is unsuccessful in recouping the loan, the institution can either write it off or refer it to a legal recovery unit to begin seizing assets according to the relevant laws and regulations. This function can either be maintained in-house or it can be outsourced to an attorney with loan recovery expertise. Within the context of their standard loan collection procedures, MFIs in this study reported several interesting ways to increase the chances that collection practices remain ethical and that delinquent clients are treated with respect.


Page 22

Monitoring loan officers and collections officers: Internal auditing departments are well-positioned to monitor the interactions between clients and MFI staff. In addition to other standard functions, auditing departments can perform random check-ins with delinquent clients to verify that they are being treated fairly. Additionally, when managers visit clients to monitor for fraud and service quality, they could also include delinquent clients in their rounds and conduct informal interviews about their treatment during the collections process. MFI Examples: Interviewing delinquent clients: Once per month, BRI branch managers visit delinquent clients randomly to check on their interactions with loan officers. The internal auditing departments of Constanta and FAMA (Nicaragua) informally survey delinquent clients to ensure that they are being treated fairly by MFI staff. By combining random interviews with clients in arrears with standard auditing procedures, auditors can learn about potential problems with minimal extra cost and effort. Another way that MFIs monitor collections practices is to mandate that loan officers and collections staff self-report their dealings with delinquent clients. By setting up a process by which employees report their interactions with delinquent clients, institutions can underscore the importance of appropriate debt collection practices while creating a system of accountability. MFI Example: Client interaction reports Loan officers at BRI are required to complete a form detailing their interactions with delinquent borrowers and report this to their managers. Limit one-on-one interaction between delinquent clients and their loan officer: As noted above, most MFIs have strict procedures for dealing with delinquent clients. A defaulting client may be visited by their loan Bringing Pro-Consumer Ideals to the Client

Page 23

officer, a second loan officer, the branch manager, a collections officer and a legal officer. Involving multiple people in the relationship with the delinquent client reduces the likelihood of client mistreatment. MFI Example: Two loan officers are better than one: After one month of working with delinquent clients one-on-one, PADME loan officers are joined by a second loan officer to visit the client to determine how best to work with the client to repay. By limiting how often loan officers are left alone with their delinquent clients, the institution attempts to reduce the incidence of client mistreatment. Additionally, the additional input from the second loan officer has proven to be valuable in helping to resolve client repayment issues. Flexibility according to local situation: Microfinance by its very nature exists in difficult business “When people are in environments. As a result, it is default, we first try to standard practice for institutions to understand why they exercise some flexibility when didn’t pay. If it is related dealing with clients having to market economy, difficulty repaying their loans. instability, change of MFIs in this study report a variety government or other of practices that consider external things out of their control, factors when dealing with we do our best to make delinquent clients. That is, while adjustments.” maintaining their underlying – Levan Lebanidze, methodology, consumer-oriented Constanta, (Georgia) MFIs make certain exceptions – including loan restructuring under special circumstances, a flexible approach to collateral, and compromises in executing guarantees – for clients faced with extenuating circumstances.


Page 24

MFI Examples: Understanding the problem with repayment When a client enters arrears, FAMA and Constanta loan officers first make a site visit to determine if the delinquency is part of a long-term unwillingness to pay, or if it is related to a broader situation outside of the client’s control, such as economic or political instability. In the latter case, the institutions frequently engage in “informal” loan restructuring. Instead of drawing up an entirely new loan with a new schedule and contract for a troubled client, clients have the flexibility to make temporary changes in the payment schedule until their situation improves. Although this is considered to be informal, it must be approved by the Credit Committee, formally documented, and generally handled under the standard norms of risk management and reporting. Because of strict and complicated ownership laws in Benin, it is very expensive for clients to formalize their collateral. Therefore, PADME does not require clients to present “When we report to the Credit formalized collateral Bureau, we only send the name of when applying for a loan. the client, the amount of the For example, if a loan particular loan and the amount they guaranteed by a client’s didn’t repay. The rest is home enters into arrears, confidential. We don’t give a PADME collects the husband or wife information on owner’s title but does not their spouse. Clients are aware of have the power to evict the privacy policies from the the client or take the consumer training sessions we home itself. This serves a provide.” similar purpose as – René Azokli, PADME (Benin) traditional collateral because the client cannot sell his or her home, but it allows the client to avoid onerous fees. If the client tries to sell the home, PADME would negotiate loan repayment through the sale price. Due to the vulnerability of Mozambique’s urban poor, Tchuma often works with delinquent clients to understand their situation Bringing Pro-Consumer Ideals to the Client

Page 25

before taking action. The institution will not consider seizing collateral until the loan is 30 days in arrears. At that point, there must be evidence that the loan officer and branch manager have been in communication with the client. In situations beyond the control of the client (such as illness, car accidents, death or theft), Tchuma often will not collect on collateral at all.

