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> Posted by Jeffrey Riecke, Communications Associate, CFI

A proactive step for client protection was recently taken in Laos when the country’s Microfinance Association (MFA) established an industry code of conduct focused on client protection. Laos’ code centers on the client protection principles and the accompanying Smart Certification standards, which designate how institutions can instill fair client treatment in their practices. The code was developed by the MFA following a Smart assessor training in late 2013, and was reviewed by the Campaign to ensure accurate reflection of the client protection principles and standards. In April, the code was presented at an MFA member meeting, where all members present committed to embedding it throughout their institutions. This new code fills an important gap, given that client protection regulation for financial services is not well developed in the country.

Established in 2007, the Microfinance Association and its members represent a growing share of the country’s industry. Members include MFIs, as well as donors, training institutes, and individual experts and advocates. The 32 MFIs that are members make up roughly 50 percent of Laos’ formal microfinance industry by number of clients.

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> Posted by Hema Bansal and Pallavi Sen, the Smart Campaign and MFIN


On June 16th the Microfinance Institutions Network (MFIN) was officially recognized as the Self Regulatory Organization (SRO) for non-bank financial company (NBFC) microfinance institutions in India. With this, MFIN not only became the first network to attain such recognition in India, but also in Asia and perhaps in the world.

An SRO is an organization that has been authorized by a statutory regulator or a government agency to exercise control and regulation on its behalf over certain aspects of an industry. Established in 2009, MFIN is an association of NBFC-MFIs acting as their primary representative body. As an SRO, MFIN will essentially support the RBI in ensuring compliance to regulatory prescriptions and the Industry Code of Conduct.

Subsequent to the Andhra Pradesh crisis, the RBI had instituted a subcommittee of the Central Board of the Reserve Bank under the chairmanship of Shri Y. H. Malegam to study issues and concerns in the microfinance sector in India. The committee submitted its report in January 2011, thereby providing concrete recommendations and guidelines for the creation and recognition of microfinance NBFCs in India. Except for setting in place an SRO, all the other recommendations of the committee were implemented by the RBI in 2012. These other guidelines included establishing a credit bureau, the Guidelines on Fair Practices Code for NBFCs, and additional guidelines on loan size, target clientele, interest rates, transparency, collection practices, and multiple lending. With MFIN recognized as an SRO, the RBI is now implementing the last remaining Malegam Committee recommendation.

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> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

According to a recent Overseas Development Institute (ODI) report, of every eight dollars sent to Africa, a whole dollar is lost to accompanying transaction fees. This loss, estimated by ODI to be between $1.4 and $2.3 billion annually, is particularly significant given that remittances comprise a significant share of African states’ economies and are rapidly increasing; the World Bank estimates they totaled around $32 billion in sub-Saharan Africa (SSA) in 2013 and may reach $41 billion by 2016. These numbers attracted The Economist to ask, “Do the middlemen deserve their cut?

Looking at these practices through the lens of the Smart Campaign’s Client Protection Principles, we question whether they are in keeping with responsible pricing. These charges can’t be explained by distance. In fact, large amounts of remittances are intra-country or intra-Africa, transmitted from urban to rural areas or by migrant workers from one country to another. Remittance corridors within Africa have some of the highest charge structures in the world. The 12.3 percent average charge for sub-Saharan Africa compares to a global average (without SSA) of 7.8 percent.

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> Posted by Hema Bansal, India Director, the Smart Campaign

As a child growing up in India, I was always intrigued by stories from Myanmar, but disturbed by conflicts that it had witnessed. Not knowing much about the country, as an adult I still had an innate desire to visit. On May 7th and 8th, I attended the Responsible Finance Seminar, organized by Entrepreneurs du Monde (EDM), held in Myanmar’s city of Yangon. I was completely awed by the mystical peace of the city, I was also impressed by the demonstrations of support at the seminar for instilling client protection in Myanmar’s microfinance industry. It’s a great opportunity for a young market to secure responsible practices from its outset.

Myanmar, the second-largest country in Southeast Asia, remains one of its poorest. Decades of isolation have severely affected its development. In terms of financial inclusion, a large proportion of the population in Myanmar relies on informal lenders. The formal sector only serves about 20 percent of the population, largely because of the existing financial institutions’ limited capability.

