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> Posted by Magauta Mphahlele, CEO, National Debt Mediation Association (NDMA)
A few weeks ago, South Africa’s Department of Trade and Industry published new proposed regulations pertaining to the National Credit Act limiting fees and interest rates on short-term and unsecured loans along with credit cards. The public may lodge comments to the draft regulations up until 30 days after its publishing date of June 25th. The intelligence used to inform the proposals have not been released so it is not clear what policy, cost, or operational factors were taken into consideration to arrive at the outlined changes. Meanwhile, the microfinance industry in the country, which has been lobbying for the flexibility to charge significantly higher interest rates and fees, seeks to understand the regulators’ rationale.
The draft regulations were published after a protracted court battle where one of the industry associations representing micro-lenders requested the court to force the regulator and policymakers to review the fees requirements of the National Credit Act. The fees and interest rates hadn’t been reviewed since the Act became effective in 2007 – a concern when taking into account factors like inflation.
Credit providers have responded with dismay and concern about the proposed changes, especially the interest rate caps on unsecured loans. They have expressed the fear that the proposed interest and fee changes will affect the cost of administering credit, reduce profits, and constrict access to credit for borrowers. Other commentators have viewed the reductions favorably considering consumers are already over-indebted to a large extent and the interest rate cycle is predicted to start trending upwards. On this blog a few months ago, I shared that in 2014, the National Credit Regulator (NCR) Credit Bureau Monitor revealed that out of South Africa’s roughly 23 million credit active individuals, about 11 million have impaired records.
> Posted by Jami Solli, Independent Consultant and Founder of the Global Alliance for Legal Aid
As we acknowledge World Consumer Rights Day, celebrated on March 15th each year, recent news from South Africa on over-indebtedness reminded us of the findings from the What Happens to Microfinance Clients Who Default? project. The South African Human Rights Commission (SAHRC) just reported that 50 percent of the country’s credit-active population is debt-impaired (meaning they are more than three months behind on bills and/or have a debt-related judgment), and another 15 percent of the population is debt-stressed (one to two months behind on bills). Essentially, more than half of South Africa’s population is over-indebted.
In reacting to this situation, the SAHRC has taken an approach drawn from a human rights-based framework. They have recognized freedom from oppressive, unsustainable debt levels is a human right. Similarly, in Greece, the birthplace of democracy, the government determined that under particular financial circumstances a fresh start is a human right. To address Greece’s growing problem of over-indebtedness, in 2010, Parliament passed a law which gives individuals the right to personal bankruptcy. The implementation of this legislation was also an attempt to harmonize the law with Article 5 of the Greek Constitution which protects citizens’ social and economic well-being. According to the new law, over-indebted individuals now have the possibility to restructure their debts, reducing both interest rates and total amounts owed. The prerequisite is that the individual’s inability to repay needs to be considered a permanent condition.
> Posted by Anton Simanowitz and Katherine E. Knotts
“Customer centricity” is the new buzz in the microfinance industry. More and more financial service providers are recognizing that their success is built on the success of their clients. Customer centricity certainly means recognizing that financial inclusion is not just about more services – it’s about better services. To achieve this, financial service providers need to grapple with the complexity of clients’ financial lives, understand what appropriate design looks like, and empower clients to use those services effectively.
But is it always a “win-win”? What if clients express preferences and make choices that are not in their long-term best interests – that is, what happens when what clients need isn’t what they might want or demand? And what if responding to client needs in the most appropriate way appears to be a riskier decision from the point of view of institutional financial performance?
These tension points (and some quite radical decisions in the face of them) can be seen in the work of AMK Cambodia, highlighted in a new book The Business of Doing Good. Witness a conversation we had with a senior manager. “We will never be a leader in client service,” he proudly announced. In the competitive Cambodian market, rapid disbursement of loans that meet customer demand is an important competitive advantage. Yet AMK accepts that its own loan disbursement is slower and more time-consuming for clients, and its loan sizes are much smaller than those of its competitors. Coming from an organization that is proudly “client focused”, this statement struck an odd note.
AMK, serving more than 360,000 people, is now the largest Cambodian MFI in terms of outreach. How can an MFI that invests heavily in understanding and responding to the needs of its clients be “less customer friendly” than others? The simple answer is that a market-led solution (responding to what clients want and are prepared to pay for) might look different from responding to what clients need in order to address the underlying complexities of their lives (i.e. poverty and vulnerability).
