Client Protection Principles: The Smart Way in Dealing with Clients

Session description:

There has been a widespread recognition in the microfinance industry for client protection. Knowing the
paying capacities of the clients and when there is an effort from the MFI of putting in place measures for
appropriate treatment to clients, then, a more sustainable relationship between the MFI and the clients
would be able to support the process.

The Smart Microfinance Campaign has defined 6 Client Protection Principles:

1. Avoidance of Over-indebtedness
2. Transparent or Responsible pricing
3. Appropriate Collections Practices
4. Ethical Staff Behavior
5. Mechanisms for Redress
6. Privacy of Client Data

The Smart Campaign aims to help the microfinance industry be “socially focused and financially sound”
by providing microfinance practitioners with tools and resources to enable them to provide transparent,
respectful and prudent financial services to clients. The Campaign is pushing these principles to stand as
the minimum standards that clients should expect to receive while doing business with a microfinance
institution (MFI). Alignment with these core principles will help MFIs build strong, lasting relationships
with clients, increase client retention, and reduce financial risk. Healthier clients also mean better returns
and a more robust portfolio for the MFI.

The Smart Campaign was formed to bring people together across the microfinance industry to implement
a common code of conduct that governs how clients should be treated and to help implement client
protection safeguards within the industry’s operations.

By incorporating client protection into all aspects of business operations, MFIs can proactively and
collectively strengthen microfinance and position the industry as a leader in responsible financial services.
Session Objective(s):

 To mobilize awareness of PCFC staff and management to the key principles of client protection
through and in depth discussion on the 6 Principles of Client Protection;
 To orient and educate PCFC as well as build their capacity to implement the Smart Campaign’s
core principles;
 To heighten the commitment to client protection and harness collective action to implement
client protection standards;
 To discuss challenges / issues in relation to the implementation of the 6 Principles of Client
Protection

Session Format:

Day What (content) How (processes) Who

1 Welcome Remarks
Overview of Agenda
Introduction, Expectations Setting
and Houserules
History of the Smart Campaign Powerpoint
Presentation
Overview of the 6 Client Protection Powerpoint
Principles Presentation
Matching Test Quiz
Avoidance of Overindebtedness Powerpoint
Presentation; Group
Discussion
Transparent Pricing Powerpoint
Presentation; Group
Discussion
Responsible Pricing Powerpoint
Presentation; Group
Discussion
Appropriate Collections Practices
Day 2 Ethical Staff Behavior
Mechanism for Redress and
Grievances
Privacy of Client Data
Synthesis
Matching Test
Getting Started Questionnaire Output
Clarification
Issues and challenges
Closing
Session Materials:

 Powerpoint Presentation of the 6 Client Protection Principles

 Powerpoint Presentation of MFIs’ CPP experience
 6 Client Protection Principles Postcard
 Sign-up Sheet
 Endorsement Sheet

Matching Test
Match the Indicators with the Appropriate Principle

This page contains a list of the 6 Principles of Client Protection. The following page contains all
the indicators for the principles. In the space below each principle on this page, write the letters
of the indicators on the following pages that go with the principle.

1. Prevent over-indebtedness. The financial institution carefully establishes the borrower’s

ability to afford the loan and repay it. Borrowers should be able to handle debt service
payments without sacrificing their basic quality of life.

Indicators:

2.A. Transparency. The financial institution ensures that complete information is made
available to customers in clear language that is not misleading and that the customer is
able to understand.

Indicators:

2.B. Responsible Pricing. The financial institution offers quality services for the price,
demonstrating its competitiveness in the marketplace, and favoring a long-term beneficial
relationship with the customer over short-term profit maximization. Consistent practice of
transparent pricing is a pre-condition to adequate implementation of this principle.

Indicators:

3. Appropriate Collections Practices. The financial institution treats customers with dignity
even when they fail to meet their contractual commitments.

Indicators:

4. Ethical Staff Behavior The financial institution creates a corporate culture that values
high ethical standards among staff and ensuring safeguards are in place to prevent, detect
and correct corruption or customer mistreatment.

Indicators:
5. Complaints Handling and Resolution. The financial institution has a mechanism for
collecting, responding in a timely manner, and resolving problems for customers.

Indicators:

6. Privacy of client data. The financial institution respects the privacy of customer data,
ensures the integrity and security of their information, and seeks the clients’ permission to
share information with outside parties prior to doing so.