Principle 6: Privacy of Customer Information. MFIs will protect the private information of customers from reaching others who are not legally authorized to see it. As with collection practices, consumer privacy laws for regulated institutions in most countries are quite specific. Superintendencies require that these MFIs inform customers how personal and loan information is allowed to be shared. MFIs must also follow regulations on the physical protection of records. In most countries, client files are required to be kept in a locked area and management information systems must have a certain level of protection. However, pro-consumer institutions go beyond simply complying with privacy laws and put forth extra effort to make their privacy policies known to both customers and staff members. Explaining rights to clients: Clients can best protect themselves when equipped with knowledge of their privacy rights. Certain MFIs make an extra effort to inform customers of their privacy rights through clear communication during the loan application process. MFI Examples: Ensuring client understanding BancoSol includes a summary of client privacy rights in the welcome packet that clients are given when signing a loan contract.


Page 26

Constanta and FAMA clients are made aware of their privacy rights within the loan contracts, where the institutions’ practices are described and consumer legal rights are clearly defined. Communication with staff: Regulations define clear protocols on how MFIs handle customer privacy. By stressing these consumer privacy policies to staff, institutions can make sure that employees understand the details of the regulations as well as the importance of following them. MFI Example: Reiterating privacy policies In addition to including privacy issues in their new employee training program, Compartamos sends a formal letter explaining the institution’s privacy and confidentiality policies to new staff. Principle 7: Ethical Behavior of Staff. MFIs will hold their employees to a high standard with respect to conflicts of interest and unethical behavior, especially behavior that harms customers (such as taking kickbacks). Employees who breach these standards will be sanctioned. Clear and specific institutional codes, combined with an investment of time and money to create a pro-consumer culture will provide a strong platform for Principle 7. However, in practice, it is impossible to control the individual behavior of every staff member. In any industry where cash transactions are taking place, there is an inherent risk of fraud. Compounded with the vulnerability of low-income, often uneducated borrowers, MFI staff are in a position of power that sometimes leads to unethical behavior. In addition to standard sanctions (which should be presented clearly to staff), MFI representatives cite a variety of practices to encourage ethical behavior. Codes of behavior: As highlighted in Principle 9, creating a pro-consumer culture through staff training and on-going internal discussion of pro-


Page 27

“Our codes are used to consumer principles is key to operationalizing them. An provide a solid framework important first step is to define for behavior internally and the appropriate behavior of staff for MFIs throughout our in their interactions with clients national network.” through specific codes of – Claudio Higuera, behavior.4 Such codes are Cooperativa Emprender fundamental to a pro-consumer (Colombia) institution, as they describe an institution’s policies and practices relating to their clients. Many MFIs detail their pro-consumer ideals in writing, through Codes of Conduct, Codes of Ethics, Codes of Practice or value statements. MFI Examples: Put it in writing Apoyo Integral, BancoSol, BRI, Compartamos, Constanta, Cooperativa Emprender, FAMA, FINAMERICA (Colombia), Mibanco and Prizma have written codes, value statements and/or procedures detailing the expected behavior of staff. The most effective of these documents outline the both the general philosophies of the institutions and the very specific rules of what constitutes appropriate interactions between staff and clients. For example, Cooperativa Emprender’s Code of Ethics includes information on spending limits when staff members travel, how to host a client at the branch office (being friendly, offering a candy, etc.). Mibanco’s Code of Conduct and Ethics outlines appropriate interactions that staff is allowed with clients and suppliers. For example, employees are prohibited from accepting gifts from clients or suppliers in excess of $100. Restrict functions of loan officers: One strategy for reducing unethical behavior of staff is to simply limit the occasions for temptation. By limiting loan officers’ direct handling of money, MFIs can encourage them to focus on their 4

For more information on developing Codes of Ethics, Codes of Conduct and Codes of Practice, see Patrick McAllister’s March 2003 SEEP-sponsored document, “Trust through Transparency.” Bringing Pro-Consumer Ideals to the Client

