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MICROFINANCE - Industry finally recognises that more has to be done to prevent over-indebtedness and past incidences of irresponsible lending

The microfinance industry is stepping up its efforts around responsible finance, including consumer protection measures and efforts to prevent over-indebtedness, according to CGAP, the global industry body dedicated to advancing financial access for the world's poor. The rapid growth of microfinance into new markets is being accompanied by a renewed emphasis on providing access to responsible financial services that deliver greater benefits for the poor.

In a new paper CGAP argues that this stepped up emphasis on responsible delivery will translate into microfinance institutions adhering to codes of conduct, improved regulation, and efforts to improve customer awareness and financial capability. In its latest Focus Note, Responsible Finance: Putting Principles to Work, CGAP says this evolution will also benefit the institutions, as stronger client protection can lead to greater customer loyalty and demand for a wider range of financial services. Those institutions that fail to improve client protection may risk much heavier government regulation of their markets, and even lose access to investors whose focus is on the double bottom line of helping the poor as well as earning solid returns.

"There is a far more realistic understanding now of the need for better internal controls, for institutions like credit bureaus, and for sound regulation, all with a view to providing responsible finance to the 2.7 billion people still without access to formal savings or loan accounts," said Kate McKee, one of the authors of the CGAP paper. "Microfinance providers are showing they have learned that they have to do more to protect their client base, not just grow it."

In a new paper on over-indebtedness, CGAP argues that problems with too much debt are to be expected as microcredit markets become more saturated. Competitors start lending to higher-risk borrowers, and may become lax on risk management and internal control. When these problems are not anticipated and managed, crises break out and both borrowers and lenders suffer.

Many institutions now grasp that the way forward requires an approach that is sensitive to the particular vulnerabilities of poor clients. At a global level, there are important new initiatives pushing for improved consumer protection, greater transparency and disclosure of interest rates, alongside efforts aimed at improving financial literacy. The Microfinance Transparency initiative which works globally to improve price transparency in the sector is operating in 28 countries so far, and has data on more than 1,000 loan products sold to more than 50 million clients. Nearly 700 financial service providers, and 130 funders have signed on to implement the Client Protection Principles advocated by the Smart Campaign.

These are solid steps, CGAP believes, but all actors in the sector need to do more to ensure responsible delivery of sound financial products to the poor. In a third paper produced in partnership with the International Finance Corporation (IFC), CGAP stresses the need for credit reporting bureaus that cover not just mainstream banking and financial services customers but microfinance borrowers as well. Despite progress on this front over the past 10 years, CGAP and IFC note that only a handful of countries have the kind of credit reporting coverage that includes microfinance borrowers in the exchange of credit information. While credit reporting alone cannot create credit discipline in a market or compensate for inadequate underwriting standards, say the authors of the paper, it can help microlenders better originate loans, manage credit risks, and create a powerful incentive for repayment among borrowers.

In addition to fostering the growth of comprehensive credit reporting, governments and regulators can also improve client protection for poor borrowers through actions like those taken in Peru, which has recently introduced new laws to enhance the fairness and transparency in lending markets, contributing to greater competition and lower prices on financial products. However, CGAP believes it will take responsibility on all sides - governments and regulators, funders, financial service providers, and their customers - to ensure that microfinance delivers what it promises: the opportunity for people traditionally without the means to build their own futures using savings, loans, and insurance.

Read the CGAP papers:
Responsible Finance: Putting Principles to Work
http://www.cgap.org/gm/document-1.9.54128/FN73.pdf  

Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness
http://www.cgap.org/gm/document-1.9.55377/OP19.pdf   

Credit Reporting at the Base of the Pyramid
http://www.cgap.org/gm/document-1.9.55445/FORUM_1.pdf  

Note: CGAP is an independent policy and research center dedicated to advancing financial access for the world's poor. It is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty.

ID: 47754
Publication date: 18/10/11
   
URL(s):

www.cgap.org
 

Created: 28/10/11. Last changed: 28/10/11.
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