Indicators:
 Indicators

A. The financial institution offers multiple loan products or flexible ones that address different
business and family needs.

B. Credit approval policies give explicit guidance regarding borrower debt thresholds and acceptable
levels of debt from other sources.

C. Staff is informed in advance of penalties for non-compliance with collections policies and
violations are sanctioned.

D. Written customer consent is required for use of information in promotions, marketing material
and other public information. Customers are asked to express their written agreement for
sharing personal information with any external audience, including credit bureaus.

E. Productivity targets and incentive systems value portfolio quality at least as highly as other
factors, such as disbursement or customer growth. Growth is rewarded only if portfolio quality is
high.

F. The organization offers information, orientation or educational sessions to clients on how to

safeguard information, access codes or PIN numbers.

G. The loan approval process requires evaluation of borrower repayment capacity & loan
affordability. Loan approval does not rely solely on guarantees (whether peer guarantees, co-
signers or collateral) as a substitute for good capacity analysis.

H. The financial institution follows truth-in-lending laws and required APR or effective interest rate
calculation formulae. In the absence of industry-wide requirements, information is provided that
shows the total amount that the customer pays for the product.

I. Managers and supervisors review ethical behavior, professional conduct and the quality of
interaction with customers as part of staff performance evaluations.

J. Loan contracts show an amortization schedule that separates principal, interest, fees; define the
amount, number and due dates of installment payments and include fees and conditions for early
repayment, late payments and default. Debt collections practices are revealed to the borrower
prior to the time of sale.

K. Customers are given adequate time to review the terms and conditions of the product and have
an opportunity to ask questions and receive information prior to signing contracts.

L. Customers regularly receive clear and accurate information regarding their accounts (e.g.,
account statements, receipts, balance inquiries).

M. Staff is trained to communicate effectively with all customers, ensuring that they understand the
product, the terms of the contract, their rights and obligations. Communications techniques
address literacy limitations (e.g., reading contracts out loud, materials in local languages).
N. Prices, terms and conditions of all financial products are fully disclosed to the customer prior to
sale, including interest charges, insurance premiums, minimum balances , all fees, penalties,
linked products, 3rd party fees, and whether those can change over time.
O. Prices are not subsidized, are market oriented and competitive within the country context.

P. The financial institution does not charge customers for its own inefficiency, as demonstrated by a
comparison of efficiency and profitability ratios of similar competitors.

Q. Internal audit or other monitoring systems check that complaints are resolved satisfactorily.

R. The financial institution invests a portion of its profits to increase value to customers, such as
lowering interest rates or adding or improving products and services.

S. Collections staff receive training in acceptable debt collections practices and loan recovery
procedures. In-house and 3rd party collections staff are expected to follow the same practices.

T. Multiple channels for disclosing clear and accurate information about the product are used, such
as brochures, orientation sessions, meetings, posting information in the branch, websites, etc.

U. The institution uses a policy on acceptable pledges of collateral, including not accepting collateral
that will deprive borrowers of their basic survival capacity.

V. A written code of business ethics spells out organizational values and the standards of
professional conduct expected of all staff.

W. The code of ethics has been reviewed and approved by the Board and is included in staff rule
books or administrative policies.

X. Management regularly monitors levels of borrower over-indebtedness and uses that information
to improve products, policies and procedures.

Y. HR procedures pay attention to ethics, such as assessing new employees for compatibility with
organizational values.

Z. Acceptable and unacceptable debt collection practices are clearly spelled out in a code of ethics,
book of staff rules or debt collection manual.

AA. The organization has a robust internal audit and fraud control system that detects customer
mistreatment, such as soliciting kickbacks and favors or using coercion.

BB. Internal audits check household debt exposure, lending practices that violate procedures
including unauthorized re-financing, multiple borrowers or co-signers per household and other
practices that could increase indebtedness.

CC. A written policy requires customer complaints to be taken seriously, fully investigated and
resolved in a timely manner without bias.
DD. Pre-payment penalties or account closure fees and other penalties are not excessive. For
example, they would not prevent a customer from changing to another product or provider, or
unreasonably compound debt.

EE. Staff is trained to handle complaints and refer them to the appropriate person for investigation
and resolution.

