Friday, April 3, 2009

Protecting Microfinance Clients: Principle 6

Last fall, we posted a blog on Kiva's participation in a few Consumer Protection Initiatives that have started to emerge in the microfinance industry. Organizations involved in microfinance at all levels are now increasingly paying attention to the clients (a.k.a., borrowers, clients, customers, entrepreneurs).

A Microfinance industry-wide Campaign for Client Protection...

... is expected to launch in mid-2009. The Campaign is an ambitious three-year initiative that aims to ensure that providers of financial services to low-income populations take concrete steps to protect their clients from potentially harmful financial products and ensure that they are treated fairly. It sets specific quantitative goals for the industry to improve client protection and is already organizing Task Forces to flesh out approaches to the six core Client Protection Principles.

The Center for Financial Inclusion at ACCION International is providing the initial secretariat for the campaign, which is endorsed and led by a broad coalition of microfinance institutions (MFIs), networks, funders, and practitioners. You can find the Campaign's goals, initial activities, endorsers, Steering Committee membership, etc. at the Campaign's main Website. All investors that have endorsed the campaign (including Kiva) are listed on the right-hand side of the home page.

What is Kiva doing to protect Entrepreneurs?

We believe that Social responsibility towards clients is an important element of a Field Partner's social impact. Entrepreneurs benefit tremendously from access to loans, but not if they become over indebted, or suffer from unethical collection practices from the field Partners that serve them.

  • We screen Field Partners based on their Social Responsibility to their clients
  • We ask that our partners have a Code of Conduct/ Code of Ethics in place
  • We ask that our Field Partners get written consent from Entrepreneurs to share their data
  • We signed (early) the "Client Protection Principles" that are now endorsed by 50+ investors
  • We are developing a social rating scale to evaluate the social impact of Kiva funding
  • We are part of 2 major industry initiatives to ensure that Client Protection Principles are implemented by Field Partners: 1/ "Beyond Codes", led by ACCION International and 2/ the Microfinance Investor Initiative on Client Protection, led by CGAP.

What are the Consumer Protection Principles?

The widely promoted Consumer Protection Principles describe the minimum that microfinance clients should be able to expect from Field Partners.

  1. Avoidance of Over-Indebtedness. Providers will take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that non-credit, financial products,(such as insurance) extended to low-income clients are appropriate;
  2. Transparent Pricing. The pricing, terms and conditions of financial products (including interest charges, insurance premiums, all fees, etc.) will be transparent and will be adequately disclosed in a form understandable to clients;
  3. Appropriate Collections Practices. Debt collection practices of providers will not be abusive or coercive;
  4. Ethical Staff Behavior. Staff of financial service providers will comply with high ethical standards in their interaction with microfinance clients and such providers will ensure that adequate safeguards are in place to detect and correct corruption or mistreatment of clients;
  5. Mechanisms for Redress of Grievances. Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients;
  6. Privacy of Client Data. The privacy of individual client data will be respected, and such data cannot be used for other purposes without the express permission of the client (while recognizing that providers of financial services can play an important role in helping clients achieve the benefits of establishing credit histories).

Consumer Protection Principles: Signed! What Next?

Endorsing Client Protection Principles is a first step. Implementing them effectively is another story. Investors that are committed to the Consumer Protection Principles will be increasingly scrutinized to see whether they are integrating them into their investment processes.

As an illustration, CGAP has an entire taskforce dedicated to developing tools and reports to support investor implementation of the Consumer Protection Principles. Examples include:

  1. "Investor Toolkit," comprised of resources and options for investors to draw on as they incorporate the Consumer Protection Principles into each stage of their investment process. The toolkit will include tools, policies and procedures currently in use or under development by investors and fund managers, grouped by stage of the investment process (e.g., due diligence, monitoring, reporting) and, where relevant, annotated as to the type of investor organization for which they are most appropriate and other considerations affecting their applicability and use.
  2. "Annual reporting format for investors" participating in the Client Protection Initiative (see draft below). Investors would be held accountable for actual progress in implementing the Consumer Protection Principles.

We will need to decide, at Kiva, how far we go in monitoring and enforcing compliance from our Field Partners.

Consumer Protection Principle 6: Privacy of client data

Principle 6 poses a particular challenge for Kiva. The crux of Principle 6 is that customers have the right to expect that their personal and financial information will not be revealed to those who are not authorized to see it. A financial institution (any one of our Field Partner) measures up to this principle by respecting the privacy of client data, ensuring the integrity and security of client information, and seeking the client’s permission to share information with outside parties.

What could our Field Partners possibly be expected to track and commit to under Principle 6? The answer is: a LONG, LONG list of issues:
  • Senior management sets the example of respecting a client's right to protect their information and ensuring systems are in place to protect the confidentially, security, accuracy and integrity of customer information.
  • A policy on confidentially is in place which governs the gathering, processing, use and distribution of client data which could result in harm or inconvenience to the client.
  • Customers know how their information will be used by the financial institution. Staff explains how client data will be used and seeks client permission for use. Clients have the option of not having their information shared.
  • The organization ensures the accuracy of information shared and requests customer consent for use of data in a Credit Registry or Bureau. Customers are given the opportunity to correct their information, and the financial institution provides assistance in this regard.
  • Customer consent is required for use of information in promotions and marketing material.
  • Clients are asked to express their written agreement for use of their personal information, such as pictures and business and personal stories in the organization's publications, promotional material, external reports and any information shared with external audience.
  • The financial institution safeguards clients' personal and financial information. Rigorous systems and checks are in place to prevent unauthorized use of information, or access to accounts. The IT system is secure and password protected with various levels of authorized access to information and access to data modification adjusted to the tasks and needs of the user.
  • The financial institution offers information, orientation or educational sessions to clients on how to safeguard access codes or PIN numbers.
  • Internal audits review security of physical locations, filing systems at headquarters, branch and posts.

Kiva's Remaining Challenge

The challenge for Kiva, as you may have guessed, is to protect the Entrepreneurs on our Website in the best possible way while providing transparent information to our lenders about what is happening on the ground.

We are likely to debate this quite a bit in the upcoming weeks.

A few options being tossed around/ discussed/ debated include:
  • Providing more privacy options to our Field Partners, allowing them to mark repayment data as private. Field Partners can already mark the Entrepreneur location and name as private and blur the Entrepreneur's picture if that puts the person at risk (i.e., our Iraqi partners chose to exercise that option).
  • Make the repayment data available only to lenders to a particular Entrepreneur, rather than the public at large.

Either way, the decision has large operational implications for our Field Partners on the ground, as the more information we disclose about individual entrepreneurs, the more Field Partner staff need to explain to the Entrepreneur in the spirit of full disclosure and consent. That increases costs for Field Partners, and reduces their ability to serve more poor people.

As we face these trade-offs, we need to learn more about what drives lenders to Kiva: do you really care about seeing repayment data for Maria in Peru when you have loaned to Aba in Ghana? In the best of worlds there would be no trade-offs - but this is not the world that we live in.