Consumer Protection in Microfinance

Transcription

1 2011/GFPN/WKSP/020 Session 6 Consumer Protection in Microfinance Submitted by: United States Workshop on Microfinance Best Practices Ha Noi, Viet Nam 7-8 April 2011

2 Consumer Protection in Microfinance Thomas Timberg, Nathan Associates Session 6: Consumer Protection and Transparency APEC Workshop on Microfinance Best Practices April 7-8, 2011 Hanoi, Viet Nam Why sudden focus on consumer protection? Crisis and revolt India, Bangladesh, Bolivia, and Nicaragua Double bottom line Microfinance is supposed to serve a social objective Financial consumer protection - A recognized element in financial sector governance. Consumers for fair financial services 1

3 Initiatives Microfinance Transparency ACCION s Center for Financial Inclusion - Beyond codes CGAP Client Protection Principles Country case studies INDIA MALAYSIA CAMBODIA Client Protection Principles Avoidance of overindebtedness Transparent pricing Appropriate collection practices Ethnical staff behavior Mechanisms for redress of grievances Privacy of client data 2

4 What is to be done? - Chernyshevsky Transparency Do not harm clients Help clients Mandates especially caps on interest rates Voluntary versus self-regulation versus government regulation Transparency for all Tell what you charge Tell what you collect Tell what you ear Perhaps justify all of this 3

5 Do no harm South African Law National Credit Bill Impact studies does microfinance help Roodman Blog Poverty Lab Where we come out? Many helped Certainly almost all think they are helped Benefit the client Financial education and counseling Malaysia Bangladesh Philippines Peru 4

6 Specific interventions Dandepat Appeals procedure India and Peru Internal Self-regulatory Government Usury limits Sad history But continues What about interest rates? What borrowers think Cheaper than moneylenders Lower than earnings Stories Controller, Market women, Kaduna borrowers. What economists say Indebtedness trap Are poor people rational? 5

7 Microfinance Ratings Help secure outside funds Help with benchmarking to industry standards and thus improve management Are offered by a number of reputed international i (Microrate, MCRIL etc.) and national sources like MICRA national usually cheaper but generally less internationally credible. Credit Bureau I Valuable resource Previous payment record best basis for lending, credit bureaus sometimes do other analysis on industry wide database. For client permit borrowing on the basis of good record, avoid burden of nonrepayers on institution cost. Sometimes specialized for MFIs, sometimes not. Also involves weighing costs versus comprehensiveness. 6

8 Credit Bureau II Credit Bureaus only as good as the quality and quantity of data they contain. Credit Information is an information not a credit business. Real costs are usually actually minimal but rent seekers are numerous. US credit bureaus are often free to large data providers. There are enormous economies of scale and network. Once an effective credit bureau exists you cannot afford to be outside. Specialized credit bureaus may be easier to set up but are obviously less comprehensive in their data and often inferior in their technical abilities. Credit Bureau III For many MFI Credit Bureaus are seen primarily il as a resource to deal with multiple lending (inevitable and even desirable in some cases) and overindebtedness (a favor to no one). This is, however, a waste of a valuable potential ti credit analysis resource, management tool, and sanction for credit discipline. 7

9 John Y. Campbell et. al., Consumer Financial Protection. About monitoring the effectiveness of disclosures: Traditional disclosure policies, such as the requirement of the Truth in Lending Act that the costs of credit should be reported in the form of annual percentage rates, are often better adapted d to how economists or lawyers think than to consumers natural habits of mind. Continued The cost per loan or overall for maintaining an account in money terms is often more comprehensible. Regulators should be keenly aware of the economics of consumer financial markets. For example, many products involve large customeracquisition, set-up, or processing costs that are fixed for each customer, as well as marginal costs that vary with the scale of the customer s s financial activity. As a result, consumer financial products are relatively expensive to provide. 8

10 Continued II In the market for short-term consumer credit, for example, small loans will bee costly to service. It turns out that a typical US payday loan for $300 for two weeks costs $5.72 to handle well over 40% in annualized terms. The US payday loan debate is actually a very good one for microlenders to familiarize themselves with because it goes to the heart of the question of benefitting customers. Continued III For the curious there are strong arguments on each side documented in this review article. Because consumers of financial products can be very different regulators should be cautious about imposing one size fits all solutions. Most of the discussion in the article is relatively l US specific in this case but the international microfinance community could give its own examples. 9

11 Continued IV Regulation should seek to allow and indeed encourage financial innovation. Regulators should be aware that financial innovation will circumvent clumsily designed or costly regulations - I suspect they will often circumvent even ingeniously designed and cheap ones. All regulation is subject to the political process, which can easily capture regulation. - As in the financial innovation the authors are making a generalization based on theory, what my wife calls secondary school counselor advice, The authors are thinking about regulatory capture by the regulated, certainly normal and customary as far as banks and regulators are concerned. The international microfinance community is typically more concerned by the confiscation of loan funds by powerful politicians. David Roodman, Microfinance Transparency and the MIX Site First, despite considerably different definitions they end up remarkably close to each other. MicroFinanceTransparency (MFT) tries to capture the total cost to the client (including items like compulsory insurance), MIX simply takes the total interest income as a ratio to the total loan portfolio. MFT s figures are naturally then higher Some MFT s figures are naturally then higher. Some other reasons are given on Roodman s blog, but they only exacerbate the factors leading to divergence. 10

12 Thanks Thomas Timberg 11