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> Posted by James Militzer, Editor, NextBillion Financial Innovation

The following post was originally published on NextBillion, in two parts, here and here

The Smart Campaign was born in the midst of extraordinary upheaval in the microfinance sector. Its launch in 2009 was sandwiched between the 2008 global financial crisis, repayment crises in several microfinance markets, and the 2010 debtor suicides in Andhra Pradesh. Yet the turmoil served to amplify the campaign’s main point: that microfinance needs to focus on customer protection. In the succeeding years, it has labored to unite microfinance leaders and practitioners around this goal – most notably through its efforts to convince microfinance institutions (MFIs) to undergo the process of Smart Certification, in which independent evaluators verify that they are “doing everything [they] can to treat [their] clients well and protect them from harm.”

Over time, these efforts have started to gain traction. The campaign – which is steered by a group of prominent leaders in the industry and housed at Accion’s Center for Financial Inclusion – has certified 39 microfinance institutions. (Note: Accion is a NextBillion Content Partner.) Certified institutions include a number of leading MFIs in markets around the world, from Equitas in India to Kompanion in Kyrgyzstan. And the campaign calculates that certified MFIs now serve slightly more than 20 million clients. In a recent interview with NextBillion, its director, Isabelle Barrès, called the 20 million client mark “an exciting milestone, recognition of the fact that there is momentum growing in the industry for client protection –  not just paying lip service to it, but actually working hard to improve practices.”

But achieving this momentum hasn’t been an easy task for the campaign – or for the industry whose practices it’s trying to improve. Barrès discusses the challenges it has faced – and the controversy it has sparked – in this two-part Q&A.

James Militzer: Do you have any data on which markets have the highest percentage of Smart Campaign-certified MFIs?

Isabelle Barrès: I think Kyrgyzstan probably is the one where we currently have the most right now – 60 percent of microfinance clients are served by organizations that have been certified. This shows that when there are some substantial efforts that are put towards improving client protection – whether it’s at the market level or at the regulatory level, or through market infrastructure, such as supporting a good credit bureau – it can make a difference for the entire industry.

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> Posted by Center Staff

Will microfinance continue to be relevant in 2020 and beyond? Should regulators or the industry lead on client protection? Will data analytics replace traditional credit reporting systems?

A new Financial Inclusion 2020 e-magazine explores these three essential questions debate-style, tapping industry leaders from around the world to weigh in with their perspectives.

Microfinance as a development strategy has in the past few years been eclipsed by the excitement around financial inclusion. This transition reflects the recognition that people need a full range of financial services. What does the future hold for microfinance institutions and other players like traditional banks and new fintech companies? Bindu Ananth, Chair of IFMR Trust and IFMR Holdings, Dean Karlan, President of Innovations for Poverty Action, and Liza Guzman, Vice President of Accion share their views.

The ideal balance in client protection is often conceived as a three-legged stool in which regulators, providers, and consumers work at equal levels of responsibility. Globally, regulators have often taken the lead, but initiatives such as the Smart Campaign prove that there is room for providers to move beyond compliance. Is a balanced three-legged stool realistic? Among the debaters are Alok Prasad, Principal Advisor of RBL Bank, Sanjay Sinha, Managing Director of M-CRIL, and Isabelle Barres, Director of the Smart Campaign.

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> Posted by Anne H. Hastings, Manager, Microfinance CEO Working Group

As a member of the Smart Campaign Steering Committee, I had the pleasure last week of attending the first ever Certification Summit held in Turin, Italy. The CEOs of 24 client protection certified microfinance institutions (MFIs) came together to discuss with one another their experiences with certification, their practices for preventing over-indebtedness, collections and grievance redressal, and their thoughts on how the certification process could be made more valuable.