> Posted by Elisabeth Rhyne, Managing Director, CFI
In his book, The Emperor of All Maladies, Siddhartha Mukherjee tells the history of the fight against cancer. It’s a grand saga involving scientists, doctors, patients, and politics, all wielding their best tools to find better treatments and ultimately a cure. And of course, the tale is not over: the scourge continues, though much progress has been made, and an increasing number of bright spots are appearing.
As I read, I see parallels between the evolution of that medical “war” and the struggle against poverty waged by the international development community, or at least the part of that struggle I’m part of, the struggle to give people financial tools to better their lives. The more I read, the more I see, until in each corner of the cancer story I find parallels with our own sector and its searches for solutions.
In the early 20th Century, surgeons began to treat breast cancer with radical mastectomies in which not only breast but also lymph nodes and many of the neighboring chest muscles were taken. The more radical, the greater the chances of success, went the theory. By mid-century, chemotherapies appeared. They represented another radical approach in which patients were brought to the brink of death as chemicals attacked cancerous and normal cells alike. In both cases, Mukherjee argues, brute force substituted for the absence of a deep understanding of the causes and behavior of cancer. The medical profession simply applied the tools at hand, raising the intensity as high as patients could tolerate. The tools sometimes cured the patient, but more often postponed the inevitable recurrence, a partial success. According to Mukherjee, the surgeons and chemotherapists who wielded these instruments were so convinced of their efficacy that they closed their minds to alternatives (including each other’s solutions), scoffed at attempts to measure success through rigorous trials, and downplayed the suffering imposed on actual patients.
Maybe you’re already seeing parallels…
> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign
The risks associated with the recent U.S. boom in subprime auto loans for the working poor are compounding, a series of articles recently published by The New York Times indicates. The articles report on the Times’ extensive investigation on the subject, which included the examination of over 100 bankruptcy cases, dozens of civil lawsuits against lenders, and hundreds of loan documents. The series draws attention to companies lending to those on the financial margins who often have questionable or missing credit histories and who are purchasing typically pretty old, low-quality cars. Lenders have lowered credit standards to widen their pool of borrowers, a risky practice incentivized by an influx of money from investors looking for a hot market and keen to securitize. Subprime auto loans have increased by 130 percent in recent years, and in 2014 they accounted for one in four auto loans.
In addition to viewing this through our did-we-learn-nothing-from-the-subprime-mortgage-crisis?! glasses and seeing potential systemic repercussions, one can take the consumer rights vantage point and see the scary picture of a world in which the underbanked or financially excluded are given two kinds of options: bad and really bad. We decided to score the features of this market against the seven Client Protection Principles of the Smart Campaign. Since the Client Protection Principles are a do-no-harm standard, we expect markets to meet seven out of seven principles to earn our endorsement. Let’s see how subprime auto loans stack up.
> Posted by John Gitau, CEO, Kenya Financial Education Centre
Written in 1910, a tiny book, The Science of Getting Rich by Wallace D. Wattles has relevance today in our financial inclusion efforts.
In one of the chapters, “How To Use the Will,” the author writes, “What tends to do away with poverty is not the getting of pictures of poverty into your mind but getting pictures of wealth into the minds of the poor. You are not deserting the poor in their misery when you refuse to allow your mind to be filled with pictures of that misery. Poverty can be done away with, not by increasing the number of well to do people who think about poverty, but by increasing the number of people who purpose with faith to get rich. If you want to help the poor, demonstrate to them that they can become rich; prove it by getting rich yourself.”
These words were written at a time when the American Titans of Industry – Cornelius Vanderbilt, Andrew Carnegie, and John D. Rockefeller – were generating millions of dollars from oil, steel, and commodities trading. The existence of poverty alongside such epochal abundance must have shocked Wallace Wattles deeply. He must have also witnessed the proliferation of poverty eradication efforts through charity and noted their failure or absence of impact.
> Posted by Sonja Kelly, Fellow, CFI
Last week in Mexico City, tens of thousands of people took to the streets to voice their hope for a better Mexico. In a hotel that overlooked the demonstration, members of the World Savings Bank Institute met to talk about how to make a safer and more effective financial system for those at the base of the pyramid. In terms of inclusive finance, in recent months we’ve seen significant progress. During the meeting, Vice President of the National Banking and Securities Commission (CNBV) in Mexico, Bernardo Gonzalez, opened his remarks by putting up a list of the top 10 countries in this year’s Global Microscope. Modestly, he pointed out that five of the 10 were from Latin America. Perhaps more emphatically, he highlighted Mexico’s place—fifth on the list.
