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Consumer Protection and Microfinance
Country Reports
Legal Empowerment Working Paper Series
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Consumer Protection and Microfinance
Country Reports
Legal Empowerment
Working Paper Series
Consumer Protection and Microfinance: Country Reports
Copyright © International Development Law Organization 2011
International Development Law Organization (IDLO)
IDLO is an intergovernmental organization that promotes legal, regulatory and institutional reform to advance economic and social development in transitional and developing countries. Founded in 1983 and one of the leaders in rule of law assistance, IDLO's comprehensive approach achieves enduring results by mobilizing stakeholders at all levels of society to drive institutional change. Because IDLO wields no political agenda and has deep expertise in
different legal systems and emerging global issues, people and interest groups of diverse backgrounds trust IDLO. It has direct access to government leaders, institutions and multilateral organizations in developing countries, including lawyers, jurists, policymakers, advocates, academics and civil society representatives.
Among its activities, IDLO conducts timely, focused and comprehensive research in areas
related to sustainable development in the legal, regulatory, and justice sectors. Through such research, IDLO seeks to contribute to existing Practice and scholarship on priority legal issues, and to serve as a conduit for the global exchange of ideas, best practices and lessons learned. IDLO produces a variety of professional legal tools covering interdisciplinary thematic and regional issues; these include book series, country studies, research reports, policy papers, training handbooks, glossaries and benchbooks. Research for these publications is conducted
independently with the support of its country offices and in cooperation with international and national partner organizations.
DONOR SUPPORT
This research is part of the IDLO‘s "Legal Empowerment Program" and is being funded by the Bill &
Melinda Gates Foundation (http://www.gatesfoundation.org). The findings and conclusions contained
within are those of the authors and do not necessarily reflect the positions or policies of the Bill & Melinda Gates Foundation.
Disclaimer
IDLO is an intergovernmental organization and its publications are intended to expand legal knowledge, disseminate
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IDLO does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any
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www.idlo.int [email protected]
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Table of Contents
List of Acronyms .............................................................................................. 8
Introduction ............................................................................................. 11
India Country Report ................................................................................. 13
1. Introduction ............................................................................................. 13
1.1 Country Overview ......................................................................... 14
1.2 Consumer Protection in India‘s Financial Services Sector ................... 15
1.3 Microfinance Institutions ................................................................ 16
1.4 Microfinance in the News ............................................................... 18
2. Protection of the Financial Consumer in Indian Legislation and Regulation ....... 20
2.1 Transactional Regulation ................................................................ 20
2.1.1 Regulatory Framework for Financial Contracts ..................... 20
2.1.2 Key Contractual Terms ...................................................... 21
2.2 Non-transactional Regulation ......................................................... 22
2.2.1 Data Regulation .............................................................. 22
2.2.2 Use of Agents ................................................................. 23
2.2.3 Advertising ..................................................................... 23
2.3 Supervision and Enforcement ........................................................ 24
3. Field Research .......................................................................................... 25
3.1 Methodology – Research Design ..................................................... 25
3.2 Microfinance Institutions ................................................................ 27
3.2.1 Assessment of Customers‘ Ability to Repay ......................... 28
3.2.2 Use of Client Information .................................................. 28
3.2.3 Information Provided to Consumers .................................... 28
3.2.4 Debt Collection Practices ................................................... 28
3.2.5 Redress Mechanisms for Consumer Complaints ................... 29
3.3 Clients ........................................................................................ 30
3.3.1 Client Selection of MFIs .................................................... 30
3.3.2 Requirements for Receiving Credit ...................................... 32
3.3.3 Information on Contract Terms and Conditions .................... 32
3.3.4 Consequences of Late Payment .......................................... 33
3.4 Ombudsmen ................................................................................ 34
3.4.1 Disputes ......................................................................... 34
3.4.2 Procedures ..................................................................... 35
3.4.3 Awards and Enforcement................................................... 35
3.4.4 Content and Clarity of Financial Contracts ........................... 36
3.4.5 Other Recourse and Applicability to Microfinance ................. 36
4. Recommendations ..................................................................................... 37
Annex I – Regulatory Framework for Relevant Subjects ...................................... 39
Annex II – Form of Complaint (to be lodged) with the Banking Ombudsman .......... 43
References .................................................................................................... 45
Colombia Country Report ........................................................................... 47
1. Introduction ............................................................................................. 47
2. Protection of the Financial Consumer in Colombian Legislation and Regulation .. 48
2.1 Consumer Protection in Colombia‘s Financial Services Sector ............. 48
2.2 Financial Consumer Protection: A Legal and Regulatory Overview ....... 50
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2.3 Consumer Protection in Transactional Regulation .............................. 51
2.3.1 Financial Contracts ........................................................... 51
2.3.2 Credit Conditions .............................................................. 52
2.3.3 Guarantees ..................................................................... 53
2.3.4 Savings Deposits .............................................................. 53
2.4 Consumer Protection in Non-transactional Regulation ........................ 54
2.4.1 Credit Risk Analysis .......................................................... 54
2.4.2 Non-bank Correspondents ................................................. 55
2.5 Supervision and Enforcement ........................................................ 55
3. Field Research .......................................................................................... 56
3.1 Methodology – Research Design ..................................................... 56
3.2 Microfinance Institutions (MFIs) ...................................................... 58
3.2.1 Assessment of Client‘s Ability to Repay ............................... 59
3.2.2 Information on Interest Rates and Payments ....................... 60
3.2.3 Collection Practices ........................................................... 60
