Client protection principles

Evaluating the impact of our investment

How to ensure Indonesia’s financially excluded get the right kind of loans?

Since 2012, FMO has invested US$ 27.5m in Mitra Bisnis Keluarga Ventura (MBK), a financing company which provides working capital financing to low-income women in Indonesia.

The investment has helped finance MBK’s successful expansion into peri-urban and rural Java, with client numbers quadrupling to one million and its loan portfolio almost tripling.

However, such rapid growth also brings risks, not least for the company’s most vulnerable clients. For this reason, FMO provided technical assistance to enable MBK to assess and improve its practices around client protection. Five years later, FMO brought in external experts to evaluate how effective its support for responsible lending practices has been and what lessons can be learnt for the future.

The investment need

Despite improvements in recent decades, financial inclusion in Indonesia remains low. Only 18% of people over 15 years old borrow from a formal source and only 21% have a savings account (Global Findex, 2018).

Only 18% of people over 15 years old borrow from a formal source (Global Findex, 2018).

MBK plays a vital role in addressing this gap through working capital financing of US$100-300 to women with low incomes working in the informal sector in rural and peri-urban Java. FMO’s support (3 loans since 2012 totalling US$ 27.5m, partly via the MASSIF fund) has been important for MBK’s expansion, as it has provided larger loans and longer tenors than other investors. In addition, FMO provided crucial capacity development support to ensure MBK’s growth is sustainable.

Protecting the client

Particularly in countries with weak microfinancing legislation and regulation, such as Indonesia back in 2012, poor practices by financing companies can mean clients taking on too much debt and running into repayment problems. Poor practices include failure to screen clients for other debts, charging high interest rates or and employing harmful debt collection methods. Aside from the negative impact on their clients, such poor practices have serious ethical and reputational implications for the financial institution. For this reason, in 2013 FMO supported MBK in working towards The Smart Campaign’s Client Protection Principles (CPP) certification (see box).

Salmi is a client of MBK, she produces sweaters from waste materials
"The centre meeting always starts on time and are well organized. At the start of the meetings the terms of the loans and conditions are explained clearly and the staff is very polite."   

Following an independent assessment to identify strengths, weaknesses and opportunities to improve business practices, MBK implemented an action plan for client protection. This led to MBK in 2014 becoming Indonesia’s first microfinance institution to achieve CPP certification.

Do Client Protection Principles make a difference?

FMO contracted Microfinanza Rating to evaluate what effect implementing the CPPs has had on MBK and its clients. Their evaluation found four main areas where MBK had improved:

  1. Transparency (better information on interest rates and contracts);
  2. Fair and respectful treatment of clients (new policies and training mean unfair treatment during debt collection and recovery are avoided);
  3. Mechanisms for complaint resolution (systematic recording, reporting, timetabling and tracking of complaints);
  4. Internal monitoring (improved complaint management and tracking of rescheduled loans).

 For borrowers, Microfinanza Rating identified three positive improvements:

  1. Appropriate product design and delivery (improved client feedback analysis has led to new products, better product delivery and MBK implementing a client-requested partial move from weekly to bi-weekly repayments);
  2. Prevention of over-indebtedness (improved repayment capacity analysis and appraisals of clients. This meant refused loans increased from 13% in 2013 to 24% in 2016). However, these efforts to reduce over-indebtedness can be undermined by other financial institutions with less rigorous checks providing loans that put these same customers in too much debt after all);
  3. Transparency: (better loan information, e.g., on total costs of credit and interest rates).
Nunung Nurjanah, she is a client of MBK and she produces tofu
"During centre meetings MBK always tells us about the risk of over indebteness. I limit myself to only having two loans. There are many offers but I refuse to have more".  

Part of a bigger challenge

Client protection requires a holistic approach, including legislation and regulation.

A key learning from the evaluation is that CPP certification alone can’t ensure client protection in Indonesia. It requires a holistic approach, including legislation and regulation, as well as a credit bureau that shares information amongst MFIs. But where that regulatory infrastructure is poorly developed, implementing CPPs helps minimize harmful practices.

Next steps

As a learning organization, FMO has embraced the report’s recommendation to adopt the most recent Smart Campaign and industry standards, and will be reviewing and adapting its tools accordingly.

Villy Melawati, Deputy Director Operation MBK explains in this video how MBK implemented the client protection principles in their business.

The CPPs and Smart Campaign

Founded in 2009, The Smart Campaign’s aim is to protect microfinance clients as the industry’s driving force, partly in response to cases in some countries of over-indebtedness, debt stress and client abuse. The Smart Campaign is endorsed by over 3,800 financial institutions and other stakeholders around the world. The cornerstone of its work is the Client Protection Principles, which form a code of conduct for client treatment:

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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