MICROFINANCE STORY: The Unaddressed Need for Microfinance Oversight and Customer Protection in Haiti

After the 2002 crisis that wiped out USD 200 million in savings in Haiti, the Haitian government passed legislation to address and increase oversight of savings and loans cooperatives. However, as discussed by the Center for Financial Inclusion’s (CFI) Summary of Client Protection in Haiti, there are no regulations that address the microfinance sector. There has been pending legislation in Parliament for the past two years that would increase oversight for the microfinance sector, the details of which are not available. The Association Nationale de Institutions de Microfinance d’Haiti (ANIMH), founded in 2002, was formed by a group of non-cooperative microfinance institutions (MFIs) to deal with the threat of a similar financial crisis in the microfinance sector. It has a loan portfolio from its member institutions of USD 47.4 million as of 2007. According to the CFI, to regulate and increase consumer protection in the microfinance sector in Haiti, legislation should be passed to address the microfinance sector specifically.

As discussed by the CFI, the Haitian government removed ceilings on interest rates and lowered the reserve requirements for banks in 1995, but did not update regulations in the banking sector. Banks thus reached out to new clients while pyramid-scheme organizations grew, claiming to be legitimate credit unions and cooperatives. Eventually, this scheme collapsed, resulting in the 2002 financial crisis with a loss of USD 200 million in savings for Haitians. The CFI explained that as a response to rectify the banking system and increase customer protection in this sector, the Haitian government increased the regulatory authority of its central bank, the Bank of the Republic of Haiti.

The Bank of the Republic of Haiti (BRH) is the main regulator for commercial banks, and in 2002, its regulatory mandate was extended to cover credit unions. As noted by the CFI, the BRH sets financial standards for these institutions and inspects them to ensure compliance. Banks and credit unions are required to submit financial reports to the BRH each quarter. The BRH also holds the review authority, and is responsible for examining requests to operate banks and credit unions and for issuing the necessary permits.

The CFI also examines the available legal provisions to protect consumers. The law limits consumer over-indebtedness by banning banks from writing mortgages for amounts exceeding 70 percent of the value of the guarantee for the general public, and 95 percent for bank employees. Additionally, the BRH maintains a central repository of credit information reported by individual banks and shares this information with banks. However, it is unclear whether this is institution or client-level data. Also, unregulated MFIs are not included in the repository. Moreover, the BRH can force banks to submit current interest rates, commissions, and other fees to regulators. However, transparent pricing to the consumer is not mandated in the 1980 decree. Collections practices appear to be largely at the discretion of the lender, but a 1984 law regulating savings and mortgage banks outlines a specific court procedure that these banks must use to collect on bad debts. The law specifies that borrowers must be given sufficient travel time to appear in court and that they can appeal any decisions made in their absence.

As mentioned by the CFI, financial institutions belong to one of four main associations in Haiti, depending on the type of institution. The 13 commercial banks operating in the country belong to the Association of Professional Bankers (APB). Established in 1998, The National Association of Haitian Credit Unions (ANACAPH) represents 42 cooperative financial institutions and has 201,662 clients from its member institutions. As of 2007, it had assets of USD 44.1 million, savings totaling USD 30 million, and a loan portfolio of USD 24.7 million from its member institutions. The National Council of Popular Financing (KNFP), founded in 1998, represents nine cooperative financial institutions based primarily in rural areas. It addresses the concerns of training of rural finance institutions and workers through its Mobile Training Institute (IMOFOR), advocacy and promotion of rural finance, and improvement of financial services in Haiti and in rural areas through information exchanges on issues of rural finance. The National Association of Haitian Microfinance Institutions (ANIMH) represents 17 non-cooperative MFIs, with six of these associations belonging to the KNFP also, and 120,658 clients from its member organizations. It promotes best practices in microfinance to local institutions via its National Microfinance Center, a microfinance training center. Some of its objectives include promoting studies, research, and data-gathering in order to disseminate information about the situation, trends, needs, and efforts of the microfinance sector; aiding in the development of draft legislation, regulations, and other documents for government authorities in order to inform and guide their approaches to structuring the microfinance sector; and establishing relations with other national and international microfinance associations in order to further information exchanges and cooperation.

As reported by the Economist in its 2008 microfinance report for Latin America and the Caribbean, Haitian banks engage in microfinance either through a specific department or a separate entity constituted as a non-bank financial institution. According to ANIMH, there are more than 350 credit unions and MFIs and 25 non-cooperatives. The Economist also found that documentation requirements and capital-adequacy ratios were also reasonable. It also noted that the state does not subsidize or distort the microfinance market through its regulation and second-tier funding, and MFIs freely determine interest rates. In a USAID 2007 microfinance census for Haiti, MFIs employed more than 3,600 people and served 239,000 clients. Two-thirds of those clients were women. The MFIs had a total loan portfolio of about USD 105 million and were holding client savings of USD 60 million.

According to the CFI, MFIs can escape the purview of these regulatory and oversight agencies because it depends on how the non-cooperative MFIs were formed. Some operate as NGOs, associations, foundations, community-based organizations, community banks, private companies, and divisions of commercial banks. Since current legislation does not address MFIs, many MFIs have yet to adopt practices and policies that promote client protection in the industry. For instance, ANIMH pointed out that MFIs are not allowed to collect savings from the general public because of the existing legal uncertainty and lack of supervision. As noted by the Economist, regulation and supervision of general banking and financial services is weak. However, the BRH is currently receiving technical assistance to set up a credit registry that would join the formal and informal sectors and include input from MFIs. Thus, as argued by the CFI, the Haitian government should pass legislation addressing the microfinance sector.