FF. Staff rules include specific provisions on what is considered acceptable and unacceptable
behavior. Provisions describe reprimands and actions that can result in termination of
employment.

GG. When available, the financial institution checks a Credit Registry or Credit Bureau for borrower
current debt levels and repayment history. When not available, the financial institution maintains
and checks internal records and consults with competitors for same.

HH. The organization's corporate culture values and rewards high standards of ethical behavior and
customer service.

II. Staff receives orientation and refresher courses on the practicalities of following codes of
conduct.

JJ. A mechanism to handle customer complaints is in place, has dedicated staff resources, and is
actively used. (Suggestion boxes alone are generally not adequate.)

KK. Re-scheduling policies prevent automatic debt extensions and re-scheduling procedures follow
written protocol.

LL. Customers are informed of their right to complain and know how to submit a complaint to the
appropriate person.

MM. The institution earns a reasonable rate of return to support operations and grow, while allowing
the customer to do the same.

NN. Complaints information is used to improve products, sales techniques and other interactions with
customers.

OO. A written privacy policy governs the gathering, processing, use and distribution of client
information.

PP. Systems, including secure IT systems, are in place and staff trained to protect the confidentially,
security, accuracy and integrity of customers’ personal and financial information.

QQ. Customers know how their information will be used. Staff explains how data will be used and
seeks permission for use.
Good and Bad Practice Examples

Preventing Over-indebtedness
Examples of good practices:
The Entry Pass: The organization’s loan officer incentive system uses portfolio quality
indicators as the entry pass for a bonus. Portfolio quality is rewarded above growth or at
least as much as growth. Revision of the incentive system was based on analysis of the
increasing trends in delinquency, competitor analysis and review of market conditions.
Internal Audit Digs in to Debt: The internal audit department checks two groups of
borrowers at the branch level: 1) a mixed group of borrowers who are delinquent and those
who are not, and 2) a group of borrowers who are delinquent. The analysis considers
compliance with loan underwriting procedures and identifies weakness or violations that
may have occurred. The IA reviews specific practices that have lead to over-indebtedness,
and management has acted to review products and procedures.

Examples of practices that make the institution and the industry vulnerable:
Market Dominance: In efforts to gain market dominance, this institution advertises and
lends in larger amounts to any borrower from another MF institution.
Debt Spiral: The MFI has one product, originally designed for small retail operations with
weekly cash flows. Without further analysis the product is extended to farmers who have a
seasonal cash flow and require higher initial loan amounts. The farmer borrows the
remaining amount from another MFI that offers exactly the same product and terms. The
farmer cannot meet the weekly installment payments required by either MFI. She borrows
from the moneylender to make the payments.

Ensuring Transparency
An example of a good practice:
It only takes a minute: This organization requires all loan officers to read contracts
together with the borrowers prior to signing. They use a Q&A point list for each provision to
ensure that the customer understands and agrees to the terms. The contracts use clear
language which is not obfuscated by legal terms.

Examples of weak practices:

Wait a minute! The institution deducts a fee at the time of loan disbursement. Borrowers
are confused (and annoyed) because the amount of the loan that the organization said it
had approved is not the same amount that the borrower received.
Wait a minute! Part 2: Effective interest rates are calculated following the banking authority
formula which the contract includes. The contract also includes another APR which is what
the institution actually earns. What the borrowers are told is that they pay 3% a month (the
nominal rate). This rate does not appear in the contract.

Examples of practices that make the institution vulnerable:

Where did all my money go? Borrowers’ mandatory savings accounts can be blocked by
the institution if the borrower is one day late with an installment payment. Voluntary savings
accounts can also be blocked and seized. These terms are in the contracts, but loan officers
do not ensure that customers understand this important provision prior to borrowing. The
number and amount of voluntary savings accounts has declined.
The extra mile matters: No one told a new mobile banking customer that there would be a
charge for each account balance inquiry. The account holder checked the balance, and it
went down. He checked it again in disbelief. This process continued until the account was
nearly drained.