As a regulator, he should be proud. Mexico’s score this year is in part a reflection of the regulatory reforms that the country has been moving forward, with attention to customers at the base of the economic pyramid. While Mexico’s microfinance sector has been under scrutiny in recent years because of notoriously high interest rates, concerns of over-indebtedness, and commercial banks hesitant to go “down-market”, a new set of microfinance regulations attempts to change things.
> Posted by Stuart Rutherford and Paul Vander Meer
ROSCAs, or rotating savings and credit associations¹, have enjoyed good press lately in the United States. The New York Times just ran a story about ROSCA users in some states earning themselves formal credit scores; Kim Wilson at Tufts University tells of a New York banker who awarded an immigrant family a mortgage after reviewing their success in making ROSCA payments²; and the U.S. Financial Diaries research project notes that ROSCAs can be the “preferred” financial tool even for people using formal banks. eMoneyPool, based in Arizona, offers Americans the chance to join simplified online ROSCAs. There are online ROSCAs in India, too, and researchers from Ithaca College note that in India “ROSCAs remain strong despite greater financial inclusion.” Similar studies find the same in other developing countries and in this post we introduce the ROSCAs of Chulin, some of the best-structured ROSCAs on the planet.
The renewed interest in ROSCAs is welcome. They are arguably the world’s most elegant, most efficient, and most reliable informal financial device, capable, at their best, of transforming the economies of whole communities, as we show in this blog. After years of relative neglect from proponents of “financial inclusion,” why are they now getting the attention they deserve?
> Posted by Lindsey Tiers, Communications and Operations, the Smart Campaign
According to a recent article in The New York Times, a number of lenders seem to have adapted General Douglas MacArthur’s views on government regulation: “Rules are mostly made to be broken.” Research conducted on the effectiveness of the U.S. government’s Military Lending Act over the past few years has illustrated that “lenders, intent on offering loans regardless of the federal restrictions, devised loan products that fell squarely outside the loan’s restrictions.” When interest rate caps were limited to loans of up to $2,000, lenders started offering loans for $2,001. When protections were applied to auto-title loans with terms under 181 days, loan periods were extended to just over 181 days.
The Obama Administration is suggesting an expansion of the law in order to close some of the loopholes, but will more rules truly deter predatory lenders? Regulators might find themselves overburdened with a multitude of rules and a decreasing ability to enforce them. A few well-supervised regulations seem preferable to a tangled web of unenforceable ones. Additionally, it would be foolish to underestimate the innovative abilities of those intent on making a buck from those in the military, based on the case precedents we’ve seen.
Even when the law does actually catch up to bad actors, there is evidence that they can go out again with the same or similar practices. Julio Estrada, a used-car dealer featured in an earlier article in The New York Times on subprime auto lending, continued to dupe customers into accepting predatory loans for several months after he was “indicted by the Queens district attorney on grand larceny charges that he defrauded more than 23 car buyers with refinancing schemes” less than a year earlier.
Predatory lending to military personnel is made easy because military salaries are largely transparent. Lenders have near perfect knowledge of just how much a servicemember desperate for cash can afford in monthly payments. The reliability of a government paycheck has fostered the creation of systems that withdraw installments before income even reaches a servicemember’s account, further minimizing the risk to lenders and increasing their relative advantage. Yet the most egregious imbalance in knowledge stems from the fact that lenders know the “military considers personal indebtedness to be a threat to national security, so high levels of debt can imperil service members’ security clearances,” and ultimately their job. Predatory lenders leverage this knowledge to threaten servicemembers.
Perhaps instead of relying on regulation, and hoping that everyone plays by the rules, we should refocus our efforts on adequately arming our servicemen and women with the knowledge they need to defend themselves. The Consumer Financial Protection Bureau (CFPB) took steps to do just that when it created the Office of Servicemember Affairs to focus on the challenges faced by military employees. However, it primarily addresses ways to save, funding for higher education, and accessing VA benefits, and only touches on indebtedness in a section on deployment and credit cards. While educating servicemembers on these issues is important, increasing savings and controlling the interest charged on credit card bills are ways to preempt debt, and might not necessarily be relevant for someone already in debt. These individuals are most likely to fall prey to abusive payday lending schemes.
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