In preparation for the launch of its Certification Program, the Smart Campaign’s Straight Talk blog series highlights standards that may be overlooked by microfinance institutions but that are an important part of client protection. This seventh post in the series by Sergio Guzman describes what aggressive sales practices are and makes a call to industry practitioners to help further identify practices we’d like to see disappear.

“You know, Sergio, I strive to do what is best for my clients, but the competition makes it very difficult for me to be transparent. They use very aggressive sales techniques,” said a microfinance provider in a country that I won’t disclose. “What are these aggressive sales techniques?” I inquired with curiosity.

Sadly I have had similar discussions during many of the Smart Assessments I have done throughout my time at the Campaign. There appears to be a unified consensus among providers that they are treating their customers adequately, but that the competition behaves badly. Sometimes I think that aggressive, non-transparent practices may be everywhere!

The Client Protection Certification standards indicate that for an MFI to be certified it must not use high pressure or aggressive sales techniques. Aggressive sales practices must be looked at through the lens of clients but also through the lens of the competitive landscape. Indeed in a competitive market the MFIs must captivate their clients attention to acquire products, but in doing so they must never resort to deceptive practices.

I’d like to share a list of other aggressive sales practices that we would like to see disappear. At the Campaign we have not seen all of the examples that are out there, but with enough help from you, we can identify more of them.

Some examples of aggressive sales practices are:

• Giving clients cash bonuses or awards for referrals of other clients, which has been a method favored by organizations seeking to grow very fast and has been responsible for the collapse of more than one institution.
• Marketing products in front of the branches of other MFIs, especially when agents actively discredit other MFIs’ pricing or credit methodology as “more expensive.”
• Forcing clients to acquire products without studying the terms and conditions (forced signing of contracts) because otherwise loan officers cannot commit to maintaining the prices or conditions of products.
• Offering clients of other MFIs larger loans to gain market share without fully studying their payment capacity – otherwise known as overselling.
• Intentionally lowering stated product prices or disaggregating interest to make one’s own products seem less expensive (see Straight Talk: Hiding Fees when Quoting Interest Rates).
• Mis-selling products – knowingly providing products clients cannot afford or are otherwise unsuited to their circumstances and needs.

Now, I have heard many providers say to me that they wish their competitors did not use some of these practices, and if they do in fact operate in this way, they want someone to do something about it. Well, MFIs, this is your chance. Tell us what aggressive sales practices you have seen, and how we can identify them in the field.

We look forward to reading your comments.

Image Credit: Philanthropedia

Have you read?

Straight Talk on Client Protection – Monitoring Client Indebtedness

Straight Talk on Client Protection – Hiding Fees When Quoting Interest Rates

Straight Talk on Client Protection – What’s Internal Audit Got to Do with It

In preparation for the launch of its Certification Program, the Smart Campaign’s Straight Talk blog series highlights standards that may be overlooked by microfinance institutions but that are an important part of client protection. This sixth post in the series by guest blogger Juan Carlos Izaguirre highlights a very specific practice at the heart of the client protection principle on transparency—and essential for certification: client contracts.

Can you imagine renting an apartment, an office, or a farm, based on a purely verbal agreement? Centuries ago codes of honor and verbal agreements may have been the norm, but not anymore. People want to avoid misunderstandings and forgetfulness by having written contract agreements, especially for long-term transactions. Now, can you imagine signing a rental agreement but then not receiving a copy of that agreement? In practice, not having a copy is almost like trusting in a verbal agreement. To be honest, I would not feel comfortable signing a document without receiving a copy. I would be suspicious of that transaction. Why would the owner not want me to have a copy of the contract? What is there to hide? I have a sense that you would feel similarly uneasy.

If this is well understood in rentals, then why does the financial industry not follow suit? In more than five years working in different countries across the globe, I keep discovering that many financial institutions do not give a copy of the financial contract to their customers. I have heard several reasons/excuses for this behavior: “The client would not like me to charge him/her for an extra copy of the contract.” “The lawyer charges a lot for a signature, so we cannot afford another copy.” Perhaps, but if there is not enough money to afford paper sheets and ink cartridges, then I would be afraid of the financial situation of the institution!

Other institutions say that “clients do not care about the full contract, they only ask for the payment schedule,” or “clients will not understand the contract, they just need the payment schedule.” Maybe clients are not aware that they can have a contract, maybe they have never seen one in their lifetime, or maybe they don’t think they will need the contract later. However, consumers really do need the full contract terms and conditions, as a matter of principle. Contracts contain the legal basis of a transaction and as such consumers have the right to receive a copy.

Contracts are like the user’s manuals for financial products. They contain detailed information that may not seem quite useful when the financial product is acquired, but will become useful when questions arise. Now that many of us are in the pre-Christmas shopping mood, can you imagine buying a new TV and not receiving any type of manual? Surely there are several paragraphs in that manual that have technical information and are not easy to understand, but there is also information that can be quite handy when we have a problem—and we can check the manual first before calling a store or manufacturer.

