EY and NpM launch Research on Client Protection during the e-MFP European Microfinance Week 2014

17 November, 2014

At the e-MFP European Microfinance Week (EMW), between 12 and 14 November, EY and NpM launched their exploratory research on client protection in microfinance, thereby addressing the current state of law and regulation in 12 countries worldwide.

"Developing Better Markets" 

The subject of client protection in microfinance matched perfectly with the EMW's theme of this year: 'Developing Better Markets'. What is most fundamental to 'developing better markets' in respect of the microfinance sector? One response to this question includes a focus on client centricity which incorporates the shifting dynamics of clients' demand for financial services and hence diversity of products and services. As Monique Cohen writes in her Next Billion blog on client centricity for which one size doesn't fit all: "In this increasingly mature industry, product and service diversity are in, and homogeneity is out."

Client Protection: the current state of law and regulation regarding overindebtedness, responsible pricing and transparency

Yet, another response goes beyond client centricity, namely client protection. The exploratory research carried out by EY in cooperation with NpM directly addresses this topic. Josien Sluijs, director NpM: "The goal of the research was to identify how the guidelines that have been self-imposed by the sector, are actually facilitated by law and regulation, thereby focusing on overindebtedness, responsible pricing and transparency." The research, that includes cases of 12 countries worldwide, has incorporated two types of MFIs: the ones with a banking license and thus deposit taking, and those which are not taking deposit. Overall the study found that in about half of the countries (Bolivia, Cambodia, Ghana, India, Kenya, Russia and Uganda) specific laws and regulations for microfinance are designed. In other countries this is part of the regular regulatory regime in the financial sector. A more specific finding is that whereas transparency about providing product information and their conditions is demanded by law in most countries, pricing is in most countries left to the market (although Indian and Russian laws prescribe a maximum interest rate and processing costs). A related issue concerns overindebtedness, which is also addressed in the Smart Campaign’s seven principles for client protection. The EY-NpM research shows that less than half of the countries have generic rules for adequate care of all steps in the credit process. It is important to determine whether the client can pay back and doesn’t take too many loans. For this reason it is also important that credit registration bureaus are there for MFIs to consult and “that in addition to overall regulation and enforcement, equal emphasis is put on financial literacy of clients", according to both EY and NpM.

Need for Client Protection to be higher on the (Research) Agenda

All in all, the topic of client protection within the microfinance sector is getting more and more important. In this respect, the need for research on client protection is emerging rapidly, as for example addressed during the Conference on Financial Inclusion at Harvard Business School, that took place on October 31th and November 1st 2014. The focus of the EY-NpM study on law and regulation plays hereby a crucial role. After all, "the guidelines that have been developed and self-imposed by the sector are only truly effective when they are supported by law and regulation in the respective country in which investments are made", explains Justina Alders-Sheya of EY.

Please click on the following links for the complete EY Report on Client Protection, the attached Bookmark (with links to general information on client protection: law and regulation) and the NpM press release (in Dutch).

Other interesting readings:

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