Agenda
1. Client protection principles
2. Principle #2 in practice
3. Participant feedback
4. Tools for improving practice
5. Conclusion and call to action
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Client Protection Principles
1. Appropriate product design and delivery
2. Prevention of over-indebtedness
3. Transparency
4. Responsible pricing
5. Fair and respectful treatment of clients
6. Privacy of client data
7. Mechanisms for complaint resolution
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Agenda
1. Client protection principles
2. Understanding over-indebtedness
3. Principle #2 in practice
4. Participant feedback
5. Tools for improving practice
6. Conclusion and call to action
4
Identifying the Causes of Over-indebtedness
Multiple loans
•Multiple loans are issued to client, by one or
more institutions, due to:
−Lack of information on the client’s liabilities
−Incentives for loan staff to oversell credit products
Poorly designed
repayment
schedules
•Repayment schedule does not match the
client’s business cycles (e.g., agriculture)
Inadequate
capacity
analysis
•The institution relies on guarantees as a
substitute for adequate capacity analysis
Unpredictable
events
•Accidents, disease, or natural disasters
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How over-indebted clients affect the MFI
Increase in client delinquency
Portfolio provisioning prevents
institution from making other loans
Slow and costly legal proceedings for
collections
Damage to the institution’s image
and portfolio
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How over-indebtedness affects the client
Clients may …
•
•
•
•
•
•
Work longer hours
Reduce consumption
Use savings for loan repayment
Take new loans to pay off current debt
Sell assets, including productive assets
Invest less in productive assets and human
capital
• Search for help from family, depleting
relatives’ assets
Source: DAI
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Agenda
1. Client protection principles
2. Understanding over-indebtedness
3. Principle #2 in practice
4. Participant feedback
5. Tools for improving practice
6. Conclusion and call to action
8
Prevent Over-indebtedness: The principle in
practice
MFI
Borrowers
• Are able to handle debt
service requirements
without sacrificing their
basic quality of life.
• Carefully establishes the
borrower’s ability to afford the
loan and repay it.
Consider this:
Research and practical experience show that borrowers
consistently overestimate their own capacity to repay debt.
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The Principle in Practice
Monitor overindebtedness
Management and Board are aware of
and regularly monitor client overindebtedness.
Evaluate
client
capacity
Loan approval requires evaluation of
client repayment capacity and loan
affordability—approval is not based
only on guarantee/collateral.
Establish
debt
thresholds
Credit policies give guidance on debt
thresholds and acceptable amount of
debt from other sources.
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The Principle in Practice (Continued)
If available, check the credit bureau. If
Verify credit unavailable, maintain and check
history
internal records and consult
competitors.
Audit credit
procedures
Use internal audit to verify staff
compliance with the procedures that
prevent over-indebtedness.
Incentivize
quality
loans
Set targets and incentives that value
portfolio quality as least as highly as
portfolio size and growth.
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Example of Good Practices from Bosnia-Herzegovina
Good Practice: Interview delinquent clients.
Practice
Outcome
Internal audit department conducts
regular interviews of a sample of
clients who have fallen behind on
their payments.
The MFI uses the
information to improve its
credit procedures and to
monitor risk.
Two main areas of investigation:
•Did loan officers follow proper
procedures to avoid overindebtedness when issuing credit?
•What are the causes of the client’s
repayment challenges?
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Agenda
1. Client protection principles
2. Understanding over-indebtedness
3. Principle #2 in practice
4. Participant feedback
5. Tools for improving practice
6. Conclusion and call to action
13
Feedback from Participants
What kinds of practices have you
seen at your own (or other) MFIs that
have contributed to overindebtedness?
How has over-indebtedness affected
clients’ ability to use credit
effectively?
What consequences have overindebted clients had on your
institution?
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Agenda
1. Client protection principles
2. Understanding over-indebtedness
3. Principle #2 in practice
4. Participant feedback
5. Tools for improving practice
6. Conclusion and call to action
15
Tools available from the Smart Campaign
Technical
Tools
Getting Started Questionnaire: Self Assessment for
MFIs
Avoiding Over-indebtedness: Guidelines for Financial
and Non-Financial Evaluation
Smart Lending
Smart Savings
Technical Guide for Investors
Samples
and Case
Studies
Client Business Evaluation Toolkit from Microfund for
Women
Loan Calculator from Opportunity Bank Serbia
Smart Note: Facing Over-indebtedness at Partner
Loan Officer Training Manual from Banco Solidario
Debt Management Guide from NCR South Africa
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Agenda
1. Client protection principles
2. Understanding over-indebtedness
3. Principle #2 in practice
4. Participant feedback
5. Tools for improving practice
6. Conclusion and call to action
17
Conclusion
The Smart Campaign has developed seven principles of
client protection, one is prevention of over-indebtedness.
Client over-indebtedness negatively affects both clients
and MFIs in serious ways.
Good practices have been developed to prevent and
correct over-indebtedness.
The Smart Campaign has tools to help practitioners
improve their practices to prevent over-indebtedness.
Call to Action: What do you see as the
industry’s next steps for facing this problem?
What are the next steps for your institution?
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Thank you!
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Questionnaire and conduct a client
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