Page 28

most important task of identifying and working with clients, and avoid the potential for kickbacks that may arise when the loan officer who has the power to grant the loan is also responsible for collecting money from clients. Reward exemplary staff: Shining a light on staff members who exhibit exemplary values and service will encourage ethical behavior throughout the organization. By instituting regular awards focused on proconsumer values, MFIs have created competition among staff to uphold the values of their institutions and have fostered a culture of ethical behavior. MFI Examples: Pro-consumer prizes BancoSol honors one staff member from each region with an annual “Best Service” award. The winners are awarded a pin and their photo and profile are featured in the institution’s newsletter. UMU awards quarterly prizes to employees who best fulfill the Code of Conduct as part of their “Core Value of the Month” awards series. Employees are nominated by other staff members and selected at the branch level. Winners receive UMU merchandise and are featured in the organization-wide newsletter.

Internal authorities: While the carrot can be powerful, the stick is often necessary. Therefore, clear rules and a predictable disciplinary process with actionable sanctions are crucial to encourage ethical behavior from staff. An effective addition to the disciplinary process is the creation of a committee set up within the institution to specifically deal with ethics violations. Such a committee serves both a functional purpose (to review cases of unethical behavior), and as a symbol of an MFI’s commitment to the importance of dealing with clients honestly.


Page 29

MFI Examples: Ethics committees Compartamos’ internal Honor Committee and UMU’s (Uganda) Disciplinary Committee were created to assess accusations of unethical conduct of staff members. BancoSol’s National Management Committee is responsible, among other things, for reviewing problems with unethical staff.

Principle 8: Feedback Mechanisms. MFIs will provide formal channels of communication with customers through which customers can give feedback on service quality. These channels will include mechanisms for responding to specific customers regarding their personal complaints. Feedback mechanisms provide consumers with recourse if they experience poor quality service, unfair treatment or other abuses. Institutions report several methods for soliciting client feedback, including client surveys, focus groups, consumer hotlines and suggestion boxes. However, not all channels are effective. A consumer-focused mechanism must be accessible and proactively promoted to all clients and include a clear resolution process. Customers must be confident that lodging complaints will prompt change and will not affect their loan terms in the future. To achieve both service improvement and customer loyalty benefits, institutions should publicly communicate how complaints have been resolved. Client surveys and focus groups: By proactively and regularly soliciting feedback through client surveys and in-depth focus groups, institutions can collect valuable information on areas to improve while demonstrating their commitment to consumer protection. For client surveys to be effective, they should be carefully worded and tested, and easy to complete in a short period of time. Institutions should distribute them through several different channels and frequently remind customers to use them. Focus groups should be expertly moderated


Page 30

and conducted on a regular basis – perhaps twice per year – and the information gathered should be systematically funneled to management to make operational improvements. MFI Example: Learning from customers BancoSol includes evaluation forms in their Welcome Packet. These forms solicit feedback on the loan application process that the customer has just gone through, and is accessible to literate and illiterate clients by soliciting feedback through illustrations. BancoSol also places customer satisfaction surveys at branch counters to gather feedback on customers’ experiences with particular cashiers. Suggestion boxes: While suggestion boxes are common at MFIs, they are often under-utilized or ineffective. To be effective, they should be actively promoted to all clients and adapted to the local culture and demographic realities. To increase the number and value of client suggestions, institutions should inform clients of them through prominently displayed posters. Suggestion boxes should be highly publicized, but placed out of staff’s view to demonstrate their confidentiality. To show the institution’s responsiveness to client suggestions, a nearby board should display previous comments and how they were resolved. Suggestion boxes are generally inadequate if they are the only means for obtaining customer feedback. While they can symbolize an institution’s commitment to responding to clients, the most robust information comes from surveys and focus groups. Hotlines: If properly structured, telephone and e-mail hotlines can provide institutions with valuable information. Effective hotlines must be well publicized and staffed by trained professionals who can respond to questions and suggestions accurately. Importantly, information gathered from hotlines should be systematically communicated to operations management so that improvements can be made based on consumers’ suggestions. Like suggestion Bringing Pro-Consumer Ideals to the Client

