Turning Principles into Practice
by the Microfinance Gateway
A Nicaraguan MFI commits to consumer protection
This Microfinance Voices article is based on a Gateway interview with Banex President, Gabriel Solorzano.
In 2007, the lucrative IPO of Mexican microfinance institution (MFI) Compartamos raised concerns about whether some MFIs were prioritizing profit over clients’ best interests. The following year a group of microfinance industry leaders, organized by ACCION’s Center for Financial Inclusion and CGAP, drafted a set of Client Protection Principles which microfinance investors, institutions, and donors could adopt, articulating their commitment to clients. They are:
1. Avoidance of Over-Indebtedness
2. Transparent Pricing
3. Appropriate Collections Practices
4. Ethical Staff Behavior
5. Mechanisms for Redress of Grievances
6. Privacy of Client Data
Hundreds of investors, donors, MFIs and other organizations have now signed on to these six principles. However, the challenge remains of turning abstract principles into concrete policies and processes that truly help clients stay financially healthy. One MFI, Banex in Nicaragua, has taken the principles to heart and designed steps to address each one.
For Banex, the political situation in Nicaragua made addressing client protection particularly important and urgent. With the national government encouraging No Payment movements and capping interest rates, MFIs in the country have found their reputations called into question.
Gabriel Solorzano, president of Banex, explains, “Our policies have been a reaction to the environment here in Nicaragua. It’s not easy to be on the front page of the newspaper five days in a row. It’s not easy to have the president of the country telling people they don’t have to pay.”
As Banex developed their consumer protection strategy, they analyzed how the Nicaraguan microfinance sector stacked up against each of the Consumer Protection Principles. This analysis helped them determine where to focus, and how to put the principles into practice.
Putting the Principles into Practice
Principle 1: Avoidance of Over-Indebtedness
“In a country of only five million people, there are 350 MFIs and just about every donor on this planet. There was a level of market saturation, about to explode,” says Solorzano. In Nicaragua, over-indebtedness has become a serious problem, Solorzano explains, “so we changed our credit policy not only to request credit information from the new credit bureau, but also to tighten the liquidity of the client.”
Banex significantly lowered its threshold for a client’s debt-to-net income ratio. As a result, they now reject 80% of all loan applications (up from a previous rate of 20-25%). Though this more conservative position stopped the MFI’s growth (they had previously enjoyed a 74% compounded annual growth), Banex recognized it as a necessary step.
Banex has also begun segmenting products based on client needs and income level and has plans to implement the Progress out of Poverty Index to better determine the poverty levels of clients.
Principle 2: Transparent Pricing
As former president of Transparency International Nicaragua, Mr. Solorzano has a strong personal commitment to this principle. Banex has taken the following steps to improve the transparency of its services:
Simplified pricing
Created a “plain explanation” brochure for credit cards
Provided all customers with material explaining their rights and responsibilities, in easy to understand format
Printed financial terms – interest rate, commissions, etc. – delivered to client on separate sheet in easy to understand terms
“Though we have gone much further than the industry, I think that we can do more,” says Solorzano, “but it has to be an industry-wide effort, not a single company effort. I am at a disadvantage when I tell a client I am going to charge them a 25% interest rate and 2% commission, when we are competing with others who do not disclose as much, and NGOs with interest rate caps.”
Principle 3: Appropriate Collections Practices
New software installed on loan collectors’ PDAs helps Banex tailor its collection process to different types of clients. It identifies patterns in how clients work and pay, flagging potential trouble spots and helping to avoid unnecessary visits. It also facilitates better collector coordination, letting Banex know who has been in contact with a client and when, so that they can avoid multiple visits, which may be interpreted as harassment.
Banex has also changed policies to avoid collections procedures whenever possible:
Increase arrears, if necessary, to reduce complaints and political risk
Write off minor amounts, as the political cost of collecting was determined to outweigh the benefits
No longer pursue legal action that can lead to criminal trials
Try to re-finance delinquent loans as much as possible, something Banex had not previously pursued
Principle 4: Ethical Staff Behavior
Banex has implemented a strict code of ethics for its staff, including a specific code for attorneys and collectors. “We’ve even fired three board members for violations of the ethics code,” declares Solorzano. “We have very strong conflict of interest rules. We are tough on the Board, and also tough on employees.”
Banex does an independent evaluation of each board member once a year. The summary of results is published in Banex’s annual report, which is available to the public on its Web site. Any violation of the code of ethics by a board member is reported to the corporate governance committee. The human resources manager sends a monthly report to the audit committee reporting any code of ethics violations on the part of employees.
Principle 5: Mechanisms for Redress of Grievances
To ensure that clients have proper options for recourse, Banex has created the position of Financial Client Ombudsman. “We are not just the only MFI, but the only institution in Nicaragua that has the position of Ombudsman,” says Solorzano. The responsibility of the Ombudsman is to gather customer complaints, liaise between the customer and the MFI, and determine when and where Banex is failing in quality of service.
Even if the client does not technically have a case to pursue -- for example if he or she did not understand the terms or conditions of the financial product -- the Ombudsman will work to identify a compromise, such as reducing a fee. The aim is to increase the client’s financial capability and also maintain satisfaction and confidence in the institution.