3.2.4 Consumer Complaint Mechanism ........................................ 60
3.2.5 Use of Client Information .................................................. 60
3.3 Clients ........................................................................................ 60
3.3.1 Choice of Microfinance Institution ....................................... 61
3.3.2 Credit Application Requirements ......................................... 62
3.3.3 Knowledge of Contract Terms and Conditions ...................... 62
3.3.4 Consequences of Late Payment .......................................... 63
3.4 Judiciary ..................................................................................... 65
3.4.1 Recurring Controversies Between MFIs and Customers ......... 65
3.4.2 Probable Causes of Process Delay....................................... 66
3.4.3 Defence Capability of Financial Consumers .......................... 66
3.4.4 Content and Clarity of Financial Contracts ........................... 67
4. Conclusions and Recommendations ............................................................. 67
4.1 Conclusions ................................................................................. 67
4.1.1 Regulatory Framework ...................................................... 67
4.1.2 Regulatory Gaps .............................................................. 68
4.1.3 Effective Application of the Regulatory Framework ............... 68
4.1.4 Gaps Between Law and Practice ......................................... 69
4.2 Recommendations ....................................................................... 69
References .................................................................................................... 72
Kenya Country Report ................................................................................ 73
1. Introduction ............................................................................................. 73
1.1 Country Overview ......................................................................... 73
2. Protection of the Financial Consumer in Kenyan Legislation and Regulation ..... 75
2.1 Financial Consumer Protection: A Legal and Regulatory Overview ....... 75
2.2 The Institutional Framework........................................................... 76
3. Field Research .......................................................................................... 76
3.1 Contracting and Disclosure Practices ............................................... 77
3.1.1 Commercial Practices of MFIs and Informational Asymmetries 77
3.1.2 Advertising and Price Display ............................................. 78
3.1.3 Contracts ........................................................................ 79
3.1.4 Interest Rate Disclosure .................................................... 81
3.2 Collateral in Kenyan Microfinance.................................................... 81
3.2.1 Typology of Microfinance Collateral ..................................... 81
3.2.2 The Issue of Blocked Deposits ............................................ 83
3.2.3 Collateral Regulation 1: The Protection of the Borrower ......... 83
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3.2.4 Collateral Regulation 2: Inefficiencies ................................. 84
3.3 Debt Collection and Judicial Procedures .......................................... 85
3.3.1 The Role of Chiefs ............................................................ 86
3.3.2 Auctioneers ..................................................................... 86
4. Conclusions and Recommendations ............................................................. 87
References .................................................................................................... 89
Cameroon Country Report .......................................................................... 90
1. Introduction ............................................................................................. 90
1.1 Country Overview ......................................................................... 90
2. Protection of the Financial Consumer in Cameroonian Legislation and Regulation ..
............................................................................................................... 90
2.1 Civil Law in Cameroon ................................................................... 92
2.2 Common Law and Customary Law .................................................. 92
2.3 International Law 1: OHADA Law .................................................... 92
2.4 International Law 2: CEMAC/UMAC/COBAC Law ................................ 93
2.5 The Directorate of Consumer Protection ........................................... 94
2.6 Bank of Central African States (BEAC) ............................................ 95
3. Field Research .......................................................................................... 95
3.1 Informational Asymmetries ............................................................ 96
3.2 Advertising, Price Display and Sales Practices ................................... 97
3.3 The Formal Requirements of Financial Contracts ............................. 100
3.4 The Notion of Public Order ........................................................... 103
3.5 Interest Rate and Usury .............................................................. 104
3.5.1 Observed Interest Rates ................................................. 104
3.5.2 A Market Interest Rate? ................................................. 104
3.6 Array of Security Interests in Cameroonian Microfinance .................. 105
3.6.1 Security Interests: Authentic Pledges and False Mortgages .. 105
3.6.2 Personal Security ........................................................... 106
3.6.3 Other Forms of Security .................................................. 106
3.6.4 Registration and Inscription ............................................. 107
3.6.5 Over-collateralisation ...................................................... 109
3.7 Redress Mechanisms ................................................................... 109
3.7.1 The Low Frequency of Cases ............................................ 110
3.7.2 Elements of Proceedings ................................................. 110
3.7.3 The Outcome of Legal Procedures .................................... 111
3.7.4 The Unsuitability of the Formal Justice Machinery in
Microfinance Operations .................................................. 111
4. Conclusion: Recommendations for Strengthening Consumer Protection .......... 112
References .................................................................................................. 114
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List of Acronyms
ADR Alternative Dispute Resolution
AER Annual Equivalent Rate
AML Anti-Money Laundering
APR Annual Percentage Rate
BAFIA Banking and Financial Institutions Act (BAFIA) 1989
BANCOLDEX International Commerce Bank of Colombia
BC Banking Correspondent
BCSBI Banking Codes and Standards Bureau of India
BEAC Banque des Etats d‘Afrique Centrale (Bank of Central
African States)
BPLR Benchmark Prime Lending Rate
CBK Central Bank of Kenya
CEMAC Communauté Economique et Monétaire d‘Afrique Centrale
(Economic and Monetary Community of Central Africa)
CEO Chief Executive Officer
CFT Combating Financing of Terrorism
CGT Continuous Group Training
CIBIL Credit Information Bureau India Limited
CIMA Conférence Interafricaine des Marchés d'Assurances
(Inter-African Conference on Insurance Markets)
CNC Conseil National du Crédit (National Credit Council)
COBAC Commission Bancaire d‘Afrique Centrale (Banking
Commission of Central Africa)
CPA Consumer Protection Act, 1986
CRB Credit Reference Bureau
CRMS Credit Risk Management System
DANSOCIAL Administrative Department of Supportive Economy
DICGC Deposit Insurance Credit Guarantee Corporation
FIs Financial Institutions
FOGAFIN Financial Institutions Guarantee Fund
FOGAMIC Fond de garantie des dépôts des EMF (Deposit Guarantee
Fund of MFIs)
FSA Financial Services Authority
FSD Financial Sector Deepening. FSD Kenya is an independent
Trust established to support the development of inclusive
financial markets in Kenya.