I tried my best to talk with each and every participant there in order to get their honest thoughts about certification. I was surprised but pleased to discover that, without exception, every one of them said how happy they were that they had gone through the process and achieved the recognition. Some examples of the types of comments I heard are:

  1. Client protection has always been part of our DNA. It’s who we are. The certification process helped us align our practices with our values – and come closer to what we aspire to be.
  2. It has allowed us to improve our relations with the regulators in our country more than we imagined. They now turn to us for advice!
  3. It was great for our employees. It was a truly motivating exercise for them . . . and the recognition that comes with certification made them feel very special. Our employees are proud to be associated with a responsible institution.
  4. There was a cost to it, no question – but the process convinced us that it was well worth the investment.
  5. We wanted third-party validation of our practices, and this gave us that validation.
  6. The process was excellent. I have tremendous respect for the rating agency that conducted our mission. It was far more rigorous than I anticipated, and it did result in our making some very significant changes, especially to our disclosure practices.
  7. Our customers have told us that they appreciate the changes we made that were clearly visible to them. They especially like the improvements we’ve made to our grievance redressal mechanism.
  8. Certification must be seen as a risk management tool because that’s what it is. We need more MFIs to go through the certification process in order to control risk in our market. We need to engage more closely with investors and regulators about what it means and how it acts to mitigate risks.
  9. The process helped us to get back to our fundamentals, for the reason we were formed. This was something we had needed to do, without really realizing it, for a long time.
  10. There’s no question that it contributed to our ability to get new capital from our local bank.

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> Posted by Susy Cheston, Senior Advisor, CFI

What financial inclusion stakeholders believe is most important in advancing client protection

Regulators take the lead in advancing client protection in financial services, we’ve heard.  Providers “merely comply.”

If you are of the view that providers can, and should, take a leading role in client protection, then the results of a recent survey conducted by the Aspen Institute are discouraging.  The survey, carried out on behalf of the Smart Campaign as part of its strategic planning, took a look at the three-legged stool of client protection—providers, regulators, and consumers—and asked which element was the most important.  Of the financial inclusion stakeholders who were interviewed, only 24 percent said that provider-led initiatives were the most important element in client protection.  By comparison, 39 percent thought regulation and governance were the most important, and 37 percent put their faith in consumer awareness and activism.

I disagree!  We believe action from the financial services providers themselves is a vital missing link.  But what is holding them back?  In a consultative process carried out by the Financial Inclusion 2020 project over the past year, here are the top six reasons we heard for providers not taking the lead in consumer protection. Read the rest of this entry »

> Posted by Allyse McGrath, Senior Associate, CFI

The Facebook page of JPay, a Florida-based company that provides a range of services to inmates in the U.S. prison system, is calling for visitation pictures – photos of families and their incarcerated loved ones. Happy images seem to echo the company’s statement that JPay is “the most trusted source for connecting incarcerated individuals with family and friends”. Money transfers are one primary element of the connection that JPay and others like it provide. JPay is one of the largest providers in the burgeoning field of financial services for the 2 million-plus inmates in the U.S. prison system. These providers are changing the way that families send money to their incarcerated loved ones and also the way in which inmates receive money upon their release. But has this change been good?

For those that might not know, money sent to inmates can be used in prison for things like making phone calls, sending emails, and buying food, toiletries, and winter clothes. To give you a sense, at the Clallam Bay Corrections Center in Washington State, phone calls begin at $3.13, and emails are 33 cents. When prisoners are released, money accumulated from work in prison or sent from family and friends can be transferred onto stores of value like debit cards.

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> Posted by María José Roa Garcia, Researcher, Centro de Estudios Monetarios Latinoamericanos (CEMLA)

Reports on the financial stability of emerging countries indicate that non-traditional institutions advancing financial inclusion are increasingly important. The contemporary financial services landscape in many markets includes new financial inclusion instruments such as electronic and mobile phone-based banking. For these newer entrants and many credit-offering institutions, the governing regulatory frameworks are either non-existent or much looser than those for formally-constituted banking institutions.

Does this lack of oversight affect market stability?

In reviewing the recent studies on the possible links between financial stability and inclusion, although additional research and analysis is required, it is shown that greater access to and use of formal financial intermediaries might reduce financial instability. As for why, the studies point to six reasons:

  1. More diversified funding base of financial institutions
  2. More extensive and efficient savings intermediation
  3. Improved capacity of households to manage vulnerabilities and shocks
  4. A more stable base of retail deposits
  5. Restricting the presence of a large informal sector
  6. Facilitating the reduction of income inequality, thereby allowing for greater political and social stability

The principal definitions of financial stability support this notion. Institutions that carry out financial inclusion activities help develop effective intermediation of resources and diversify risk, which are essential elements in supporting sustainable markets.