Page 31

boxes, hotlines are often more of a symbol of an MFI’s commitment to client input, while surveys and focus groups collect practical client information. MFI Examples: Soliciting client feedback BRI conducts internal training with staff on how to handle customer complaints in order to maintain quality service. A centralized call center in the head office handles calls from customers of all 300 branches. The call center number is widely distributed, placed on ATM screens, BRI’s website, informational materials and customer passbooks. Compartamos created a telephone hotline and e-mail address for customers to lodge complaints or provide suggestions. These fall under Compartamos’ client services department. The hotlines are publicized in all institutional materials. Management is made aware of the number of complaints as well as problems that are becoming trends. Clear complaint resolution process: While institutions with well-publicized feedback mechanisms will receive customer suggestions for some time, such a system will be ineffective in the long run unless customers witness results. To give customers the confidence that their complaints are being taken seriously, institutions should publicly detail their complaint resolution process on a sign or in informational material. This could be further strengthened with centrally-placed bulletin boards featuring complaints and how they were resolved. External authorities: Several countries have set up consumer protection authorities through industry associations or as part of the national regulatory agency. These ombudsmen aim to improve consumer protection within the financial industry by investigating and responding to customer complaints. This system is particularly effective when there is a clear complaint resolution process in which the external


Page 32

authority is a last resort after the internal bank channels are exhausted. MFI Examples: A pro-consumer environment Bolivia’s Superintendency of Banks and Financial Entities (SBEF) created a consumer protection authority in response to the consumer credit crisis in the late 1990s. The authority is charged with working with customers and their financial institutions to address consumer complaints. The Colombian Association of Banks and Financial Entities created the Defensoria, a consumer protection authority for those institutions that fund it. While it is effective in resolving many complaints, it has no authority over non-member institutions, thus excluding certain consumers from its benefits. In Peru, the Defensor del Cliente Financiero (Defender of Financial Clients), under ASBANC, the national association of banks, is set up to resolve disputes between participating financial entities and their clients. Principle 9: Integrating Pro-Consumer Policies into Operations. MFIs will make pro-consumer orientation a hallmark of the way they conduct business, through efforts such as staff training and incentives, financial education for customers, customer satisfaction programs and the like. While committing to the ideals of the Pro-Consumer Pledge is critical, institutions must continually focus on how these principles can be operationalized. Educating both staff and clients on these issues, as well as aligning staff incentives with pro-consumer goals are important first steps.


Page 33

Consumer education: Offering consumer education and financial literacy programs is an important – and only minimally explored – pro-consumer practice. By arming customers with information on interest rates, managing debt and their rights as consumers, MFIs can build customer loyalty while fulfilling their client-centered missions. Several MFIs offer consumer education free-of-charge as a component of their standard methodology. Others provide training at a cost to clients for more specialized business development services. MFI Examples: Knowledge is power Compartamos holds financial literacy sessions for new clients. Solidarity group clients attend the sessions for one hour each week over a three-week period. On the fourth week, their loan check is disbursed. Cooperativa Emprender and FAMA offer Diálogo de Gestiones (Dialogue for Managers) as a business development service to clients for a fee. Topics covered in the program include accounting and more industry-specific issues such as food sanitation. Similarly, Mibanco invites its best clients to “lonches,” informal sessions aimed at educating customers on loan products and ways to improve their businesses. FMSD (Colombia) loan officers hold regular client training sessions for all clients, free of charge. Some sessions focus on business themes, such as administration, accounting skills and managing business resources. Other sessions focus on broader, more personal issues such as personal financial management and life planning. Each day, from 10am to 11am, the branch manager from every PADME office holds free-of-charge information sessions, available to all clients. Sessions focus on a variety of topics, including products, loan conditions and interest rates. The sessions aim to make clients knowledgeable consumers of financial services. For example, in the interest rate discussions, APRs are Bringing Pro-Consumer Ideals to the Client

Page 34

illustrated by giving examples of how much a client would pay per month for loans with different terms. These are interactive and casual meetings, with the purpose of ensuring that clients fully understand their relationship with PADME and their obligations as borrowers. Publicizing pro-consumer ideals to clients: While consumer protection initiatives may be central to the internal culture and operations of an MFI, their true value is maximized only when clients are aware of “If staff members at the operational these pro-consumer level really understand the philosophies and importance of the commitment of practices. There is a Prizma [to pro-consumer principles], strong practical it will be successful.” argument for – Kenan Crnkic, Prizma (Bosnia) publicizing proconsumer ideals (increased customer loyalty), as well as moral one (empowering clients). If clients are aware of their rights as consumers, they will be more sophisticated consumers, better advocates for themselves and more loyal to their financial institution. MFI Examples: A Competitive Advantage Constanta summarizes the Pro-Consumer Pledge during introductory meetings with clients as a way to distinguish themselves from their competition. Prizma displays “Our Commitment to Clients” prominently in all branches. This pledge, developed in partnership with Freedom from Hunger, is a concise document that clearly outlines Prizma’s mission and seven pro-consumer principles. Prizma is one of the only institutions to have a distinct pro-consumer document separate from its standard code of behavior.


