> Posted by Sergio Guzmán, Lead Specialist, The Smart Campaign, CFI
The Smart Campaign will soon launch its Certification Program on client protection for microfinance institutions (MFIs). As such, this is a good time to discuss issues MFIs may face in meeting certification standards. In this series of blog posts, Sergio Guzmán and other Smart Campaign staff will use their experience from the field to shed light on standards that are often overlooked by MFI managers but that are still a crucial part of client protection.
For MFIs to be certified, they will need to demonstrate that they meet adequate standards of care in implementing the Client Protection Principles. Most MFIs have strong capacity and practices in certain areas, but few are strong in all.
One indicator where we commonly see shortcomings involves the role of the internal audit in preventing client over-indebtedness.
The Smart Campaign views internal audit as an essential link between policies that reflect the intent of management and practices at the field and customer levels. When it comes to ensuring that staff actually implements measures to prevent over-indebtedness – and that these systems are actually working – there is no substitute for internal audit. The expectation is that an internal auditor should conduct some forms of regular review of the steps used to prevent over-indebtedness and whether those steps are working. For instance an auditor might examine whether an MFI is successfully conducting analysis of client repayment capacity and debt exposure, regularly using credit bureau data (if applicable), implementing appropriate rescheduling/refinancing agreements, and providing loan officers with appropriate incentives and productivity targets.
More often than not, I have seen in the field that the internal audit department or function is only tasked with the basics, like making sure that loan officers completely fill out loan files, reconciling cash-in and cash-out records and preparing the organization’s books for external audit. These are all valid internal audit functions, but, to meet the standards of adequate care for client protection, an MFI’s audit function should also actively verify compliance with over-indebtedness prevention policies.
In our observation, some MFIs score poorly on this indicator because their internal audit system itself is deficient. More often, however, it is because their internal audit system does not address over-indebtedness prevention.
Auditors are not internal enemies or moles! They are important guardians whose job is to double check so that MFIs avoid making mistakes, including mistakes that might allow too many clients to get over their heads in debt.
Image Credit: Much Better Adventures
Have you read?
Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes.
New Smart Note: Responding to Complaints at Tameer Bank, Pakistan
Progress toward Improved Client Protection in the Indian Microfinance Sector