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> Posted by Magauta Mphahlele, CEO, National Debt Mediation Association (NDMA)

Overall, 2014 was not a good year for South African consumers of credit. Evidence of this is based on statistics from the banking regulators as well as the casework compiled through the work of the National Debt Mediation Association (NDMA) with individuals and mineworkers employed by two of the largest mining companies in South Africa.

The South African economy has remained stagnant, contributing to strikes and retrenchments across the board, especially in the mining sector. For those consumers who were lucky not to be retrenched, factors, such as price inflation, a freeze on bonuses, reduced commissions, and personal circumstances like illness, divorce, and death in the family put pressure on their finances leading many to default on their debt repayments. Despite several regulatory initiatives and interventions, the results of the December 2014 National Credit Regulator (NCR) Credit Bureau Monitor showed that the number of credit active consumers was 22.84 million and of these, 10.6 million (46 percent) have impaired records.

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> Posted by Susy Cheston, Senior Advisor, CFI

There was good news from the Alliance for Financial Inclusion (AFI) yesterday: the announcement of a partnership with MasterCard Worldwide to build technical capacity so that AFI members are better equipped to regulate innovations in products and business models.

Since its birth seven years ago, we have admired AFI for so effectively galvanizing a powerful regulator community to set a high bar on financial inclusion. Part of AFI’s strategy has been a fierce commitment to ownership of the issue by the regulators themselves. The results have been measured not only in dramatically increased access among AFI member countries, but also in higher standards around the quality of those services, as evidenced by Maya Commitments around client protection and financial capability. AFI Working Groups have also been developed for peer learning on digital financial services, financial inclusion data, and other key issues.

Yet we are among many in the industry who have felt that AFI’s circling of the wagons meant that their policy solutions were not always smart about encouraging innovation and investment in financial inclusion. To its credit, AFI got the message, and in 2014, it launched a Public-Private Dialogue Platform (PPD) to incentivize policymakers and regulators to cooperate with the private sector. Yesterday’s announcement about the new relationship with MasterCard is a strong next step toward realizing the PPD’s promise.

This trajectory resonates with recent interviews on client protection that we have carried out at FI2020. Among the regulators we interviewed, what was striking was the path many have followed toward empowering the private sector to play an active role in customer protection. We heard about a number of good practices that build capacity and break down communication silos between the public and private sectors.

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> Posted by Elisabeth Rhyne, Managing Director, CFI

The following post was originally published on the MasterCard Center for Inclusive Growth blog.

Reaching full financial inclusion by 2020 will require supportive policies in every country around the globe. The Economist Intelligence Unit’s “Global Microscope on Financial Inclusion, 2014” assesses the policy environment for financial inclusion in 55 countries. The Microscope examines 12 policy dimensions essential for creating an inclusion-friendly regulatory and institutional framework. The rigorous model incorporates input from hundreds of policy makers and participants in the financial sector and a review of existing policies and implementation. The resulting rankings represent the best readily available source for judging the state of financial inclusion policy around the world.

What’s surprising about the 2014 Microscope results is their wide range. Out of a possible 100 points, the top scorer (Peru) received 87 while the lowest (Haiti) earned only 16. If full inclusion requires good policies, it is disappointing to learn that the median score across all countries was a mediocre 46.

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Gail Buyske, Advisory Committee, Microfinance Information Infrastructure Project

> Posted by Center Staff

Convening of Stakeholders

Several weeks ago we learned that MFT has suspended its operations. Moody’s has discontinued its Social Performance Assessment Program. The MIX is trying to increase revenue through its MixGold program. Should we care about these developments? What are they telling us about the state of microfinance’s information infrastructure?

The Center for Financial Inclusion undertook an analysis of these issues to follow up on Elisabeth Rhyne’s provocative blog of March 11, 2014, in which she argued that the microfinance industry needs an “infrastructure fix.” Today’s blog summaries the key issues, which will be discussed at a stakeholder discussion in DC on April 14, followed by one at a later date in Europe.

Let’s start by thinking about why we should care about microfinance’s information infrastructure. Information and its natural outcome, transparency, have been guiding principles of the microfinance industry practically since its inception. These are not just feel-good concepts: they played a fundamental role in the development of microfinance. Information and transparency were critical in microfinance’s early days in enabling donors and investors to identify promising MFIs that they could support. Readily available information enabled MFIs to benchmark their performance and set goals to improve their performance. And we can never forget that a commitment to transparency is a pact between MFIs and their clients.

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