Client Protection Practices: Findings from Social Ratings

1. Client Protection Practices:Findings from Social Ratings SPTF Annual Meeting 2010

2. Social Ratings Use the Client Protection Principles • A social rating reviews operational guidelines for staff. Some ratings include observation of field practice and interviews with staff and/or clients to check their understanding and practice. • A social rating examines how an MFI monitors and promotes compliance with the principles—for example, does the MFI incorporate client protection into staff incentives? • A social rating also helps reveal gaps in compliance with the principles, so that MFIs can make improvements. • Each of the four social rating agencies makes good use of the principles of client protection during their social rating process.

3. Social Rating Findings: Challenges for MFIs in Implementing the Principles Over-indebtedness • MFIs have difficulty measuring and managing client over-indebtedness. Generally, they lack adequate information on their clients’ liabilities. • In group lending, assessment of repayment capacity is often delegated to group members. • MFIs have difficulty explaining a declining interest rate (as opposed to a flat rate) to clients. In competitive environments, the appearance of a more expensive loan puts the MFI at a disadvantage. • Government-imposed interest rate ceilings tend to lead to less transparent pricing, as MFIs add more fees, commission, etc. But regulated institutions are more likely to publish their interest rates. Over-indebtedness Pricing Transparency Pricing Transparency

4. Example Findings from Social Raters: MicroFinanza Rating (Results from 41 MFIs) • Using the national poverty line: • The poorer the clientele, the less likely they are to be cross-indebted. • Poorer clients tend to resort to less formal providers, which account for half of the cases of multiple borrowings.

5. Social Rating Findings: Challenges for MFIs in Implementing the Principles Appropriate Collections Practices • MFIs have widely differing definitions of “appropriate.” Many once-accepted practices are now considered coercive. • Many MFIs express the need for clients to take them seriously/ maintain discipline. • Staff need very careful guidance and support, backed up by clearly stated procedures. Details of these procedures are best agreed with clients as part of ongoing communication. • Quality training for staff is challenging where MFIs have rapid scale-up of staff and/or high staff turnover. Appropriate Collections Practices Ethical Staff Behavior Ethical Staff Behavior

6. Social Rating Findings: Challenges for MFIs in Implementing the Principles Privacy of client data • “Privacy of client data” is broadly interpreted to imply that only authorized persons have access to client information, whether at the group level or in the MIS. • For some MFIs, female clients have specifically requested that information on their savings amounts not be disclosed in open meetings, where relatives may be present. • Very few MFIs have formal complaints handling mechanisms. Some MFIs provide complaint and/or suggestion boxes for clients. To be effective, such boxes require a deliberate approach to inviting clients to use them, together with a regular and open process of review and response to client submissions by MFI management. Privacy of client data Redress of client grievances

7. Social Rating Findings: Challenges for MFIs in Implementing the Principles Overall • A weak MIS often contributes to weaknesses in policy compliance. • Internal control and audit is often weak. Even where policies are in place, compliance remains an issue. • Staff incentive schemes often push growth over quality and affect compliance with policies. Overall Overall

8. Social Ratings: Use of Client Awareness and Feedback Some social ratings include interviews with clients. These client interviews can be used to assess client awareness of products, services, and systems. This speaks to the transparency of the MFI. The following questions are adapted to the MFI: