Consumer Protection, the Law & the

Provision of Financial Services to

the Poor

Consumer protection, the Law and

the Provision of Financial Services

to the PoorToday’s topics:

•Why consumer protection is currently far from what it should be in the MF industry.

•Difficulty in determining what the law is.

•International Development Law Org.’s ongoing research in five countries.

•Recommendations for how to bring MF industry practices more in line with the law.

« Les dettes aujourd'hui, quelque soin qu'on

emploie sont comme les enfants, que l'on

conçoit en joie, et dont avec peine on fait

l'accouchement. L'argent dans une bourse

entre agréablement ; Mais le terme venu que

nous devons le rendre,

C'est lors que les douleurs commencent à nous

prendre. »

« L'Étourdi » (1653), Molière

Why Should MFIs be concerned

with Consumer Protection?• a) To provide de facto compliance with

domestic law

• b) Better customer service; satisfied clients should be your raison d’etre.

• c) Specific to MF industry: the consumer is semi literate and has a weaker (if any) bargaining position compared to the MFI.

• d)Specific to clients in most developing countries, neither the regulator, nor the courts are an avenue of redress for the consumer.

Impact of the consumer

protection law on actual

industry behaviour? • At present: influence is negligible for a variety of

reasons.

• Historic orgins of consumer protection law: In US, in 1800’s it was journalists like Upton Sinclair reporting on unsanitary conditions in the meat packing industry impacting consumers.

• Problems with consumer protection law awareness: scattered principles throughout commercial law (trade, advertising, competition law, contracts etc.) Not viewed as applicable to non food, beverages or non “consumables” like financial services.

• No real responsible government regulator; no forum and poor consumers are unlikely to press for their rights.

Who has done a thorough legal

analysis of applicable law on consumer

protection?• Is there a general consumer protection law in effect in the country? Are CP principles contained in various commercial legislation?

• What are MFIs obligations regarding advertising? Information which must be disclosed in contracts? Is there a cooling off period?

• Any laws with regard to data privacy? Is there an insolvency/bankruptcy law in place?

• Does executive level at MFI know the law, and are they informing loan officers?

• Do clients know their legal rights in addition to financial literacy? Is there a dispute resolution policy clearly posted?

Five Country Analysis: Research

Methodology• In country partners in dev. countries (universities; jurists)

• Assessment of what the domestic law dictates vis-à-vis consumer protection in financial services

• Interviews w/ MF industry execs., loan officers, clients (defaulting and current) & magistrates/judges who deal with debt defaults. MFIs selected based on market share (assumption of being examples of better behavior)

• Five countries; country selected on basis of a confirmed instance of bad practices in a neighboring country

Abuses of the MF consumer:

IDLO research in five

developing countries• In loan contracts: not giving client a copy & changing terms

of agreement (4/5 countries)

• In guarantees and collaterals: hyper collateralization, improper handling of titles to property and requiring multiple guarantees; failure to inform guarantor of implications of guarantee (Cameroon & Egypt).

• In dispute resolution: no internal DR procedure, no loan officer discretion or interest in rescheduling debt (all five)

• In payment difficulty or default: inflexibility to reschedule loans; threats including incarceration; bankruptcy/insolvency law outdated; and borrower protection non existent (all 5)

• In collections practices: misuse of police/judiciary to “send a message.” (Cameroon; Egypt)

Country by country results:

from okay to not okay to v. bad• Colombia: Why would you need a contract when it is

much more simple if I just write the numbers down on a payment schedule?

• India: One defaults; the whole group goes down together. Rescheduling? Why would we want to offer that?

• Kenya: Pay late; pay double (you won’t see that in your contract because I did not give you a copy).

• Cameroon: You give me the title to your home; I’ll give you a loan worth 25% of its value.

• Egypt : Microfinance default may induce prison time for you or your guarantor(s)); MF executives state this rarely if ever happens, but refuse to provide stats. Courts are not automated, but one judge estimated he saw 100-150 debt default cases per week.

Recommendations for a Better

Business Methodology?:- Industry self regulation may not have the required

“teeth” to stop bad behavior (ex. From private security contractors in Afghanistan): With Smart Campaign, is it possible to have some neg. Consequences for those who sign up but do not comply?

- Empower MF networks to produce something which it can sell to the market; like mediation of defaults (and/or insurance for defaults)

- Any existing ombudsman or complaint window at the CB? If not, set one up maybe at MF network.

- Legal Aid & Clinics: find a law faculty and involve law students

- Standard form contracts could be useful for the industry; again a role for MF network?

Parting thoughts?-Biggest problem with consumer protection is that it is lowest on every law maker’s agenda.

-And,the poor consumer (by definition) is both poor and socially marginalized.

-Without legal aid, who will speak for the poor?

- Rule of law in a society means all are protected; even the weakest members.

-IDLO has a network of jurists around the globe; please let us know if you need assistance in a particular country. (We are happy to provide pro bono introductions and our 2 cents worth of advice.)

Thanks, and happy conferencing!

Jhubbard@IDLO.int