Protecting Low-Income Consumers: An interview with CGAP microfinance expert Kate McKee

July 15, 2008    

News coverage in places like India often depicts microfinance as a means to protect poor consumers from the potentially exploitative informal sector ("RBI to encourage microfinance to curb money-lenders," Economic Times). But microfinance scandals are also front page news in India and in other countries like Uganda ("Arrest Owners of Thieving Banks, Says Museveni," The Monitor). As more and more private investors are attracted to the sector, the topic of protecting low-income clients only gets hotter, when publications like The Economist raise the question: “Is it acceptable to profit from the poor?” In this context, we asked CGAP’s Kate McKee what protecting consumers is really all about.

1. Let’s start at the beginning. Why focus on consumer protection?

We tend to assume that access to finance always benefits those without it. But the subprime crisis and growing debt stress in some markets are a sober reminder that credit can hurt rather than help if it’s not well-designed and well-delivered. At a minimum, we must take reasonable steps to avoid harm to our clients, who confront plenty of risk and vulnerability in their lives already.

The first priority is to protect clients against over-indebtedness and loss of their hard-won savings. Second, we must agree on clear and specific standards of fair treatment and ethical behavior. Third, we need to increase transparency to clients so they fully understand the prices, terms, and conditions of our products. And finally, we should recognize that investing in client financial literacy makes good business sense.

2. What’s happening in the microfinance industry around this issue?

Awareness of consumer protection in the microfinance industry is fairly new – though interest does seem to be growing. ACCION, SEEP, the Microfinance Network, and other international and national networks and associations (in places like India, Uganda, and Ghana) have been working on different aspects of the “pro-client” agenda for a few years. Meanwhile, investors are also in the process of signing on to CGAP's new Investor Initiative for Client Protection in Microfinance.

Agreement on broad principles and “codes of conduct” for protecting clients and treating them well has been relatively easy to achieve – however, translating codes into concrete changes in microfinance providers’ policies, procedures, and customer interaction has been slow and uneven. We hope that getting investors on board will be one way to help remedy this.

3. Why focus on consumer protection now?

A number of forces are raising the profile of consumer protection now. To start, policy makers seem increasingly willing to respond to abuses in places where competition is growing, like India, South Africa, Brazil, and the new European Union states. These markets are experiencing high growth in consumer lending, driven by profit-oriented providers. As they reach out to inexperienced and more vulnerable borrowers, concerns are increasing about “reckless lending” and “predatory” behavior.

In other countries, financial inclusion is moving to the top of the policy agenda, bringing into focus the potential vulnerability of previously unbanked consumers – many with low levels of both income and education.

Recent heated discussions concerning “ethical” or “responsible” microfinance are also raising the prominence of consumer protection and client transparency. We see debates around the obligations of “double bottom line” microfinance providers – and investors – to their clients. Concern about the corporate social responsibility of more commercial institutions opens the conversation on consumer protection as one aspect of responsibility.

Finally, the slow but steady inroads of social performance measurement and management into our field creates opportunities to incorporate protection and transparency dimensions, as well as to analyze potential unintended negative consequences for microfinance clients.

4. As awareness of consumer protection concerns in the sector grows, what stands in the way of practical action?

We have been hindered by the lack of strong incentives for providers to change short-term practices that might be more profitable or easier than those that would better protect clients. Some practices at the provider level, like simple financial education and clear loan agreements, seem to benefit both the provider and the client, but others, like plain-language disclosure of interest rates and fees, could hurt the provider’s business if its competitors carry on using opaque pricing. The first mover can pay a big initial price for practices, even though those practices would make the market more sustainable over time if all or most big players adopt them.

We need both carrots – like investors rewarding those that adopt better practices – and sticks, like “light-touch” regulation. One advantage of regulation is that it can create a more level playing field by setting minimum standards for all players in the market and not just the good guys.

5. What are the next steps in improving consumer protection?

CGAP sees a strong need for raising awareness across the industry and developing policy and regulatory guidance that strikes an appropriate balance between access and protection. Working with investors to integrate consumer protection concepts and tools with social performance management and corporate social responsibility is also extremely important – as is identifying appropriate ways, including self-regulatory mechanisms, for providers and their networks and associations to address consumer protection on an industrywide basis.