Page 35

Deepening a pro-consumer organizational culture: The most fundamental way to develop a pro-consumer institution is to dedicate time, money and effort to developing a deep proconsumer culture among employees. By holding retreats and training sessions and testing employees on consumer issues, MFIs have found innovative ways to engage employees more deeply in the organizational culture. MFI Examples: Staff Buy-In To reiterate the organizational values, Apoyo Integral holds company-wide “Value Fairs” for employees. Each department or branch creates a team, which graphically illustrates the words representing their selected value, such as respect, tolerance or empathy. These illustrations – drawings, paintings or photographs – are displayed together with those of the other teams. All employees are invited to participate, and they are publicized and supported by Apoyo Integral’s senior management. The overall goal of the Value Fair is to remind employees of their particular function and how that contributes to the overall values and goals of the organization. BRI has an internal division that is responsible for training all employees. Training programs highlight topics such as service quality and new products. Employees are sent to these sessions with varying frequency (loan officers attend twice per year). Planning centers, which hold the internal training sessions, are located in six areas throughout the country. Compartamos holds an annual retreat during which senior managers deliver speeches reiterating the institutional client-centered philosophy, focusing on the importance of providing clients with opportunities. As an introduction to the ideals of their Code of Ethics, new staff undergoes a three-hour training course and are then required to answer questions on an internal web page dedicated specifically to the code and its Bringing Pro-Consumer Ideals to the Client

Page 36

underlying values. After completing this exercise, staff members receive a pin with a logo designed specifically for Compartamos’ pro-consumer initiative (pictured here). Additionally, all staff review and re-sign the code each year. Before attending training for their particular job, all new FAMA staff are required to attend a one-week “induction” to learn about the institution’s goals, mission, products and clients. During the induction, management discusses quality of service and FAMA’s client-focused philosophies and practices with the new employees. FINAMERICA conducts staff training with a particular focus on the respect and dignity of the clients. This training is supported by the Codes of Behavior that are central to the institution. Each year, Mibanco has obligatory training for staff on their Codes of Conduct and Ethics. At the end of the training, staff sign a document stating that they subscribe to the values. Each year, PADME conducts a three-day obligatory training for all staff. The training focuses on daily jobs as well as the mission and vision of the organization. It includes sessions on how to welcome clients, how to collect and assess client information and discusses PADME’s mission, vision and culture. Individual staff training needs are determined at the end of each year in response to employee evaluations. After developing “Our Commitment to the Client” principles, Prizma held a retreat with all staff to discuss the importance and meaning of their internal pledge. PRODEM conducts staff training programs at all branches on specific topics within the broad ideals of consumer protection. Staff incentives: Regardless of the quality of training given to staff members, ultimately people respond to incentives. Therefore, the structure of Bringing Pro-Consumer Ideals to the Client

Page 37

staff incentives has important potential in encouraging proconsumer actions on the ground. While most institutions compensate loan officers on criteria such as portfolio quality, portfolio size and number of clients, several institutions have attempted to incorporate pro-consumer ideals into their incentive schemes. MFI Examples: Aligning expectations BRI loan officer incentives are based on traditional criteria such as portfolio quality and number of clients. Additionally, they are compensated based on non-traditional measures of complaint handling, and “competency targets,” which are a set of soft skills and characteristics (including ethical behavior) that BRI has determined are important for all employees to possess. Sutardjo Soeharto of BRI (Indonesia) noted that “We evaluate the employee not only on the basis of performance, but also how well they improve their competency in a variety of qualitative areas, including work integrity, team leadership, customer service orientation, and teamwork.” At Compartamos, customer service staff are evaluated based upon the number of complaints and inquiries they resolve. Annual evaluations also include a qualitative assessment of their interactions with clients. Incorporating pro-consumer principles into policies and operations: After including pro-consumer policies (e.g., pricing, appropriate staff behavior, privacy, over-lending) in their overall operations, MFIs should incorporate pro-consumer ideals as a distinct and standardized part of the credit application process.