In May 2011, President Thein Sein publicly recognized microfinance as a means of development by enabling local and foreign investors to establish fully privately-owned MFIs. Since the rationalization of licensing in Myanmar, around 110 MFIs have been registered. Deposit-taking institutions have been allowed to set-up shop rather easily due to low minimum capital requirements and the absence of separate prudential regulations from non-deposit-taking institutions, such as rules pertaining to reporting standards and portfolio quality management.

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> Posted by Alexandra Rizzi and Alyssa Passarelli, Deputy Director and Communications and Operations Assistant, the Smart Campaign

The Smart Campaign has worked tirelessly for over five years to embed the Client Protection Principles into the microfinance sector, and increasingly, the broader financial inclusion community. Yet until now, the Campaign has had minimal input from the very clients whose well-being drives the entire movement.

In order to better understand the concerns and experiences of the individuals who use microfinance, the Campaign has launched a client voice research and learning project. Through listening directly to clients, market stakeholders can raise awareness, dialogue with each other to identify potential issues, and in turn integrate this learning into their work. The Smart Campaign has a unique role in shining a light on potentially harmful or negative experiences that low-income users of financial services have had and bringing those experiences to the attention of those who can do something about them.

To conduct this project, the Campaign will be working with Daryl Collins and her team at Bankable Frontier Associates (BFA). BFA has conducted extensive global research with low-income households, including projects with an explicit focus on consumer protection. The client voice project will be conducted in four markets – Pakistan, Benin, and two others to be chosen this summer. The markets are selected based on geographic diversity as well as engagement by local stakeholders with the Smart Campaign. In Pakistan and Benin for example, the project is working closely with the Pakistan Microfinance Network and the Alafia Consortium, who have helped convene local stakeholders to give feedback on project design, research locations, and results. This ensures that the research has input and support at all stages from local expertise and will be used by those who are best placed to take action in response to the findings.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

Nearly every industry requires infrastructure to thrive, and this goes for the microfinance industry too. But the infrastructure that the global microfinance industry has constructed over the past two decades is looking a bit shaky today. Infrastructure investments are urgently needed to keep the industry sound and prepare it for the future.

One could argue what exactly constitutes the microfinance industry’s infrastructure, and there are a range of organizations to choose from, but for this conversation, let’s look at several key organizations dedicated to setting standards and providing information for microfinance globally: the Microfinance Information Exchange (MIX), the four specialized microfinance rating agencies, the Social Performance Task Force (SPTF), Smart Campaign, and Microfinance Transparency (MFT). These organizations, which perform vital functions for the industry, arose during two different phases of microfinance industry development.

The first generation of organizations – MIX and the rating agencies – were created to provide financial transparency and standards, primarily so that investors could identify well-performing institutions, and also so microfinance institutions could evaluate their own performance against common standards. It took a lot of work to create these organizations. MIX had to find ways to incentivize MFIs to report and to devise a system for data quality assurance. The founders of the rating agencies – Microrate, Planet Rating, Microfinanza Ratings, and M-CRIL – took substantial personal risk in devoting their careers to promoting financial transparency in microfinance.  Together, these organizations have helped spread financial standards throughout the microfinance industry and contributed to improving the financial performance of MFIs, enabling the entry of private social investors who now contribute very importantly to the funding of microfinance. We sometimes now take financial transparency for granted, but if these organizations were to stop playing their role in upholding it, adherence to standards across the industry would undoubtedly drop, with consequences for investor interest, which up to now has remained strong.

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> Posted by Fernando Botelho, Founder, F123 Consulting

Microfinance institutions (MFIs) may not be aware of tools and resources at their disposal that can make it easier for them to work with persons with disabilities (PWDs) as clients or staff. A new tool launched a few weeks ago attempts to close this gap, “Inclusion of Persons with Disabilities in Microfinance through Organizational Learning and the Strategic Use of Low-Cost Technologies.” This tool is part of the Framework for Disability Inclusion toolkit produced by CFI through work with Fundación Paraguaya and others.

Need help? (Braille translation)

Need help? (Braille translation)

The new tool provides concrete guidance for selecting appropriate technologies, forming partnerships with disability-related organizations, and incorporating disability inclusion throughout an organization. It was developed by myself and my organization, F123 Consulting, inspired by our work with the staff of Fundación Paraguaya, to make their organization more disability inclusive.