FTC Federal Trade Commission
GDP Gross Domestic Product
GRT Group Recognition Test
IBC Current Bank Rate
ICA Investment Climate Assessment
ICETEX Colombian Institute for Educational Credit and Technical
Studies Abroad
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IDLO International Development Law Organization
IPO Initial Public Offering
KBA Kenya Bankers Association
KRA Kenya Revenue Authority
KSH Kenyan Shillings
KUSCCO Kenya Union of Savings and Credit Cooperative
Organizations
KYC Know Your Customer
LMMW Legal Monthly Minimum Wage
M-CRIL Micro-Credit Ratings International Limited
MFI Microfinance Institution
MFIN Microfinance Institutions Network
MHCP Ministry of Finance and Public Credit
MINFI Ministry of Finance
MIPYMEs Micro, Small, and Medium Enterprises
MSCA Multi-State Cooperative Societies Act, 2002
NABARD National Bank for Agriculture and Rural Development
NBC Net Bank Credit
NBFC Non-Banking Finance Company
NCA National Credit Act
NGO Non-Governmental Organisation
OFT Office of Fair Trading
OHADA Organisation pour l'Harmonisation en Afrique du Droit des
Affaires (Organization for the Harmonisation of Business
Law in Africa)
PARIF Plan d‘Actions en vue du Renforcement de
l‘Intermédiation Financière au Cameroun (Action Plan for
the Strengthening of Financial Intermediation in
Cameroon)
PESF Programme d'Evaluation du Secteur Financier (Financial
Sector Assessment Programme)
RBI Reserve Bank of India
RCCM Registre du Commerce et du Crédit Mobilier (Trade and
Real Estate Credit Register)
RETSAS Registry of Interest Rates, Fees and Other Costs
RIDF Rural Infrastructure Development Fund
RLA Registered Land Act (Cap. 300 Laws of Kenya)
RRB Regional Rural Bank
RTA Registration of Titles Act (Cap. 281 Laws of Kenya)
SACCO Saving and Credit Cooperative
SAFC System for Attending to the Financial Consumer
SF Superintendence of Finance
SHG Self Help Group
SIDBI Small Industries Development Bank of India
TEG Taux Effectif Global (Percentage Rate of Charge)
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TILA Truth in Lending Act
TPI Tribunal de Première Instance (Court of First Instance)
VAT Value Added Tax
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INTRODUCTION
IDLO has five years of experience in studying and providing training on legal and
regulatory frameworks for microfinance. Building on this experience, IDLO initiated
and carried out a series of research projects on approaches to consumer protection
in the microfinance industry in four countries: Cameroon, Colombia, India, and
Kenya. The following reports combine review of law and regulation with empirical
findings on actual practices. It is hoped that the results will inform the search for
principles of good practice and regulation.
In a World Bank working paper entitled ―Good Practices for Consumer Protection and
Financial Literacy in Europe and Central Asia: A Diagnostic Tool‖, the authors wrote
that until the financial crisis of 2007-2009, an estimated 150 million new consumers
in financial services were being added to the global economy each year.1 The pace
has slowed since then, but growth continues, especially in developing countries
where consumer protection and financial literacy are still in their infancy. Particularly
in countries that have transitioned from central planning to market economies,
empowering consumers has become a prerequisite for efficient and transparent
financial markets.2 The term ―consumer protection‖ encompasses ensuring that
consumers receive information that will allow them to make informed decisions, are
not treated unfairly or deceived by unscrupulous firms, have access to recourse
mechanisms to resolve disputes when transactions go awry and can maintain privacy
of their personal information.
In addition, the World Bank paper encourages financial literacy initiatives to provide
consumers the knowledge, skills and confidence to understand and evaluate the
information they receive and empower them to purchase those financial products
and services which meet their needs and the needs of their families.3 Countries that
establish consumer protection regulation and also promote financial literacy can
establish clear rules of engagement between financial firms and their retail
customers—and help narrow the knowledge gap between consumers and their
financial institutions. Thus, consumer protection regulation and financial literacy
efforts are complementary, rather than alternative methods for achieving the long-
term stability of a country‘s financial market.