Page 38

MFI Example: Fitting into daily operations Prizma is working to incorporate “Our Commitment to Clients” as a distinct step in their standard loan application process (during loan officer site visits to clients). After their application has been completed and the loan officer is visiting the clients workplace, clients will be introduced to the Commitment and sign a document saying that they are aware of the principles. Prizma is also in the process incorporating “Our Commitment to Clients” principles into their credit manuals and human resources policies. Section III: Next Steps ACCION and the MicroFinance Network’s work in consumer protection is meant to urge MFIs to develop their own criteria to ensure ethical business practices and fair treatment of clients. Its overarching goal is to equip consumers with rights while minimizing the operating costs of MFIs. Now that pro-consumer principles have been developed or adopted by many MFIs, this report aims to put some meat on the bones of such principles by suggesting ways they can be implemented. Future projects to advance consumer protection in microfinance could include: Strengthening the role of a coordinating body (perhaps SEEP’s Pro-Consumer Working Group) to track and coordinate proconsumer efforts among MFIs, networks, regulatory authorities and donors. • Continuing to compile case examples of institutions pursuing pro-consumer principles into a publicly available central database. • Compiling a database on country-specific regulations affecting consumer protection, such as collections practices, privacy laws and pricing regulations. • Developing consumer education and financial literacy campaigns.


Page 39

• •

Convening meetings for MFIs to share experiences and cost effective ways to implement their pro-consumer ideals. Encouraging funding for national networks to encourage pricing transparency and credit bureaus.


Page 40

Section IV: Pro-Consumer Checklist The following self-diagnostic checklist can help institutions gauge how well they are fulfilling the principles of the Pro-consumer Pledge and how they can improve their consumer protection performance. It is presented as a guide only. Institutions should adapt the most practical and important of these ideas depending upon the realities of their specific market and circumstances. Principle 1: Quality of Service The institution has committed training and human resources to integrate excellent customer service throughout the organization. Customer service procedures are standardized in written policies and systematized through procedures carefully documented in employee manuals. The institution has a distinct customer service department. The customer service department undergoes training in customer service and operations. The institution has a managerial position specifically dedicated to consumer protection. There is a credible, high-level committee dedicated to overseeing consumer protection policies and practices. The institution pursues processes (including technology) to increase the efficiency of its operations and minimize wait times. The institution provides clients with up-front information about the nature, level and quality of service and products they should expect. In countries with indigenous populations, the institution makes its materials available in local languages. The institution has methods to communicate information to illiterate clients. Staff members at all levels and functions are dedicated to providing a clean, safe, professional and comfortable


Page 41

environment for customers. Dress codes are enforced and followed throughout the organization. Staff knows and follows standardized behavior towards clients, including appropriate greetings and an understanding of products offered. The institution measures turn-around time and meets its targets for rapid response to loan applications. The institution measures the wait time for clients at branch offices and meets its targets to minimize wait time. Principle 2: Transparent Pricing The institution provides clients with effective annual percentage rates (APRs), including interest rates and any additional fees. These APRs are clearly posted in each branch in an easily visible and attractive way. The institution provides clients with a table of payments, with each payment by date and amount and clear information on principal and interest payments. The institution charges interest on declining balances, or if an institution charges a flat interest rate, the APR is available and complete information is provided on all interest payments. All fees are clearly divulged from the initial contact the client has with the institution. The institution offers courses or information sessions free-ofcharge to consumers that include an in-depth explanation of interest rates. The institution coordinates with competing MFIs to encourage pricing transparency throughout the market. Principle 3: Fair Pricing The institution has a definition of a “fair price.” The institution has a definition of “excessive profits.” The institution limits its prices to these definitions. The institution limits its profits to these definitions. Bringing Pro-Consumer Ideals to the Client

