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> Posted by Kelley Mesa
If you haven’t signed up for our monthly Inclusions e-newsletter, then now is a great time to do so! Create a Center login account and check the Inclusions box.
Along with updates on Center happenings, the e-newsletter will include a “Question of the Month,” on which we’d love to hear your thoughts and comments. This month’s question is on one of the Center’s core projects – consumer protection:
Is there a business case for client protection in inclusive finance? Do you believe the implementation of client protection will improve the financial bottom line of microfinance institutions?
Comments:
“The MFI market in Nicaragua is one of the most competitive ones in Latin America, with over 300 MFI’s. The presence of just about every donor, a large influx of international funding, and banks downscaling has created an environment of market saturation and over-indebtness of clients. MFIs have begun to see a significant increase in arrears and a decrease in margins. Some MFIs have toughened their collection methods, creating friction among clients. This, compounded with a more populist regime, interest-rate caps, and a very weak legal system, has resulted in a number of customer complaints being printed in the press. A group of people with criminal backgrounds and the backing of the political party have begun striking against MFIs and threatening employees, even setting one branch on fire.
Banex identified the risk in the middle of 2007 and made significant changes, including prevention, changes in its internal processes, the addition of appropriate collection technology, and, in general, a strong client focus. This included implementing a code of ethics for collectors and attorneys, training them on customer rights, preventing judicial collections whenever possible, adding an ombudsman to protect the customer, and giving a written statement to customers explaining their rights.
These steps have helped to reduce our political exposure and keep our arrears much lower than the industry average.”
– Gabriel Solorzano, Banex
Audio comment
– Nejira Nalic, MiBospo
“We believe in protecting our customers in the following ways: avoiding overindebtedness, and educating them in the correct use of financial instruments, such as credit and deposits.
Protecting clientes, both depositors as well as borrowers will generate loyalty. This in turn will reduce the costs of losing customers, and thus improve the bottom line.”
– Kurt Koenigsfest, BancoSol S.A.
> Posted by Sergio Guzman
During the past few months, the Colombian economic media have kept a close eye on the current financial crisis, but many people’s attention has been captured by a company with a mysterious money-making scheme called DMG, founded by David Murcia Guzmán, a twenty-something, who in 2003 started his company in a small town close to the Ecuadorian border. The company claims to pay clients for “personalized advertising” which really means client referrals. According to Dinero magazine, clients invest in pre-paid cards with which they buy goods from company stores. They are obligated to refer three people and in exchange the company pays them cash or merchandise honoraria in company stores.
A similar scheme, DRFE (Spanish for “Easy Money, Fast Cash”), collapsed last week. The government shut it down and is forcing it to return its “investors’” money. (Click here to read a Washington Post article on the riots caused by DRFE.)
DMG claims that it has more than 70 thousand active members and that over 200 thousand people have participated in the scheme. The model is a grave concern for the banking authorities, tax collection agencies, and even the prosecutor general’s office. Many have signaled the operation to be an elaborate Ponzi scheme. There have been reports by president Uribe that police officers and even some senators have invested in the scheme. The government intervened DMG on Monday citing illegal deposit-taking.
According to Maria Cristina Cortez, a senior director for Global Programs at ACCION International, some people have borrowed from microfinance institutions and cooperatives in order to invest that money in the pyramid schemes. Some savers have been tempted to take their savings elsewhere because of the juicy returns, which in turn dries up deposits.
The collapse of the pyramids could create serious consequences for microfinance. As Elisabeth Rhyne, managing director of the Center for Financial Inclusion says, “the big risk of pyramid schemes is that they cause serious and often long lasting damage to people’s willingness to trust financial institutions or in this case electronic cards as a means of exchange.” She adds that “a pyramid scheme collapse can also makes regulators more suspicious of new financial sector entrants, which can result in regulators raising higher barriers to entry.”
It is no surprise that poor people are investing in DMG. The trust in financial organizations, according to the Custumer Value Index as reported in Portafolio, has fallen. “In part due to the lack of transparency and compliance of banks, who make promises to clients and then fail to live up to their commitments.” Some clients complain that banks do not provide them the treatment they deserve and turn to organizations like DMG who seem to make a greater commitment to their growth and development.
Responses to the pyramid schemes include financial literacy to educate clients about how to recognize pyramid schemes and avoid offers that seem too good to be true. This episode is a wake-up call for financial institutions to step up their game in consumer protection initiatives in order to maintain client confidence in the financial sector.
> Posted by Mr. Provocative
Joshua Goldstein is a director at the Center and our very own “Mr. Provocative.” In addition to his work with the Center, Josh is a writer and teaches a playwriting class in Boston University’s Creative Writing Department. He’s published several of his plays, poetry, and prose. Josh will post here on topics of interest and debate. Feel free to add your comments by emailing .
The explosion of remittance transfers from people who have migrated to developed countries to their poor relatives back home has led to new wealth creation and a better standard of living for many. And this is, on the face of it, very positive.
But I believe that there is a particular sorrow behind a considerable percentage of remittances that demands greater scrutiny and perhaps some kind of remedial action. The transfer of money is often made by families living under the great stress of separation—such as an absent mother supporting the small children she has left behind—an abandonment from which some never recover.
Enrique’s Journey, (2006) by Pulitzer Prize winning journalist Sonia Mazarin, is the harrowing story of a teenage Honduran boy who embarks on a dangerous journey, riding the tops of freight trains, to reach the United States in search of his mother Lourdes, whom he has not seen since he was five years old. He is, says Mazarin, one of an estimated 35,000 migrant children each year who sneak into the United States (many others are turned away at the boarder) with the dream of reuniting with a mother they hardly remember.
Like countless other impoverished, single mothers, Lourdes left Honduras for the United States with the best interests of Enrique in mind. Hers is an agonizing decision, driven by economic necessity and the dream of a better future. Lourdes does find work, remits money regularly, and within a year or two plans to return to Honduras. But that last, critical piece of her plan is not possible.
As a five-year-old, all Enrique understood was that his mother had abandoned him. His loss ultimately drives him to risk everything and head north to find her. But, after years of separation, the kind of perfect bonding he longs for with his mother is not achievable, leaving him bitter and confused.
When impact studies are done about the value of remittances, it is inevitable that proxies for success like school attendance and increased consumption are used. And that makes sense. But poor people are as psychologically complex as the rest of us, and increased material well being afforded by remittances may be counteracted by the profound social dislocation and loss that children like Enrique suffer. (And what good is school attendance if a child cannot concentrate anyway?) As a first step, a public health campaign to educate migrant mothers about how best to communicate with the children they have left behind, in order to minimize the psychological damage, would be well advised.
Transfers of money are no substitute for the daily reassurance of parental love that allows children to flourish, and that means doing more to keep families together. Microfinance institutions focus on serving people where they are. Made explicit in the mission statements of microfinance institutions might be something like the following: Working capital loans to the self employed poor sector make it possible for mothers and fathers to stay with their children. This is a very impressive achievement of the microfinance revolution that, in my opinion, should be highlighted more and is surely an impact that we should design studies to measure. It certainly is another powerful argument for exponentially expanding the reach of microfinance.
Reading recommendation: Readers of this blog might also be interested in Edwige Danticat’s new memoir, Brother I’m Dying, which is filled with poignant passages about separation, loss, and the role of remittances in the lives of the Haitian poor.
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