Fair Pricing
No Penalties for Prompt Repayment! The bank does not charge pre-payment penalties on
any loan product.
Prices Fall: No up-front fees or commissions are charged for the loan. This is a recent
practice. When fees were eliminated, the monthly interest rate did not increase to
compensate for them.
Discounts Prevail: A non-bank institution offers group deals on savings accounts through
established agreements with local banks, allowing groups to pool their savings and avoid
charges for not maintaining minimum balances, which can be significant. The organization
has negotiated agreements with local banks and convenience store outlets to cover
installment payment fees that are often charged by 3rd parties for the credit transaction.
Promises Kept: One organization values establishing long-term business relationships with
customers over short-term profit-maximization, as demonstrated by interest rate discounts,
flexible terms and guarantee requirements that are offered to repeat customers as part of
customer loyalty initiatives.

Appropriate Collections Practices

What is appropriate? Here are some stories that illustrate the topic:
Visits: Is it okay to visit the borrower’s home? At 3PM in the afternoon, at 1AM in the
morning? Can a collections officer sit in front of a borrower’s house? How long? A story: A
loan officer visited the borrower’s house and place of business to collect a late payment.
The borrower said that her husband was coming from a nearby town with the payment. The
loan officer asked is it okay to wait. Yes. The loan officer waited until 9PM that evening. If
she had made the initial visit at 9PM, she conceded that would have been inappropriate (it
would have appeared as a threat); but she was invited to stay until the husband arrived,
which he never did.
Postings: Can a list of delinquent borrowers be posted in public? Can it be published in the
newspaper? Is that considered unreasonable public harassment or embarrassment? In
some contexts only government or court authorities are permitted to publish debtor
information, in some contexts there may be no convention.
Visits: Visiting a place of employment is generally shunned, but….the loan officer arrives at
factory gate, phones from gate and client goes to meet the loan officer on an established
break. This was acceptable, since the client was not embarrassed in front of her co-workers
and the break time was her own. In other contexts visiting the place of employment, or even
making a call may not be considered appropriate.
A kind offer: The loan officer visits a borrower’s farm. The farmer says she doesn’t have the
money, but has two lambs that she was intending to take to market and sell. The loan officer
says I’ll take you there now. The farmer agreed and sold the lambs to the butcher, paying
the delinquent loan balance with the proceeds. Is this considered seizing assets, or a kind
offer to pay transportation costs to the market? The organization was horrified at this
behavior and sanctioned the loan officer. The reason: “For us, this is not an acceptable
practice.” The organization identified what they considered an “inappropriate” collections
practice.
Software Reduces Perceived Harassment: One organization instituted specialized
collections software that tracks the patterns of late payments. The system revealed that
some clients are always 5-10 days late, but always repay; some clients slip more deeply
towards default. The organization’s collections procedures give priority to the unusual
patterns, providing for a more efficient operation and reducing unnecessary collections visits
that may be perceived as harassment.
Change in attitude: Debt collectors are rarely viewed as the borrower’s friend. A client and
staff survey of collections practices within the organization revealed significant complaints
with collections agents and their practices. The collections department was reorganized
under the legal department. Collections agents are expected to view their job as “a new
face, another opportunity to pay” and the organization provides training in ethical dilemmas
collections agents will likely face, using cases from experience. A second survey,
undertaken one year later, shows almost no complaints with collections. This example
shows how an organization’s good intent is put into practice through specialization, clear
procedures, staff preparation for the job, and regularly monitored for consistency throughout
the organization.

Staff Ethics
A bonus for ethics!! This organization awards an additional monthly bonus to staff
members who meet 30 out of 50 criteria for ethics and customer service. The incentive
program is popular.
Know Your Job (KYJ): This organization developed a comprehensive ethics training
program that includes job-specific ethical dilemmas. The modules are based on experience
of what ethical choices others have found in the job.
Real-Time: This organization developed an anti-corruption and fraud prevention training
program, which uses real cases that have occurred.

Complaints Mechanism and Resolution

Transparency and complaints: This organization includes call center information on the
first page of all contracts. The organization also includes the hotline for the government
consumer protection financial services agency on the same page.
Compliance, Transparency and complaints Part 2: This organization requires the Internal
Audit department to check to see that clients have been informed about the complaints
hotline and their obligation to complain if things go wrong.
Blind Spot: This organization undertakes a detailed customer satisfaction survey every six
months to provide information for staff performance reviews. However, the information is
not used to revise products and procedures, which clients find problematic