Page 42

Principle 4: Avoiding Overindebtedness The institution participates in a comprehensive credit bureau, or if none is exists, it engages in an informal credit bureau. The institution analyzes the cash flow of the microenterprise and household to determine client repayment capacity and ultimate loan size. The institution uses credit scoring to efficiently determine customer repayment capacity. The institution takes into account the amount of debt clients have outstanding from other sources and avoids lending amounts that will cause total debt service to exceed capacity to repay. Incentives are designed in a way that does not cause loan officers to push credit irresponsibly. Loan officers are clearly instructed to avoid pushing too much credit as a way to meet their incentive targets. Principle 5: Appropriate Debt Collection Practices The organization is committed to ensuring that collection practices involve respect for clients and do not deprive clients of the means to meet their basic survival needs or earn a living. The organization has culturally appropriate policies and procedures in place that state what actions are and are not acceptable in enforcing collections. Staff members are trained to approach loan recovery as a professional and collaborative – not emotional and confrontational – process with clients. The institution’s loan collection procedures incrementally increase pressure on clients to repay during each stage of the loan recovery process. For example, a variety of personnel (loan officer, branch manager, collections officer, legal officer) are dispatched to visit the client at various stages of the delinquency. Loan officers visit clients after a payment is one day late to determine the cause of the late payment and to resolve the Bringing Pro-Consumer Ideals to the Client

Page 43

issue as quickly as possible. Loan officers attempting to recover delinquent loans appeal to the moral obligation of the borrower by asking for verbal or written commitments to repay by a certain date. The institution uses strongly worded letters to inform delinquent clients of the importance of repayment and the consequences of default. In dealing with delinquent clients, loan officers and collections staff are required to fill out a form detailing their interactions and how they are working to resolve the repayment problem. A manager or fellow loan officer accompanies loan officers on their visits to clients beyond a certain level of arrears (e.g., after 15 days). Collections departments are not outsourced to another organization, but remain internal to the institution to maximize control over the behavior of collections officers. The institution offers flexible solutions to clients who enter into arrears under extenuating circumstances, while maintaining clear restructuring policies and processes. The internal auditing department and branch managers perform random check-ins with delinquent clients to verify that they are being treated fairly by loan officers and collections agents. Principle 6: Privacy of Customer Information The institution summarizes client privacy rights clearly and promotes them to clients during the loan application process. The institution trains staff on client privacy and has systems designed to guard access to private client information. The integrity of these systems and controls is looked after by internal audit. Principle 7: Ethical Behavior of Staff The institution has a Code of Behavior, Ethics and/or Conduct that specifically outlines appropriate behavior in Bringing Pro-Consumer Ideals to the Client

Page 44

dealing with clients. The institution has clear sanctions and an internal disciplinary authority to deal with employees who violate ethical behavior. Staff are aware of the disciplinary process that will take place if they are accused of engaging in unethical behavior. The institution restricts the occasions that loan officers handle cash. The institution explicitly prohibits conflicts of interest and unethical behavior such as staff accepting gifts from their clients (in line with local norms of politeness), selling any products to their clients besides those offered by the institution, granting loans to immediate family members, and giving preferential treatment to one client over another. Principle 8: Feedback Mechanisms The institution regularly collects information on client satisfaction through outreach such as professionallymoderated focus groups and well-publicized client satisfaction surveys at least once per year The institution has systems in place to integrate the information received through the focus groups and client satisfaction surveys into daily operations. The institution solicits feedback through means such as telephone and e-mail hotlines or suggestion boxes. The institution publicizes the complaint resolution process to customers, including publicly posting responses to specific suggestions. The institution informs customers of any external consumer protection authority, and publicizes how and when to contact them.

Principle 9: Integrating Pro-Consumer Policies into Operations The institution offers regular, free courses to clients on managing debt, personal finance and/or consumer rights. The institution posts its commitment to pro-consumer ideals Bringing Pro-Consumer Ideals to the Client

Page 45

in a central location in its branches. The institution holds meetings with clients, such as an annual retreat, during which all clients learn about and actively discuss consumer protection and pro-consumer principles. New employees receive training specifically on the topic of consumer protection. The institution regularly checks employee internalization of pro-consumer ideals by issuing a “test” of their understanding. The institution holds internal value-focused events during which employees highlight and deepen their commitment to consumer protection. The institution holds regular training for all staff to reiterate pro-consumer values. Employees sign a contract articulating their commitment to consumer protection. The institution rewards employees who exhibit exemplary pro-consumer behavior. Staff evaluations and incentives include client satisfaction and adherence to pro-consumer principles. Pro-consumer ideals are incorporated into the institution’s policies. Pro-consumer ideals are incorporated into every stage of the credit application process.