For example, free and open source assistive technologies can be used by organizations that have an interest in ensuring that operational and financial viability are maintained. In that regard, it’s important to take advantage of the many available low-cost, high performing technologies, and to adapt instead of replace existing processes whenever possible. Managers don’t have to roll their eyes and fret about cost. Small modifications to already existing systems can often make MFIs accessible to staff and clients with disabilities. And the best part is that some of these modifications are free!

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> Posted by Laura Galindo and Alexandra Rizzi, Senior Associate and Deputy Director, the Smart Campaign

A few days ago a post on this blog detailed debt collections practices in the United States. The Smart Campaign, led by Jami Solli of Consumers International, is working to shed light on provider practices in microfinance through exploratory research in Peru, India, and Uganda.

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.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on the IFMR Trust Blog

The Mor Committee Report offers a radical take on client protection, built around the concept of a legal right to suitability. After describing the recommendations briefly, I would like to tell IFMR’s readership why I’m excited about the approach (two big cheers), provide some thoughts on how to make it work (and how the Smart Campaign could assist), and raise a couple of questions.

Suitability is about ensuring that clients are sold financial services that are appropriate for their circumstances. A suitable product is one the client can be expected to manage with a low probability of serious hardship and a reasonable prospect that it will provide value. The concept has been present for some time in financial consumer protection regulation, most notably in the UK and Australia. The Mor Report proposes a unique approach to implementing suitability, which places responsibility on the service provider to install processes to ensure that clients are sold suitable products, e.g., client targeting and underwriting procedures that adequately assess repayment capacity. Regulation would hold the board of directors responsible for approving and overseeing the implementation of these processes, subject to external review. Hand in hand with this, the report recommends an energetic grievance redress system (which I will not address here), including both internal and external mechanisms to cope with individual problems.

The first big cheer goes to the decision to focus on suitability as the heart of client protection. This directs attention exactly where the greatest potential for harm occurs. Overindebtedness, is perhaps the greatest failure of suitability, resulting from selling loans that exceed a client’s debt threshold. This is why the Smart Campaign places Appropriate Product Design and Delivery and Prevention of Overindebtedness as Client Protection Principles #1 and #2, even ahead of Transparency. Among all the standard client protection problems, only overselling of credit has repeatedly caused sector-wide crisis and collapse, and thus if there is to be a focal point, this is the right one. (The report discusses the relative merits of suitability vs. disclosure as the core of consumer protection policy, which raises both practical and philosophical issues – an engaging topic for another day’s post.)

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> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI

Over the last two years, the Center for Financial Inclusion has worked to develop a series of tools and trainings (a how-to guide) for MFIs that have decided to become disability inclusive but don’t know how to do so.

Through our strategic partnership with Handicap International, Fundación Paraguaya, and the Smart Campaign, we have now completed a comprehensive toolkit. And today, we are pleased to announce that we are making these tools and trainings available to the industry in English, Spanish, and French on the Persons with Disabilities (PWD) page on the CFI website. Everything is open source and available to any MFI or other financial services provider that wishes to use the tools.

The Center made inclusion of PWD an institutional priority because at 15 percent of the global population, PWD represent a very large vulnerable minority, and are largely unbanked – no more than 0.5 percent of current MFI clients worldwide are PWD.

In its Responsible Treatment of Clients principle, the Smart Campaign emphasizes the importance of non-discrimination. As the Smart Campaign’s principles evolve, MFIs are encouraged to broaden their scope of services to minorities like PWD and promote equal opportunity to financial services.

The Convention on the Rights of Persons with Disabilities (2006) stipulates in Article 27 on Work and Employment that countries that have ratified the treaty must level the playing field so that persons with disabilities have an equal right to employment. The Center’s White Paper “A New Financial Access Frontier: People with Disabilities” made the case for disability inclusion, drawing on the approaches used around the world to guide implementation of the Convention. Now we present the industry with practical implementation guidelines for those institutions seeking to close the financial inclusion gap for persons with disabilities.

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The views and opinions expressed on this blog, except where otherwise noted, are those of the authors and guest bloggers and do not necessarily reflect the views of the Center for Financial Inclusion or its affiliates.
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