The challenge for countries that want to create prudent consumer protection
regulations is to strike the right balance between government regulation and market
competitive forces. Government intervention should be considered, according to the
World Bank‘s recommendations, only when it is both feasible and cost-effective to do
so. Rules need to be proactive to prevent abuses and not simply react to problems of
the past. At the same time, care must be taken since regulation can stifle financial
innovation. As noted by U.S Federal Reserve Board Chairman Ben Bernanke in April
2009, regulators should strive for the highest standards of consumer protection
without eliminating the beneficial effects of responsible innovation on consumer
1 Rutledge, Susan L., Annamalai, Nagavalli, Lester, Rodney, Symonds, Richard L., Good Practices for Consumer Protection and Financial Literacy in Europe and Central Asia: A Diagnostic Tool, World Bank, August 2010. 2 Ibid. 3 Ibid.
12
choice and access to credit. To ensure that regulation is both effective and efficient,
sound regulatory impact analyses should be conducted.4
IDLO appreciates the assistance of the many persons and organizations, who
provided data and experience, which informed this report.
4 Ibid.
INDIA COUNTRY REPORT
Matteo Mandrile*
(Microfinance Research Officer, International Development Law Organization)
Anthony Hazkial
(Microfinance Researcher, International Development Law Organization)
1. Introduction
This Country Report summarizes the results of the research conducted in India by
IDLO in partnership with Micro-Credit Ratings International Limited (M-CRIL).
As financial inclusion is a public policy objective for the Indian government and the
Reserve Bank of India (RBI), consumer protection regulation has recently taken
center stage in the country. Moreover, India‘s microfinance sector has been in the
news headlines recently with reports that cited experts who warned of a looming
crisis in India‘s microfinance sector. IDLO has identified an urgent need to compile
and analyze case law that can help establish legal precedence of consumer rights
protection in the microfinance industry, specifically regarding microcredit (group and
individual lending and guarantee agreements), and the actual implementation of
these principles within the microlender-poor borrower relationship.
This report first provides a background on the Indian microfinance market and the
key players in consumer protection. The paper also examines the Indian legal and
regulatory framework for consumer protection in microfinance, focusing on
transactional and non-transactional regulation, supervision and enforcement. Finally,
field research results are presented based on interviews and surveys of microfinance
institutions (MFIs), borrowers, and ombudsmen.
The MFIs that we interviewed represented regulated and unregulated entities with
large loan portfolios of consumers throughout India. From each MFI, clients were
then interviewed to gauge their perceptions about consumer protection. Finally,
Banking Ombudsmen were interviewed so that accounts could be taken of their first-
hand experiences in adjudicating consumer complaints in India. MFIs were also
surveyed about how they selected clients and evaluated their ability to repay the
loans. The researchers asked about disclosure procedures, as well as details
regarding loan collections. Lastly, MFIs were asked about consumer complaints and
redress mechanisms. This information was used along with client interviews to obtain
the borrowers‘ perceptions. Interviewing the Banking Ombudsmen helped to
reinforce the themes that we heard during the MFI and client interviews. The
Ombudsmen interviews also helped us to assess overall consumer protection and to
develop recommendations to improve it.
The authors would like to acknowledge the local research team from M-CRIL and IDLO contributors for
their work in compiling this report. Alok Misra, Rohit Midha and Aleksandra J. Kasprzycka provided valuable assistance.
14
1.1 Country Overview
India, with a population of more than 1.1 billion people, is the world‘s second most
populated country. Its population is mostly rural, with only 29% living in urban
areas.1 About 65% of India‘s total population is literate. The literacy rate, however,
is much greater in India‘s urban areas, 80.3%, compared to 59.4% in rural regions.2
Even then, India‘s gross domestic product (GDP) is roughly evenly distributed
between rural and urban areas.3 GDP per capita was estimated at $3,100 in 2009,
ranking the country 163rd in the world, and an estimated 25% of the population lives
below the poverty line.4
India is a ―sovereign, socialist, secular, democratic, republic‖5 state. Under its
constitution, India strives to secure justice, liberty, and equality for all its citizens.6
India is a federal republic comprised of 28 states and 7 union territories. The legal
system is based on English common law and its legislation is subject to judicial
review.7
In line with the principles noted in the preamble to India‘s constitution, some of
India‘s laws were drafted to promote economic justice and equality. For example, to
increase financial access among low-income segments of the population, the Reserve
Bank of India (RBI), India‘s bank regulator, devised a policy of Priority Sector
Lending requiring commercial banks, both domestic and foreign, to direct a certain
percentage of their net bank credit (NBC) to low-income segments of the population.
Such segments include: agriculture, small-scale industries, small road and water
transport operators (owning up to 10 vehicles), small businesses, and state-
sponsored organizations for scheduled castes/scheduled tribes (any of the historically
disadvantaged Indian castes of low rank, now under government protection; the
name is derived from the fact that these castes were entered on a list or "schedule"
during British rule).8 Domestic scheduled9 commercial banks, public and private, that
fail to achieve the priority sector lending targets are required to deposit into the
Rural Infrastructure Development Fund (RIDF) (maintained by National Bank for
Agriculture and Rural Development (NABARD) and used for rural infrastructure
financing) such amounts as may be assigned by the RBI. If a foreign bank operating
in India fails to achieve the Priority Sector Lending targets, an amount equivalent to
the shortfall is required to be deposited with the Small Industries Development Bank
of India (SIDBI) for one year, and the bank must pay a penalty of 8 percent interest
per year.10
1 Central Intelligence Agency (CIA), The World Factbook: India <https://www.cia.gov/library/publications/the-world-factbook/geos/in.html>. 2 Ministry of Finance, Government of India, Economic Survey 2001-2002. 3 CIA, The World Factbook: India, supra note 1. 4 Ibid. 5 The Constitution of India, Preamble. 6 Ibid. 7 CIA, The World Factbook: India, supra note 1. 8 Reserve Bank of India, FAQs <http://www.rbi.org.in/scripts/FAQDisplay.aspx>. 9 The commercial banking structure in India includes scheduled and unscheduled banks. Scheduled banks have been included in the Second Schedule of RBI Act, 1934. See: <http://rbi.org.in/scripts/NotificationUser.aspx?Id=3159&Mode=0.>. 10 Reserve Bank of India, FAQs, supra note 8.
