> Posted by Leah Wardle, Tool Development Specialist, The Smart Campaign, CFI

The Smart Campaign will soon launch its certification program on client protection for microfinance institutions (MFIs). In this third post in a series, Leah Wardle uses her experience from the field to shed light on standards that are often overlooked by MFI managers but that are a crucial part of client protection. 

Living in Kenya, I’ve had the opportunity to work in one of the most dynamic microfinance markets on the African continent. Given the variety and number of providers in this country, I often wonder if MFIs in Kenya and their clients will soon contend with over-indebtedness—the situation where clients are taking more loans and/or bigger loans than they can repay.

It’s my sense that Kenyan MFIs—like MFIs everywhere—should at least be aware of the potential for an overheated market, and should regularly monitor the indebtedness levels of clients. But here—as in many places—monitoring this risk does not seem to be a priority. Here are some common responses that I get when I ask MFIs: “Why don’t you regularly monitor the indebtedness levels of your clients?

  • If clients were over-indebted, our PAR would be going up, and we don’t see that trend.
  • So many people in this country are unbanked—how could we be at risk for a saturated market?
  • Kenyans are very aware of the dangers of over-indebtedness, so consumers know not to take on too much debt.
  • We don’t have a credit bureau for MFIs, so we can’t monitor multiple borrowing.

There’s logic in these responses, but PAR might be low because of high-pressure tactics by loan officers, and even though most people might not have access to credit, what if providers are sharing the same small pool of clients? I’ve seen evidence of both. Even in countries where people generally know the dangers of too much credit, the temptation to borrow can overpower good sense—take the U.S. for example! And finally, the absence of a credit bureau is a handicap, but even when credit bureaus are available, they are still no replacement for careful client monitoring by the provider.

The Smart Campaign certification standards require that management and the board monitor the risk of client over-indebtedness. Practically, that means that senior managers regularly track indicators such as the incidence of multiple borrowing and among clients and client debt to income ratios. They should also review the MFIs’ market penetration rates, competition, and macroeconomic trends that could lead clients into debt stress like food price increases. These factors should be checked through audit, surveys, portfolio reports, feedback from the field, and competitor analysis. Any time that management identifies a potentially “high risk” situation (e.g., PAR is on the rise and competition has increased), they should take quick action to mitigate the problem. To pass this standard, the exact factors that are tracked may vary from institution to institution, as may the means of monitoring. What is important here  is that management uses high quality information about potential over-indebtedness risk to actively guide credit operations.

To state it simply, the potential danger of over-indebtedness should be a regular topic of conversation when management meets. It’s not something to take lightly. The risk is real.

Recommended reading: Over-indebtedness of Microfinance Borrowers in Ghana by Jessica Schicks.

Image Credit: UN

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