Contracts are a symbol of transparency, a mechanism to instill trust and reduce fears, especially with clients that are not savvy on financial transactions. Having a copy of the contract would also contribute to the efficiency of the system. If clients have any doubt about their financial product or service, they can first read the contract on their own or with the help of friends, relatives, or community leaders. If clients have a problem, their dialogue with an MFI officer would be easier if they have read the contract, which might in turn reduce the time spent to solve problems.

It is true that contracts are often hard to understand. It is a great idea to work toward more streamlined and simple documents. It is also a good idea to provide a “key facts” statement that summarizes the contract terms and conditions. That step has been implemented in other countries. However, the contract is the basis of a financial transaction, so however difficult it may be, the client still needs to have it.

Sharing a copy of the contract with the consumer should be a basic, obvious, common practice for financial institutions, which would help them to build a more trustful and transparent relation with their customers. There is nothing more valuable in business than earning the trust and loyalty of a client. Regulators should not even have to intervene to make it a requirement – it should be common sense! And, for sure, clients should not have to ask Santa for copies of their contracts this Christmas.

Juan Carlos Izaguirre works as a Financial Sector Specialist with the World Bank’s Global Program on Consumer Protection and Financial Literacy.

Image Credit: Villages Connected

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The Smart Campaign will soon launch its Certification Program on client protection for microfinance institutions (MFIs). In this fifth post in a series, Sergio Guzmán uses his experience from the field to shed light on standards that are often overlooked by MFI managers but that are a crucial part of client protection. 

A friend of mine has a very interesting saying that I’ve found myself repeating recently: “The common sense is the least common of senses.” I think this saying applies to microfinance organizations especially when it comes to setting adequate behavioral standards for staff, especially in collections. Most microfinance organizations assume good intentions in their staff. There is a good reason for this. MFIs have to deeply trust their loan officers. They are often the organization’s only connection to its clients.

Loan officers are one of the microfinance industry’s greatest assets, but also one of its biggest risks in terms of brand and reputational management. They have great power vis-à-vis the clients MFIs serve. This is why MFIs need to set standards of professional conduct that are expected of all staff and spell these out clearly in a Code of Conduct, Code of Ethics, or Staff Rules. My point goes double for standards regarding debt collection practices.

The Code of Ethics is supposed to inculcate staff with the organization’s values. In practice, I’ve often seen that Codes of Ethics voice only broad and non-specific behaviors: “Staff will treat all clients with respect and dignity.” Or “We expect all staff to be honest and transparent to clients.” Not to say that respect, dignity, honesty, and transparency are wrong, but MFIs should be better at framing these behaviors by articulating clearly to their staff what these mean, and especially what they do not mean.

For example, MFIs should explicitly prohibit the following behaviors: use of abusive language; use of physical force; limiting physical freedom of clients; shouting at the client; entering the client’s home uninvited; publicly humiliating the client; violating the client’s right to privacy; discriminating based on ethnicity, gender, sexual orientation, religious belief, political opinions, or disability; participation in corruption, kickbacks, or theft; and participation in sexual or moral harassment.

Maybe you think these things go without saying? And maybe they are embarrassing to mention?

Let’s be honest. These practices have happened in the microfinance industry in the past, and they will happen again – more often if organizations do not take a clear stand against them, backed up by procedures and monitoring. It is good to give loan officers some freedom to work, and we all know that salesmanship requires some improvisation and a lot of charisma. However, we must also frame sales and collections behavior within adequate standards. After all, our reputation as a client-focused industry depends on it.

Image Credit: World Vision Micro

Have you read?

Straight Talk on Client Protection – Mechanisms for Complaints Resolution

Straight Talk on Client Protection – Monitoring Client Indebtedness

Straight Talk on Client Protection – Hiding Fees When Quoting Interest Rates

Straight Talk on Client Protection – What’s Internal Audit Got to Do with It?

The Smart Campaign will soon launch its certification program on client protection for microfinance institutions (MFIs). In this fourth post in a series, Smart Campaign members Leah Wardle and Alex Rizzi discuss how experience from the field sheds light on standards that are often overlooked by MFI managers but are a crucial part of client protection. 

A Dominican loan officer once told me that if I really wanted to know what clients thought of the institution, I should ask a client who had already exited the program. These are the only people, he told me, who speak honestly about the institution’s failures.

In some ways, he was right about exit clients. They have little to lose, and can freely complain about their former lender without repercussion. But I think MFIs should also expect to hear from current clients, and to address problems before they lead to client exit. The key is to have a complaints system that is easy for clients to use (so they’ll actually complain if they need to) and to respond quickly to issues (so the concern is addressed). Increased client satisfaction is one of those fantastic “win-win” achievements, and the effective handling of client complaints is one way to get there.

At a high level, the Smart Campaign Certification standards require that an institution a) has policies and procedures that provide a straightforward way for clients to submit complaints, b) teaches clients (and staff) how to use the system. The institution should also c) have a protocol for resolving complaints in a fair and timely way, and d) should ultimately analyze trends in the complaints data to improve their operations.