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1.2 Consumer Protection in India’s Financial Services Sector
India enacted the Consumer Protection Act 1986 (CPA) that provides consumers with
effective safeguards against exploitation and unfair dealing, relying mainly on a
compensatory, rather than a punitive or preventative approach. The CPA applies to
all goods and services, unless specifically exempted, including the private, public,
and cooperative sectors and includes the provision of financial services. It also
provides for speedy and inexpensive adjudication. Consumer Courts have been
established under the CPA, and these judicial bodies make legal remedy available at
the district, state and national levels. District court decisions may be appealed to the
higher-level Consumer Protection Courts. Banks often appeal Consumer Courts‘
rulings that are in favor of customers.
As a prudential regulator, the RBI responds to consumer frauds that threaten the
safety of India‘s banking sector.
The RBI has promulgated the Banking Ombudsman Scheme 2006. Under the
scheme, a Banking Ombudsman is responsible for receiving and considering
customer complaints relating to banking services. The Ombudsman facilitates the
resolution of complaints through conciliation or mediation. Within the RBI, a separate
Customer Service Department works in coordination with both the Banking
Ombudsmen and the Banking Codes and Standards Bureau of India (BCSBI). The
RBI has periodic meetings with banks‘ Grievance Redressal Officers in order to
analyze recurring complaints, complaint handling processes, and efforts to minimize
complaints and improve consumer protection and overall satisfaction.
The RBI introduced Banking Ombudsmen into the regulatory and consumer
protection framework in 1995. India has 15 ombudsmen who act at an appellate
level to address complaints and grievances that have not been resolved by the banks
involved or that have not been addressed to the full satisfaction of the client.
Banking Ombudsmen receive complaints from customers and can issue notices to
banks involved. A conciliatory and consensual approach is adopted to resolve
complaints, but Ombudsmen can also issue awards. Those awards are binding on
banks unless they choose to appeal. If the appeal is dismissed, the decision or award
is binding on the bank.
The BCSBI, which includes 70 member banks and the RBI, is a voluntary industry
body that was created to promote consumer protection issues. The BCSBI also
advocates for banking standards and transparency. Among other initiatives, BCSBI
has developed the ―Code of Bank‘s Commitment to Customers‖ and the ―Code of
Bank‘s Commitment to Medium and Small Enterprises.‖ The BCSBI also operates a
web-based hotline for client complaints which are managed through the RBI.
Finally, microfinance institution (MFI) associations have developed and are
promoting self-regulatory tools and best practices. One association is Sa-Dhan, a
national network of community finance institutions, that has created standards of
practice and a code of conduct for microfinance lenders. Members of another
association, the Microfinance Institutions Network (MFIN), have also developed a
code of conduct.
16
1.3 Microfinance Institutions
MFIs provide financial services to low-income clients, who have traditionally lacked
access to banking and related services. Microfinance institutions in India reached
over 22 million borrowers and had a portfolio outstanding in excess of $2.3 billion as
of March 2009, according to research conducted by Lok Capital.11.
Most MFIs in India operate as registered societies or trusts. Cooperatives are also a
common legal entity for MFIs. A growing trend is for MFIs to organize as not-for-
profit companies under Section 25 of the Companies Act 1956. Some MFIs are also
organized as non-bank financial companies (NBFC). While there are relatively few
NBFCs, they have 80% of the microfinance market share.
The RBI established Priority Sector Lending targets that include loans to MFIs. As a
result, India‘s commercial banks are an important source of microfinance funds. A
bank is defined by the Banking Regulation Act 1949 as an organization ―accepting,
for the purpose of lending or investment, deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise.‖12 Banks are mainly regulated by the Banking Regulation Act, 1949. The
RBI is responsible for licensing and supervising banks, while bank deposits are
insured by the Deposit Insurance Credit Guarantee Corporation of India (DICGC).
As previously mentioned, most non-governmental organization (NGO)-MFIs are
registered as societies under the Societies Registration Act 1860. To be legally
registered as a society, the MFI needs to explicitly mention microfinance in its
Memorandum of Association as an activity fulfilling the society‘s charitable purpose.
The Societies Registration Act 1860 lacks specific provisions regarding the
management of funds, but it is an established precedent in case law that a society‘s
governing body acts as trustee of the funds. Thus, the governing body must manage
the society‘s funds as a prudent person would manage his or her own property. Also,
the Societies Registration Act 1860 does not have provisions regarding the
maintenance or audit of accounts. To fill the regulatory void, various states have
enacted independent laws with provisions for maintaining and auditing financial
records and accounts. Under Section 45S of the Reserve Bank of India Act 1934,
unincorporated bodies are not allowed to accept public deposits. This includes
organizations registered under the Societies Registration Act 1860 such as non-
governmental organization (NGO)-MFIs.
