“Does Good Client Protection Impact Financial Performance?”; by B. Perez-Rocha, A.G.F. Hoepner, L. Spaggiari, C. Lapenu and B. Brusky in collaboration with the European Microfinance Platform (e-MFP) Making Microfinance Responsible Action Group; May 2014; 28 pages; available at http://www.e-mfp.eu/sites/default/files/resources/2014/05/Brief_No_4_2014_web.pdf
This paper explores the relationship between the financial performance of microfinance institutions (MFIs) and the Client Protection Principles (CPP) that are promoted by the Smart Campaign, a US-based consumer protection initiative targeting microfinance clients worldwide. To evaluate the financial performance of the MFIs, the authors considered: return on equity (ROE), return on assets (ROA), operating expense ratio (OER) and portfolio at risk after 30 days (PAR 30). The six CPPs used in the study were: prevention of over-indebtedness, transparency, debt collection, ethics, privacy and complaints resolution.
The authors’ statistical analysis of the two sets of variables – the CPPs and the financial indicators – indicates an overall positive relationship between client protection and financial returns. In particular, transparency, appropriate collection practices and privacy of client data were correlated with higher ROA. Ethical staff behavior and good complaint resolution procedures were correlated with higher ROE.
The analysis of CPPs against OER, an indicator of operational costs and efficiency, and PAR 30, which indicates portfolio quality, yielded both synergies as well as “trade-offs.” Good complaint resolution mechanisms were associated with lower OER that, the authors surmise, could be the result of higher client retention due to high client satisfaction. Preventing over-indebtedness was correlated with higher OER, which could be due to cost of conducting sound analyses of lending decisions. Transparency was correlated with lower portfolio quality, which could be due to the MFIs not being able to “mask” poor portfolio quality with write-offs. Good collection practices and PAR 30 were negatively related, indicating best practices in collections are associated with improved portfolio quality. The authors state that this result could indicate that clients are more diligent in repayment if they feel they can have a quality, long-term relationship with the MFI based on “structured recovery policies and trainings.”
The authors note that, while the analysis can establish correlations, it cannot establish causality. The study does not determine whether strong CPPs lead to good financial performance. However, the authors propose that “early investment in some client protection aspects might not immediately pay off, but organizations with the best practices in client protection may ultimately achieve better financial outcomes, thanks to the benefits of a good reputation.”
By Nisha Koul, Research Associate
About European Microfinance Platform (e-MFP): The European Microfinance Platform (e-MFP) is a network of approximately 130 organizations and individuals. Its objective is to promote cooperation among European microfinance institutions working in developing countries by facilitating communication and the exchange of information. e-MFP members include banks, financial institutions, government agencies, NGOs, consultancy firms, researchers and universities.
Sources and Additional Resources:
European Microfinance Platform Briefs, “Does Good Client Protection Impact Financial Performance?”
Smart Campaign, The Client Protection Principles
MicroCapital, March 2013, MasterCard Foundation Donates $4.3m to Smart Campaign for Microfinance Client Protection Effort
MicroCapital, January, 2013, Smart Campaign Launches Certification of Microfinance Institutions Regarding Client Protection
MicroCapital Universe Profile, European Microfinance Platform (e-MFP)
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