Page 46

Annex One: List of Interviewees

Interviewee Luis Antonio Castillo President of the Board Manuel Torres General Manager Julio César Herbas Gutierrez Commercial Manager Sutardjo Soeharto Assistant Vice President, Micro Banking Division Levan Lebanidze Executive Director Claudio Higuera General Manager Victor Tellería General Manager Germán Contreras President Ayleen Cortés Communications Manager Marciano Puche Executive Director Jesús Ferreyra Commercial Manager René Azokli General Manager

Organization

Country

Network Affiliation

Apoyo Integral

El Salvador El Salvador

BancoSol

Bolivia

ACCION, MFN

Indonesia

MFN

Georgia

Apoyo Integral

ACCION ACCION

Bank Rakyat Indonesia (BRI) Constanta Foundation Cooperativa Emprender

Colombia

FAMA

Nicaragua

FINAMERICA

Colombia

MFN ACCION, MFN ACCION, MFN ACCION, MFN

Mexico

ACCION, MFN

Financiera Compartamos Fundación Mario Santo Domingo

Colombia

Mibanco

Peru

PADME

Benin


ACCION ACCION, MFN ACCION, MFN Page 47

Kenan Crnkic Executive Director Fernando Anker President of the Board William Blacutt National Commercial Manager Kathryn Larcombe Deputy Director Rodney Schuster Executive Director

Prizma

Bosnia

MFN

PRODEM FFP

Bolivia

MFN

PRODEM FFP

Bolivia MFN Mozambiq ue ACCION

Tchuma Ugamda Microfinance Union (UMU)


Uganda

ACCION, MFN

Page 48

Bibliography Brand, Monica. "Marketing & Competitive Positioning." Transforming Microfinance Institutions: Providing Full Financial Services. Joanna Ledgerwood and Victoria White, eds. Forthcoming August 2006. McAllister, Patrick “Trust through Transparency.” SEEP Network. Washington, D.C.: 2003. Porteous, David and Brigit Helms “Protecting Microfinance Borrowers.” CGAP, Washington, D.C.: 2005. Wright, Graham A. N., David Cracknell, and Lisa Parrott. Customer Service Toolkit. Nairobi, Kenya: MicroSave, 2005.


Page 49

Other Monographs in This Series (available at http://www.accion.org/pubs): 1. The Solidarity Group Concept: Its Characteristics and Significance for Urban Informal Sector Activities,by María Otero (1986) 2. A Question of Impact: Solidarity Group Programs and Their Approach to Evaluation, by María Otero (1987) 3. A Handful of Rice: Savings Mobilization by Micro-Enterprise Programs and Perspectives for the Future, by María Otero (1989) 4. Breaking Through: The Expansion of Micro-Enterprise Programs as a Challenge for Non-Profit Institutions, by María Otero (1989) 5. The Critical Connection: Governments, Private Institutions, and the Informal Sector in Latin America, edited by Katherine Stearns and María Otero (1990) 6. Alchemists for the Poor: NGOs as Financial Institutions, by Deborah Drake and María Otero (1992) 7. The Solidarity Group Experience Worldwide, by Shari Berenbach and Diego Guzmán (1992) 8. Leverage or Loss? Guarantee Funds and Microenterprise, by Katherine Stearns (1993) 9. What Makes Them Tick? Exploring the Anatomy of Major Microenterprise Finance Institutions, by Elizabeth Rhyne and Linda Rotblatt (1994) 10. Balancing the Double Day: Women as Managers of Microenterprises, by Eliana Restrepo and Rebecca Reichmann (1995) 11. From Margin to Mainstream: The Regulation and Supervision of Microfinance ,edited by Rachel Rock and María Otero (1997) 12. Maximizing Efficiency: The Path to Enhanced Outreach and Sustainability, by Monica Brand and Julie Gerschick (2000) 13. Supervising & Regulating Microfinance in the Context of Financial Sector Liberalization: Lessons from Bolivia, Colombia and Mexico, by Jacques Trigo Loubière, Patricia Lee Devaney and Elisabeth Rhyne (2004) ACCION International is a private, nonprofit organization with the mission of giving people the financial tools they need – microenterprise loans, business training, and other financial services – to work their way out of poverty. A world pioneer in microfinance, ACCION International was founded in 1961 and issued its first microloan in 1973 in Brazil. ACCION partners with 30 microfinance organizations throughout Latin America, the Caribbean, Asia and Africa, as well as serving U.S. microentrepreneurs through the U.S. ACCION Network.

ACCION Publications 1401 New York Avenue, NW, Suite 500, Washington DC, 20005 USA Telephone: (202) 393-5113 Fax: (202) 393-5115 Website: http://www.accion.org /pubs, Email: [email protected] Bringing Pro-Consumer Ideals to the Client

Page 50