Enforcement of the Societies Registration Act 1860 and of corresponding state acts is
the responsibility of the Registrar of Societies in each state. With respect to the
microfinance activities of a society, the Registrar has no responsibility for prudential
regulation, financial performance or solvency. The Registrar can only intervene if
there is a major dispute regarding the management of the society, or if the Registrar
suspects fraud against the society‘s creditors or other unlawful or unauthorized
activities.
Some MFIs (known as trust MFIs) are registered under the Indian Trust Act 1882.
The creator or author of the trust-MFI is an individual with the intention of providing
financial services to the poor and underserved. The creator of the trust gathers the
funds and deploys them to the trust for the benefit of the beneficiaries. Under
11 ―Microfinance Industry in India,‖ Lok Capital, March 2010. 12 Banking Regulation Act 1949 (India) s 5(b).
17
Section 9 of the Indian Trust Act 1882, any person capable of holding property may
be a trust beneficiary. Typically the trustee of a trust MFI is a board or other
governing body. Though certain rights and duties of trustees are designated in the
Indian Trust Act 1882, no specific provision was made regarding the trust‘s
management. Thus, the deed forming the trust often includes specific directions for
the management of the trust and for the use and investment of the trust‘s funds.
Also, the trust must maintain financial records and accounts that must be periodically
audited. Like societies, trusts are unincorporated bodies and are not allowed to
accept public deposits.
When MFIs are established as not-for-profit companies pursuant to section 25 of the
Companies Act 1956 (Section 25 Company), they enjoy all the privileges and are
subject to all the obligations of a limited company, except in instances where certain
exemptions apply. The basic exemptions for Section 25 Companies relate to paying
income tax and appointing a company secretary. More importantly for MFIs, sections
45IA and 45IC of the Reserve Bank of India Act 1934 do not apply to Section 25
Companies. Accordingly, MFIs registered as Section 25 Companies can engage in
microfinance activity without registering with the RBI or obtaining its permission;
microfinance activity is limited to business loans up to Rs 50,000 and home loans up
to Rs 125,000. Section 25 Companies are not allowed to accept deposits.
Another legal form used by some MFIs is the NBFC. An NBFC is a company registered
under the Companies Act 1956 (but not under Section 25 of the Companies Act), and
is engaged in the business of loans and advances, leasing, hire-purchase, insurance,
chit business, or the acquisition of shares, stock, bonds, debentures, or other
securities issued by the government or local authority or other securities of like
marketable nature. However, NBFCs do not include any institution whose principal
business consists of agriculture activity, industrial activity, or the sale, purchase or
construction of immovable property.13 Thus, any company that undertakes
microfinance activities, but is not registered as a Section 25 Company, qualifies as a
NBFC and all related regulations apply. The regulations include registration with the
RBI, imposition of prudential norms and compulsory credit rating of deposit-taking
NBFCs.
As companies, NBFCs are subject to the provisions of the Companies Act 1956. The
provisions include laws relating to the board of directors, share capital, management
structure, meetings, and maintenance and audits of financial records and accounts.
In addition, NBFCs must comply with RBI regulation. Specifically, NBFCs holding or
accepting public deposits are required to comply with all RBI directives on
acceptance of public deposits and prudential norms, and have to submit periodic
reports to the RBI.14 Further, after operating for a minimum of two years, an NBFC
that wants to accept deposits must obtain an investment-grade rating from an
approved credit rating agency at least once a year.15
The RBI, in conjunction with the Registrar of Companies, is responsible for licensing
and supervising NBFCs. In case of consumer fraud, abuse or complaint, the RBI, as
13 Reserve Bank of India, FAQs, supra note 8. 14 Reserve Bank of India, Non-Bank Financial Companies in India (2001) ch V. 15 A NBFC allowed to accept deposits is prohibited from accepting demand deposits. Deposits must be held for a minimum of 12 months and a maximum of 60 months from acceptance or renewal. NBFCs cannot pay more than 11% interest on deposits, and interest shall not be paid or compounded more often than monthly. NBFCs cannot pay more than 2% of the amount deposited as a commission or other incentive to a broker.
18
well as the Economic Offences wing of the Central Bureau of Investigation, will
respond. Deposits at an NBFC are insured by the Deposit Insurance and Credit
Guarantee Corporation, but only up to Rs 5,000 per depositor.
Cooperative banks and other cooperative societies in India are also undertaking
microfinance activity. Specifically, MFIs are operating as primary cooperative banks.
Under the Banking Regulation Act 1949, a primary cooperative16 bank is a primary
credit society (other than a primary agricultural credit society) that mainly
undertakes banking business, has paid-up capital and reserves of at least Rs
100,000, and does not permit admission of any other cooperative society as a
member. Primary cooperative banks are registered under the Cooperative Societies
Act 1912, or under any other cooperative society law in force in any Indian state.
Cooperative banks with a multi-state presence register under the Multi-State
Cooperative Societies Act (MSCA) 2002.
Cooperative banks are subject to state and federal licensing and supervision. On the
state level, they are licensed through the Registrar of Cooperative Societies, and at
the federal level by the RBI.17 Likewise, for urban cooperative banks, supervision
occurs at the state level by the Registrar of Cooperative Societies and at the federal
level by RBI. However, non-urban cooperatives are supervised by NABARD.18 The
Registrar of Cooperative Societies is responsible for dealing with cases of consumer
fraud. Deposits at a credit cooperative are not insured.