At the Smart Campaign, we’ve observed many different complaint systems in the field, ranging from the high-touch/low-tech customer service desk, to the low-touch/high-tech Facebook page. In many cases there is no formal system at all and the staff receives verbal complaints from clients but does little to record the information for institutional use. Perhaps the most common complaints channel we’ve observed in the field is the office suggestion box. While easy for clients to understand and inexpensive for the institution, the Smart Campaign Certification standards do not consider a suggestion box an adequate standard of care. Suggestion boxes fall below an adequate standard because they do not provide an opportunity for individual clients to resolve their problems or to receive a response from an institution. In short, a suggestion box is not a problem resolution system.

The Smart Campaign Certification standards set benchmarks for problem resolution that allow for a range of solutions to be used depending on institution size and contextual issues, such as client literacy and preferred communications methods. Just as technology has revolutionized other aspects of microfinance, it offers innovative and user-friendly mechanisms for collecting and analyzing client complaints. A few innovations we have observed in the field include:

• Call centers with toll-free numbers. This works well in the many countries where clients have high access to cell phones (see this Smart Note for an example).

• Phone numbers that accept text messages from clients, including some which ask clients to respond to client satisfaction questions via text message (see this Smart Note for an example).

• Social media or email addresses that allow clients to send questions and complaints to the institution.

• Institution-sponsored events during which clients can make direct complaints or ask questions of senior management.

These systems are typically low-cost for clients, easy to access, and in most cases, give clients a way to make complaints privately and, if they wish, anonymously. They also create systems for data to be aggregated and used at the institutional level. With these criteria met, it’s safe to expect that an MFI will hear from clients before a situation gets so bad that the client leaves the institution. Such a system makes it more likely that when a client has a problem the institution can ask “how can we fix this situation?” rather than “how can we get you back?”

Image credit: Transitions Abroad

Have you read?

Straight Talk on Client Protection – Monitoring Client Indebtedness

Straight Talk on Client Protection – Hiding Fees When Quoting Interest Rates

New Smart Note: Responding to Complaints at Tameer Bank, Pakistan

The Smart Campaign will soon launch its certification program on client protection for microfinance institutions (MFIs). In this third post in a series, Leah Wardle uses her experience from the field to shed light on standards that are often overlooked by MFI managers but that are a crucial part of client protection. 

Living in Kenya, I’ve had the opportunity to work in one of the most dynamic microfinance markets on the African continent. Given the variety and number of providers in this country, I often wonder if MFIs in Kenya and their clients will soon contend with over-indebtedness—the situation where clients are taking more loans and/or bigger loans than they can repay.

It’s my sense that Kenyan MFIs—like MFIs everywhere—should at least be aware of the potential for an overheated market, and should regularly monitor the indebtedness levels of clients. But here—as in many places—monitoring this risk does not seem to be a priority. Here are some common responses that I get when I ask MFIs: “Why don’t you regularly monitor the indebtedness levels of your clients?”

• If clients were over-indebted, our PAR would be going up, and we don’t see that trend.
• So many people in this country are unbanked—how could we be at risk for a saturated market?
• Kenyans are very aware of the dangers of over-indebtedness, so consumers know not to take on too much debt.
• We don’t have a credit bureau for MFIs, so we can’t monitor multiple borrowing.

There’s logic in these responses, but PAR might be low because of high-pressure tactics by loan officers, and even though most people might not have access to credit, what if providers are sharing the same small pool of clients? I’ve seen evidence of both. Even in countries where people generally know the dangers of too much credit, the temptation to borrow can overpower good sense—take the U.S. for example! And finally, the absence of a credit bureau is a handicap, but even when credit bureaus are available, they are still no replacement for careful client monitoring by the provider.

The Smart Campaign certification standards require that management and the board monitor the risk of client over-indebtedness. Practically, that means that senior managers regularly track indicators such as the incidence of multiple borrowing and among clients and client debt to income ratios. They should also review the MFIs’ market penetration rates, competition, and macroeconomic trends that could lead clients into debt stress like food price increases. These factors should be checked through audit, surveys, portfolio reports, feedback from the field, and competitor analysis. Any time that management identifies a potentially “high risk” situation (e.g., PAR is on the rise and competition has increased), they should take quick action to mitigate the problem. To pass this standard, the exact factors that are tracked may vary from institution to institution, as may the means of monitoring. What is important here  is that management uses high quality information about potential over-indebtedness risk to actively guide credit operations.

To state it simply, the potential danger of over-indebtedness should be a regular topic of conversation when management meets. It’s not something to take lightly. The risk is real.

Recommended reading: Over-indebtedness of Microfinance Borrowers in Ghana by Jessica Schicks.

Image Credit: UN

Have You Read?

Straight Talk on Client Protection – Hiding Fees When Quoting Interest Rates

Straight Talk on Client Protection – What’s Internal Audit Got to Do with It?

Can Providers Take More Responsibility for Client Protection? The Smart Campaign Says Yes.