Privacy and Security of Client Data

Bankers into Social Workers: With the advent of new technology that loses direct contact
between the teller and the customer, one organization finds staff turning into family
counselors, as well as bankers. Husbands, wives and children know or can guess account
access codes and PIN numbers. When the customer checks the balance and finds it low,
she accuses the organization of stealing the funds. Only the security video system reveals
the real culprit. The institution has made an extra effort to train clients about how to
safeguard this information.
Appendix 1: Scoring Form
Prevent over-indebtedness. A financial institution Good Adequate Adequate Not Quite Weak Comment
measures up to this principle by carefully establishing the +++ Adequate
borrower’s ability to afford the loan and repay it.
Borrowers should be able to handle debt service
payments without sacrificing their basic quality of life.
Management regularly monitors levels of borrower
over-indebtedness and uses that information to improve
products, policies and procedures.
The financial institution offers multiple loan products or
flexible ones that address different business and family
needs.
(*) The loan approval process requires evaluation of
borrower repayment capacity & loan affordability. Loan
approval does not rely solely on guarantees (whether
peer guarantees, co-signers or collateral) as a substitute
for good capacity analysis.
Credit approval policies give explicit guidance
regarding borrower debt thresholds and acceptable levels
of debt from other sources.
When available, the financial institution checks a
Credit Registry or Credit Bureau for borrower current debt
levels and repayment history. When not available, the
financial institution maintains and checks internal records
and consults with competitors for same.
(*) Productivity targets and incentive systems value
portfolio quality at least as highly as other factors, such
as disbursement or customer growth. Growth is rewarded
only if portfolio quality is high.
Internal audits check household debt exposure,
lending practices that violate procedures including
unauthorized re-financing, multiple borrowers or co-
signers per household and other practices that could
increase indebtedness.
Overall Assessment of Practices: Good Adequate +++ Adequate Not Quite Adequate Weak
Transparency. A financial institution measures up to this Good Adequate Adequate Not Quite Weak Comment
principle by ensuring that complete information is made +++ Adequate
available to customers in clear language that is not
misleading and that the customer is able to understand.
(*) Prices, terms and conditions of all financial
products are fully disclosed to the customer prior to sale,
including interest charges, insurance premiums, minimum
balances , all fees, penalties, linked products, 3rd party
fees, and whether those can change over time.
(*) Staff is trained to communicate effectively with all
customers, ensuring that they understand the product,
the terms of the contract, their rights and obligations.
Communications techniques address literacy limitations
(e.g., reading contracts out loud, materials in local
languages).
Multiple channels for disclosing clear and accurate
information about the product are used, such as
brochures, orientation sessions, meetings, posting
information in the branch, websites, etc.
The financial institution follows truth-in-lending laws
and required APR or effective interest rate calculation
formulae. In the absence of industry-wide requirements,
information is provided that shows the total amount that
the customer pays for the product.
Loan contracts show an amortization schedule that
separates principal, interest, fees; define the amount,
number and due dates of installment payments and
include fees and conditions for early repayment, late
payments and default. Debt collections practices are
revealed to the borrower prior to the time of sale.
Customers are given adequate time to review the
terms and conditions of the product and have an
opportunity to ask questions and receive information prior
to signing contracts.
Customers regularly receive clear and accurate
information regarding their accounts (e.g., account
statements, receipts, balance inquiries).
Overall Assessment of Practices: Good Adequate +++ Adequate Not Quite Adequate Weak
Responsible Pricing. A financial institution can measure Good Adequate Adequate Not Quite Weak Comment
up to this principle by offering quality services for the +++ Adequate
price, demonstrating its competitiveness in the
marketplace, and favoring a long-term beneficial
relationship with the customer over short-term profit
maximization. Consistent practice of transparent pricing is
a pre-condition to adequate implementation of this
principle.
Prices are not subsidized, are market oriented and
competitive within the country context.
(*) The financial institution does not charge customers
for its own inefficiency, as demonstrated by a comparison
of efficiency and profitability ratios of similar competitors.
The institution earns a reasonable rate of return to
support operations and grow, while allowing the customer
to do the same.
The financial institution invests a portion of its profits
to increase value to customers, such as lowering interest
rates or adding or improving products and services.
Pre-payment penalties or account closure fees and
other penalties are not excessive. For example, they
would not prevent a customer from changing to another
product or provider, or unreasonably compound debt.
Overall Assessment of Practices: Good Adequate +++ Adequate Not Quite Adequate Weak