As demonstrated, microfinance in India can take many forms and have numerous
applicable regulations and responsible regulators. However, in the case of societies,
trusts, and Section 25 Companies, microfinance activity is largely unregulated and
unsupervised.
1.4 Microfinance in the News
India‘s microfinance sector was featured in major news articles in recent months.
The news initially held promise of a maturing and growing industry, but recent
developments include warnings of a crisis in India‘s microfinance sector.
In July 2010, news of the initial public offering (IPO) of SKS Microfinance, the
country‘s first publicly owned and traded MFI, was featured in Indian and global
news outlets. The development was a sign of the industry‘s maturity and growth, but
it did not come without controversy.
Some experts argued that microfinance‘s mission — to lift people out of poverty —
was incompatible with the objectives of a publicly traded company, which is to earn a
profit for shareholders. In opposition to the IPO, Dr. Muhammad Yunus, 2006 Nobel
Peace Prize Laureate and founder of Grameen Bank, was quoted as saying, ―by
offering an IPO, you are sending a message to the people buying the IPO (that)
there is an exciting chance of making money out of poor people. This is an idea that
16 The term urban co-operative banks (UCBs) refers to primary cooperative banks located in urban and semi-urban areas. Until 1996 these banks were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centered around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably. Source: Reserve Bank of India, at <http://www.rbi.org.in/scripts/fun_urban.aspx>. 21 Reserve Bank of India, Report of the Task Force to Study the Cooperative Credit System and Suggest Measures for its Strengthening (2000) ch II; see also Banking Regulation Act 1949 (India). 18 Ibid.
19
is repulsive to me. Microfinance is in the direction of helping the poor retain their
money rather than redirecting it (to) the direction of rich people.‖19 The conversation
continued between Dr. Yunus and SKS founder and Chairperson, Mr. Vikram Akula,
at a special session of the 2010 annual meeting of the Clinton Global Initiative. Mr.
Akula argued that an IPO was the only way to access enough capital to be able to
reach the more than 3 billion people who need access to microfinance. Dr. Yunus
rebutted that microfinance should be considered as a separate service that is distinct
from banking, and as such, MFIs should work toward deposit mobilization in order to
enable them to become self sustaining.20
Unfortunately, the recent microfinance news emerging from India has turned
negative. In early October 2010, SKS‘s CEO was forced to resign. Later that month,
Indian microfinance news developments were dominated by reports of a wave of
suicides in the state of Andhra Pradesh that many blamed on MFIs‘ heavy-handed
collection practices. The suicides, as many as 56 in 60 days, triggered a political
crackdown in Andhra Pradesh that resulted in an emergency ordinance requiring all
MFIs in the state to register, and prohibiting loan collectors from visiting people‘s
homes.21 The controversy and crackdown has led commercial banks to freeze their
MFI funding, and MFIs are now suffering from a liquidity crisis that may have ripple
effects throughout India‘s financial, and particularly microfinance, industry.22
In response to the current crisis, the head of MFIN, a group of 44 of India's largest
microfinance companies, is asking the RBI to step in and regulate them in place of
Andhra Pradesh‘s government. Currently, the RBI oversees only those MFIs that are
registered as NBFCs. NBFCs cover 80 percent of the microfinance market by loan
volume, but constitute a small percentage of the total number of India's microfinance
lenders.23Alok Prasad, MFIN‘s chief executive, said that registered microfinance
companies are not the problem. Instead, he blames the hundreds of unregulated
MFIs. Mr. Prasad met with RBI officials to urge them to assert themselves as the sole
regulator of the industry, and he was quoted by news outlets as saying, "The central
bank understands what we are doing, but the Andhra Pradesh state government
doesn't."24
The central bank encourages commercial banks to lend to MFIs by classifying them
as a Priority Sector. However, earlier in 2010, the RBI ordered a panel to examine
whether the priority sector designation should be revoked. That question is likely to
be explored by a subcommittee formed in the wake of the current crisis to broadly
examine microfinance oversight.25
Only one day after the Andhra Pradesh government passed its emergency ordinance,
the RBI established a subcommittee of its board to investigate the issues concerning
19 E Kinetz, ―SKS Launches India's First Microfinance IPO,‖ The Associated Press, 28 July 2010. 20 Clinton Global Initiative, Annual Meeting Special Session: Profiting from the Poor? A Discussion on Microfinance IPOs (2010) <http://www.clintonglobalinitiative.org/ourmeetings/2010/meeting_annual_multimedia_player.asp?id=83&Section=OurMeetings&PageTitle=Multimedia>; summarized at <http://www.clintonglobalinitiative.org/ourmeetings/2010/pdf/session_summaries/Tuesday,%20Microfinance%20SS%20Summary.pdf>. 21 E Kinetz, ―Indian microfinance warns of crisis after suicides,‖ The Associated Press, 28 October 2010. 22 A Kazmin, ―Microfinance warns of collapse over credit freeze,‖ Financial Times, 26 October 2010. 23 Ibid. 24 E Kinetz, ―Indian microfinance warns of crisis after suicides,‖ supra note 21. 25 Ibid.
20
the microfinance sector.26 For example, the MFIs — supported by commercial banks‘
priority lending — were not engaged in capacity building and empowerment of the
loan groups. Many MFIs were in fact disbursing loans to newly formed groups within
two weeks of their formation. The Self Help Group (SHG) Bank linkage program
sponsored by the government recommends that a new group should spend six
months for forming a group and nurturing it before accepting a microcredit loan.
