Promoting Inclusive Markets and Financial Systems
Client Protection in Asia’s Microfinance Industry
This report summarizes client protection (CP) policies and practices in nine microfinance markets in Asia: India, Pakistan, the Philippines, Myanmar, Cambodia, Bangladesh, Nepal, Sri Lanka, and China. The findings in this report have been gleaned from assessments conducted by the national microfinance associations in these countries from August to November 2014, using the SEEP Client Protection Market Diagnostic Tool. This tool is based on the CGAP methodology used to conduct CP diagnostic exercises in various countries and uses the Smart Campaign’s Client Protection Principles as a reference.
The results offer a multi-country perspective on legal frameworks and industry practice in five areas related to CP in financial services: Price transparency, fair treatment of clients, protection mechanisms for borrowers and depositors, recourse mechanisms, and client data protection.
Diversity in market contexts, product availability, types of providers covered by the participating associations, and differences in regulations for different provider types notwithstanding, an analysis of associations’ responses provides the following findings:
1. Client Protection Overview
- In six out of the nine markets in which the tool was applied, associations indicate that there are laws or regulations pertaining to some areas of CP practices.
- In a few countries, authorities are keen on enforcement of CP regulations and have created entities and/or partnerships with microfinance associations to educate members and to assist in monitoring in order to improve levels of compliance by financial services providers.
- Most microfinance associations (MFAs) play an important role in self-regulation through the establishment of codes of conduct that take into account Smart Campaign CP principles.
2. Price Transparency
- Providers are required by law to disclose product pricing to clients in Pakistan, India, Cambodia, Bangladesh, and the Philippines, and also must meet some requirements with respect to the manner in which price disclosures must take place.
- In most of the other markets, self regulation systems implemented by the industry address price transparency and disclosure mechanisms.
- Four of the nine countries in the study have interest rate caps imposed on microfinance products.
3. Fair Treatment of Clients
- With the exception of India, legal frameworks regarding fair treatment seem to be inadequate in the countries covered by this report, despite the fact that six countries (China, Nepal, Sri Lanka, the Philippines, India, and Cambodia) have some type of law, regulation, or self-regulation in place or in development that outlines fair treatment practices.
- Most MFAs incorporate fair treatment practices in their codes of conduct; however, enforcement is challenging.
4. Protection of Borrowers and Depositors
- Associations indicate that participation in credit bureaus, as a mechanism to protect borrowers against over-indebtedness, is available in only four out of the nine countries participating in the study (India, Pakistan, Cambodia, and the Philippines). Providers utilize credit bureaus regularly in only three countries, of which Pakistan is the only one mandating that microfinance banks (MFBs) utilize the Central Bank’s credit bureau.
- Four of the five countries that permit microfinance providers to accept deposits have regulations requiring deposit protection mechanisms.
5. Recourse Mechanisms
- Only three countries (India, Nepal, and Pakistan) have legal requirements for providers to offer internal recourse mechanisms to clients. In Pakistan, only MFBs are required by law to have an internal recourse mechanism in place; the other microfinance providers (MFPs) are not.
- In Cambodia, Nepal, India, Bangladesh, and the Philippines, systems of self-regulation, such as the MFA’s code of conduct, indicate that providers should provide recourse mechanisms to clients and provide examples for doing so.
- There are no self-regulation systems requiring internal recourse mechanisms in China, Myanmar, or Sri Lanka. However, only Myanmar indicated that no MFIs provided internal recourse channels to their clients.
- Even though, for the most part, associations report that providers are making an effort to provide their clients with channels to file and resolve grievances, many clients do not actually use these much.
6. Data Protection
- Associations in Pakistan, the Philippines, and India are the only ones reporting that they have national laws regarding clients’ data privacy; in Pakistan, these laws were only applicable to MFBs.
- With the exception of China and Nepal, MFAs indicate that data protection aspects are also covered by the codes of conduct they have in place for their members.
- Four countries (Bangladesh, China, Nepal, and Sri Lanka) have reported cases of illegal usage of clients’ data.
The results showed many achievements in the area of CP in the countries that were in the study. They also reveal however that some key areas need improvement of both legal frameworks and industry practice across countries, including fair treatment of clients, price transparency for deposits and other products such as insurance, promotion of usage of grievance mechanisms, and protection of clients’ data and information.