> 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.

Existing MFA members are not required to commit to the code, but they are requested to present the option to their board of directors for a decision. New members that join the association are required to sign onto the framework. Those who agree to abide by the code are expected to fulfill all its dimensions. Compliance oversight is comprised of annual reports self-conducted by institutions.

The code focuses on institutional handling of client well-being, but it also encompasses how MFI staff and other industry stakeholders are treated. The first section of the code provides a statement of values, starting with commitment to the MFA’s mission and continuing to affirm accountability, transparency, and a social orientation towards the betterment of lower income individuals as essential elements.

This is the first time an industry code of conduct has incorporated the client protection principles in their entirety. One of the benefits of this is the ability for institutions to directly apply the Smart Campaign tools and resources for both implementing the code and monitoring progress and compliance. The annual self-reports conducted by institutions will be carried out using the Getting Started Questionnaire, and Smart Assessments will be used for third-party assessments.

Laos’ microfinance market began in the early 90’s with the establishment of village-based credit schemes and revolving funds by bilateral and multilateral organizations. By mid-decade, NGOs were conducting similar efforts. By the end of 2011, this informal, unregulated sector totaled 4,400 village funds with an aggregated loan portfolio of roughly $37 million, encompassing 430,000 members – about six percent of the country’s population.

The younger, smaller sector of licensed MFIs was first regulated by the Bank of the Lao PDR (BoL) in 2008, according to three institution types: deposit-taking MFIs, non-deposit taking MFIs, and savings and credit unions. At the end of 2011, 42 MFIs had been licensed by BoL, 9 deposit-taking, 15 non-deposit taking, and 18 savings and credit unions. As of that time, those institutions served about 68,000 clients, with a total loan portfolio of $10 million.

The Microfinance Association, recognizing the industry growth of recent years, points to several challenges that face the country’s industry. Transparency among MFIs is weak as are institutional awareness of best practices and portfolio at risk levels. A lack of capacity among staff and governance structures is low overall, and so too is stakeholder cooperation. In terms of outreach, it’s estimated that one-quarter of households in Laos have access to some kind of financial service.

We’ll look forward to the implementation of the Laos code of conduct in the months and years to come.

Elsewhere in the region, the Indian networks MFIN and Sa-Dhan developed standard-setting codes of conduct in the wake of the Andhra Pradesh crisis. Pakistan’s PMN developed a code in 2009 in response to a rise in portfolio at risk levels and an upsurge in borrower revolt.

Image credit: Elliot Margolies

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