The eight Client Protection Standards are meant to keep low-income customers safe when they borrow money. This evaluation asks a simple but important question: do these standards really help the people who need them most?
Client Protection Standards (CPSs), formerly known as Client Protection Principles, are an industry standard for Financial Service Providers (FSPs), including Microfinance Institutions (MFIs), operating in emerging markets. The eight CPSs aim to protect (vulnerable) low-income end-customers against risks, such as over-indebtedness, excessive interest rates and malicious collection practices, when accessing financial products on credit.
By adhering to the CPSs, FSPs commit to offering clear and understandable products, ensuring transparency about terms and conditions, and maintaining an accessible complaints mechanism, among other safeguards. Their credit can offer a real opportunity for end-customers in emerging markets, e.g. to start or grow a business. The CPSs ensure that these customers and their collateral remain financially viable, especially in contexts where regulatory oversight and credit rating systems are limited.
CPSs constitute core values for FMO when investing in FSPs in emerging markets, and this evaluation assessed whether these standards genuinely benefit end-customers. We as FMO appreciate this study as it inspires FMO, FSPs, and third-party evaluators of CPSs to better serve and protect vulnerable communities and enhance our impact.
FMO manages MASSIF, a Dutch public fund program, aimed at supporting financial inclusion for underserved populations in emerging markets. Through MASSIF, we invest in financial institutions committed to serving a) The unbanked, especially in the least financially penetrated and fragile countries; b) (M)SMEs supporting agriculture and rural livelihoods; c) Gender equality, especially women-owned (M)SMEs, and d) Inclusive development through innovative products.
In addition to increasing access to finance, MASSIF aims to ensure that the services provided are safe, transparent, and truly beneficial to end-customers. Our partnerships with two FSPs in Bangladesh and the Philippines reflect these goals, as both markets have substantial populations that can benefit from responsible financial services to improve livelihoods and build resilience. This also aligns with FMO’s ambition to reduce inequalities across the globe.
While there are established processes to measure the implementation of the CPSs by Financial Service Providers (FSPs), less is known about the experience of end-customers, particularly the most vulnerable groups such as those struggling with repayments, those in rural areas, or people with limited education. Are the protection standards genuinely leading to intended outcomes for the end-clients themselves?
The evaluators assessed whether CPSs were effective in reducing financial burdens, providing respectful treatment and making end-clients feel safer in challenging situations
To address this knowledge gap, the evaluation team conducted interviews and surveys directly with end-customers of two FSPs in Bangladesh and the Philippines. For each FSP, 250 end-customers participated in the evaluation, oversampling past-due clients with at least 70, to give statistically significant results for this segment. The evaluators assessed whether CPSs were effective in reducing financial burdens, providing respectful treatment and making end-clients feel safer in challenging situations, based on the feedback provided about a set of client protection indicators. This evaluation identified successes and gaps in the implementation of CPSs by FSPs, helping both FMO and partners to enhance their impact and strengthen the protection of the people we aim to support.
In general, the evaluation found that the CPSs are beneficial for both FSPs and their end-customers. Nearly all the CPSs are embedded in the two organizations’ core operations in a way that is intrinsic to the institution and in line with their stated vision, mission and values. The CPSs also appear to generate benefits for the FSPs themselves, as their customers generally reported high levels of satisfaction with the products offered. The Net Promoter Score for both FSPs was above the regional average for Asia.
Between 75%-90% of sampled end-customers reported positive experiences across crucial aspects like fairness, respect, transparency, and privacy
Furthermore, feedback from end-customers provides strong evidence that the CPSs policies and procedures of the two FSPs contribute effectively to the intended client protection outcomes. Between 75%-90% of sampled end-customers reported positive experiences across crucial aspects like fairness, respect, transparency, and privacy, comparing well with industrial benchmarks. Most of the end- customers understood their loans clearly and trusted the financial institutions providing their services.
However, these positive responses were often provided by existing customers able to repay their loans on time. The evaluations revealed areas for improvement on client protection outcomes for special segments of clients: Clients in default, clients with less schooling, rural clients. These types of clients are more likely to encounter challenges. Among all defaulting end-customers included in the sample, 15-20% reported negative experiences with FSPs, with some reporting that loan repayments posed significant financial burdens. In addition, understanding product features was more difficult for clients with less schooling, especially in cases of more complex products such as insurance. Finally, complaint procedures via online channels or hotlines were hardly used by end-clients, limiting opportunities for continuous improvement.
Clients in default, clients with less schooling, rural clients are more likely to encounter challenges.
The evaluation produced several learnings on CPSs and the way to make them even more beneficial for end-customers.
For a start, the evaluators emphasize the importance of including end-customers voices as an integral part of client protection, particularly that of vulnerable customers, which could reveal critical insights that standard assessments might overlook. More broadly, FSPs should collect and apply more knowledge on how CPSs are applied by their organization as client feedback helps to identifying client protection issues that merit deeper assessment; feedback from branch staff can bring forward more insights on their familiarity with CPSs and the challenges they encounter; and granular institutional data - rather than averages- is important to fully understand operational issues. In this way, FSPs can take more targeted actions to ensure that CPSs deliver maximum impact for their clients.
Furthermore, while CPSs are currently applied primarily to mitigate risk from credit provision, other financial products – savings, insurance, payments – also warrant full attention as part of responsible finance. These products often involve new and complex systems, which require equally robust safeguards to ensure client protection.
Finally, as an impact investor committed to the CPSs, FMO contributes to building an inclusive financial sector in emerging markets. All FMO’s investees in the financial sector are carefully assessed, amongst others in terms of their application of CPSs where applicable. When gaps are identified, FMO can support customers in addressing them with technical assistance. In highly sensitive contexts, such as Cambodia, a comprehensive CPSs assessment is conducted, which includes both a regular CPSs assessment as well as an in-depth survey among end-customers. Based on this study, FMO will consider further improvements to our CPSs approach. As a learning institution, FMO will also continue to evaluate, adapt and share findings to build a responsible and sustainable financial system.