> Posted by Zahra Khalid, Social Analyst, Pakistan Microfinance Network

Pakistan’s financial sector is due for some client-centric changes. Over the past decade there has been rapid growth in consumer lending as well as an increase in the number of households that have taken on risks and obligations that they do not fully understand due to unfair and deceptive practices coupled with low levels of general and financial literacy.

These trends make the World Bank’s recently released industry-wide diagnostic review of the state of consumer protection and financial literacy in the country all the more relevant, and its recommendations targeting irresponsible practices, such as inadequate price disclosure, gender-based discriminatory lending practices, and lack of dispute resolution mechanisms, increasingly important. Offering key findings, recommendations, and comparisons against World Bank-developed best practices, the review is the first to cover the country’s legal, institutional, and regulatory framework from the consumer protection angle.

The review, co-financed by USAID and released in April in Islamabad, covers the microfinance, insurance, securities, and banking sectors.

The financial industry in Pakistan is dominated by the banking sector, which holds approximately 74 percent of the financial system’s capital assets. Insurance and other non-bank financial services hold less than 10 percent of the financial system’s assets. Overall literacy levels in the country are low, at 55 percent of the total population. Financial literacy is dismal, according to the Access to Finance Survey 2008, for example, only 47 percent of adults are aware of the term “bank accounts.”

One of the most important gaps highlighted in the diagnostic is that the institutional framework for financial consumer protection is fragmented. The fragmented legal environment in terms of consumer protection does not provide a sound basis for the microfinance industry’s long term sustainability, and it puts at risk progress achieved so far under what is considered one of the world’s most enabling regulatory regimes for microfinance.

In terms of business practices, while comprehensive guidelines and directives on lending practices and debt collection exist for microfinance banks (not for unregulated MFIs), systematic oversight of these from a consumer protection perspective is absent, contributing to poor practices. While the regulators have issued directives to financial institutions to enhance transparency and disclosure of their terms and conditions, practices are still significantly opaque with no standards for disclosure prescribed for sector-wide adoption. The lack of effective disclosure impedes healthy competition in the sector. The absence of dispute resolution mechanisms for microfinance clients is another core weakness, which is influenced by the lack of regulatory requirements for institutions to set up internal complaints handling mechanisms or any stipulated standards for complaints handling. There are few channels for microfinance clients to lodge complaints, and they are generally unaware of the channels that do exist.

The widely practiced gender-biased discriminatory loan application criteria pose consumer protection issues for female microfinance clients.

Moreover, current laws and regulation leave NGO-MFIs largely uncovered. This presents a major risk given that the majority of microfinance loans are from these institutions at present.

Financial literacy initiatives are also fragmented and not part of a comprehensive country-level strategy.

While some of these findings pose serious concerns for the microfinance as well as broader financial sector in Pakistan, a number of steps can be taken to help mitigate their adverse effects, as the study outlines. These include enforcing adequate disclosure and responsible sales practices, dispute resolution mechanisms, and other safeguards for client wellbeing. The review’s recommendations are ranked in terms of their estimated completion timeframe and priority levels.

Already, as evidenced by the diagnostic review launch event in Islamabad, stakeholders from each of the financial sector specialists, including microfinance practitioners, are engaging with many of the review’s recommendations. As for next steps, mechanisms include inter-stakeholder cooperation and taskforces to ensure that these recommendations see fruition.

Part one of the review covering findings and recommendations can be viewed here, and part two comparing Pakistan’s to industry best practices here.

Image credit: Bloomberg/ Getty Images

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