MICROCAPITAL STORY: Thirty-Five Organizations Sign Client Protection Principles to Ensure Fair Treatment and Financial Protection of Low-Income Microfinance Clients

In late October, 35 microfinance institutions (MFIs) and investment funds signed the Client Protection Principles (CPP), a list of pro-consumer principles and mandates that aims to become an industry-wide standard for ensuring the fair treatment and financial protection of low-income microfinance clients. The CPP are part of a larger campaign launched in September of 2008 at the annual meeting of the Clinton Global Initiative, a conglomeration of governments and public and private organizations dedicated to sustainable development, with the goal of incorporating at least half of the world’s 500 largest MFIs within the next three years. According to Consultative Group to Assist the Poor (CGAP), there is little evidence of client abuse in the microfinance sector.

These principles are the product of the aggregated experience of several MFIs, microfinance networks and other public microfinance organizations that have developed consumer-friendly conduct and practices. Signatories to the CPP have committed to translating the principles to a host of different clients, products and situations, says CGAP. Casting this wide net will require, says CGAP, that each signatory ensure the compatibility of its investment selection and oversight processes with the CPP. Currently, there is no oversight board or regulatory body in place for promoting CPP compliance and no mechanism for determining the nature and extent of each institution’s efforts.

The six core principles enshrined in the CPP are the following:

1. Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take reasonable steps to ensure non-credit financial products,(such as insurance) extended to low-income clients are appropriate;

2. The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) will be transparent and will be adequately disclosed in a form understandable to clients;

3. Debt collection practices of providers will not be abusive or coercive;

4. Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients;

5. Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients;

6. The privacy of individual client data will be respected, and such client-identified data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services have an important role to play in helping clients achieve the benefits of establishing credit histories).

As of late October, the list of signatories to the CPP included:

Aavishkaar Goodwell India Microfinance Development Company Ltd and Goodwell Microfinance Development Company B.V.

ACCION Gateway Fund and ACCION Investments

Aga Khan Agency for Microfinance

Belgian Investment Company for Developing Countries SA/NV (BIO)

Calvert Foundation

CHF International

Citigroup

Co-Operative Bank (UK)

Deutsche Bank

Developing World Markets

Development Finance Equity Partners