The Ombudsman also conducts surveys at branches to determine the quality of service and identify weaknesses. The idea is to be proactive, not simply responding to current problems, but foreseeing and circumventing future problems. Among the Ombudsman’s recommendations have been:
Publish the interest rate more clearly -- customers have complained that they are not sure how much they were being charged
Measure the number of clients served by each cashier and use this to determine how many cashiers should work at one time -- avoiding long lines
Principle 6: Privacy of Client Data
Banex is in full regulatory compliance regarding the security of client data, using software in place in many banks in Panama. They also have a backup server, as financial data is stored digitally.
Conclusion
Signing on to the Client Protection Principles is easy. Putting them into practice takes analysis, time, and effort. Banex has prioritized this initiative over the past year and provides a good example for MFIs who wish to implement the principles. Though there is always more work to be done, Banex has taken the essential step forward, turning a commitment to client protection into tools and processes that keep their clients and their business secure.
My congratulation to Mr. Gabriel Solorzano, president of Banex for implementing these customer protection codes into practice. These Customer protection codes not only safeguard the customers from high indebtedness, rather safeguard the MFIs from Delinquency and build better rapport with customer and the general public. These codes keep the MFIs into self-discipline.
Bhoj Raj Bashyal Nirdhan Utthan Bank Ltd. Nepal
31 Aug 2009
Appreciation for putting into practice client protection measures
My congrats to Mr.Gabriel Solorzano, president of Banex for having
put to practice the client protection codes, which is the need of the hour as because of increased competition in matured markets, many players without any code of ethics in lending, create a situation, where it leads to multiple borrowing and overindebtedness.
Dr. Jeyaseelan Natarajan Hand in Hand Tamilnadu India
18 Aug 2009
if there is a will there is a way
Congratulations Solorzano for transforming the principle into practices. I appreciate your commitment as well as sense to the accountibility towards clients. I know this journey has not been that easy for you but you proved that if there is a will there is a way
Achyut Hari Aryal Bangladesh
14 Aug 2009
Ethical values of Micro finance
For sustaining the social and ethical values of Micro financing for the cause of the poor, introduction of Ombudsman and codes of ethics violation report by Banex are worthy emulation . Unethical competition among the players need to be eschewed. Towards poverty reduction,instead of aggressive financial inclusion leading to over indebtedness, it is imperative to ensure enabling environment for effective credit absorption at client / village level by providing physical capital in terms of roads bridges, , power, marketing, transport, telecommunication and raw materials needed for income generation .
Varadarajan rengarajan Independent consultant -Microfinance India
10 Aug 2009
Challenges of Principle 2
I was hoping Mr. Solorzano could have elaborated more on Principle 2, and how they are coping with the competition not complying. I agree completely that complying can put him at a steep disadvantage when other MFIs are not. Written, clear explanations don't always penetrate through to the client. My congratulations to him, however, for taking on this challenge.
Jim
Jim Anderson Mercy Corps Mongolia
07 Aug 2009
Social Commitment to the Client
Every MFI has some social commitment but they failed to keep their commitment due to many reasons. Banex set up a good example for MFI regarding social commitment to the client. MFI disburse money at a fixed interest rate and field worker/collector collect the installment ignoring the any circumstanses. Client satisfaction is also ignored by MFI. The client has no clear concept about the product and other services of MFI. MFI should give the clear message about their product and financial services to the client. It will make good and positive reputation of MFI if it practices six steps of Banex in microfinance field level operation.
Whilst I agree that a sole mfi will find it difficult to practicalize the priciples on its own, I think that if a few key or leading MFIs adopt a common strategy to praticalise the priciples, the ensuing benefits will be reflected in client satisfaction. This in turn will influence the others to join up. The country level network may coordinate the strategy.
David Andah Ghana Micrfinance Institutions Network Ghana
05 Aug 2009
Client protection
We at the Development and Employment Fund take this issue very seriousley and our social statment adopting full transperancey in promoting our services and in proving it.
Ali Ghezawi Development and Employment Fund Jordan
05 Aug 2009
Principles into practice
It is a very successful step to make agreement of institutions on customer's protection code, but now it is the responsibility of managements of the institutions to make sure of its implementation. The selection of client and its appraisal before lending is a meter of a very serious concern where the most of MFIs lack. The impact assessment reports shows the failure of various lending methodologies and even practices and organizations are limited with only miro credits. There is no worth able cussion for poor clients. Although the microfinance addresses social services but the result is not up to the mark because we are not performing our social responsibilities as well. This is the proper time and it should be taken as PARTNERSHIP WITH POOR with full package of social performance, otherwise we have to face challenges continuously like that.
Farhat Shah Pakistan
14 Jul 2009
Client Protection
Dear sir:
I agree with those principles,and we could add some points like putting
a balance and fair incetive scheme for staff, balance between
social and financial performance,and inceresing MFIs awarness about
SCR towords commuinty.
Ahmed Abdelwahab National Bamk for Development (NBD) Egypt
14 Jul 2009
Learning for others
This is a very fruitful example set by the banex for other MFIs, which are willing to implement code of conduct for customer protection. ASASAH has also started implementing six principles but according to my opinion as a grass root expert it is difficult to explain interest rates and making a recovery process smooth as well.