2. Protection of the Financial Consumer in Indian Legislation and
Regulation
2.1 Transactional Regulation
2.1.1. Regulatory Framework for Financial Contracts
In India, in line with common law principles, financial contracts are generally not
required to be in writing.27 As such, no specific format or language is required and
oral financial contracts will be enforced if proven before a court of law.28 Even if a
contract is in writing, the contract is not required to be written in plain language.
Also, financial services providers are not required to give the client a copy of the
written contract.
Conversely, financial institutions regulated by the RBI must adhere to the Fair
Practices Code. Under the Code, the loan agreements should be in writing and
conveyed to the borrower.29 Also, if a loan application is denied, the lender should
communicate the reasons for the denial in writing.30 Institutions that are regulated
and supervised by the RBI are also required to adopt the Fair Practices Code.
Apart from restrictions on a minor‘s ability to contract, Indian law does not hold a
person incompetent to contract based on gender, age or literacy. Nor does Indian
law require a ―cooling off‖ period when contracting for financial services. Indian law
requires that parties give free consent to form a contract.31 Where consent was not
given freely, but instead was granted because of fraud, misrepresentation, coercion,
or undue influence, the contract is voidable.32 Furthermore, Indian law provides that
a contract is void if its object or purpose, even in part, is unlawful.33 Perhaps most
importantly for consumers, who often lack bargaining power, a contract cannot
restrict a party‘s ability to seek legal recourse and cannot eliminate a party‘s
liability.34
India adheres to common law contract principles including offer and acceptance,35
modification and novation, and breach and rescission.36 Likewise, performance of a
26 P Krar and R Kumar, ―RBI puts microfinance players on notice,‖ Economic Times, 16 October 2010. 27 Indian Contract Act 1872 (India) s 10. A notable exception is the negotiable instrument. Negotiable Instruments Act 1881 (India). 28 Specific Relief Act 1963 (India) s 10. 29 Reserve Bank of India, Guidelines on Fair Practices Code for Lenders, 6 March 2007 (citing Circular DBOD. Leg. No.BC. 104 /09.07.007/2002- 03 dated May 5, 2003); Reserve Bank of India, Master Circular - Fair Practices Code 2009. 30 Reserve Bank of India, Guidelines on Fair Practices Code for Lenders, 6 March 2007 31 Indian Contract Act 1872 (India) ss 13, 14, 19. 32 Ibid s 19; see Indian Contract Act 1872 (India) ss 15-18 for definitions of coercion, undue influence, fraud, and misrepresentation. 33 Ibid ss 23, 24. 34 Ibid s 28. 35 Ibid ch I. 36 Ibid ss 62, 73-75.
21
financial contract is governed by common law principles. These principles allow the
financial institution to specify the time, place, and manner of repayment if agreed to
by the client.37 Furthermore, under Indian law, a financial institution cannot
unilaterally change the terms of a contract.38 A financial institution can, however,
unilaterally forgive, in whole or in part, repayment of the loan, or extend the time for
repayment.39
2.1.2. Key Contractual Terms
In addition to collecting the principal, Indian lenders are allowed to charge interest,
commissions and fees.40 The interest rate charged can be fixed, variable or a
combination of the two.41 In India, the Usurious Loans Act 1918 authorizes courts to
re-write the terms of an agreement when, based on its judgment, the interest rate
charged is excessive. However, the Usurious Loans Act does not apply to banking
companies and other financial institutions that are subject to the Banking Regulation
Act 1949.42 Thus, the main purpose of the Usurious Loans Act is to protect borrowers
who obtain credit from unregulated sources. This means, however, that many MFIs
face the risk that courts may use the authority arising from the Usurious Loans Act
1918 to reopen their transactions and change the interest rate charged.
While the Usurious Loans Act does not apply to institutions subject to regulation
under the Banking Regulation Act, the RBI has promulgated a Master Circular on
Interest Rates on Advances, 2007. According to the Circular, regulated institutions
must develop a Benchmark Prime Lending Rate (BPLR). The BPLR is determined by
each institution after taking into account its (i) actual cost of funds; (ii) operating
expenses; and (iii) a minimum margin to cover the regulatory requirements of
provisioning, capital charge and profit margin. The BPLR is then the maximum
interest rate allowable for credit advances up to and including Rs 200,000. For
advances exceeding Rs 200,000, the institution is free to determine the interest rate
charged. Certain transactions, however, are exempted from the above guidelines,
regardless of their size. Exempted transactions include: (a) loans for purchases of
consumer durables; (b) loans to individuals against shares and debentures or bonds;
(c) other non-priority sector personal loans including credit card dues; and (d)
finance granted to intermediary agencies for on-lending to ultimate beneficiaries and
agencies providing input support. These exemptions are important, particularly
because they include the situation where banks advance funds to MFIs for on-lending
to ultimate beneficiaries.
Regulated institutions are not allowed to charge penal interest rates (for defaults) on
loans up to Rs 25,000 to priority sector borrowers. Also, for the purpose of improving
price transparency, institutions are required to charge interest at monthly intervals,
except for agricultural loans, where interest charges can be linked to the growing
season. Lastly, according to the Circular, institutions should refrain from offering low
or zero-percent interest rates on loans for consumer durables (made possible by the
adjustment of manufacturer or dealer discounts) since such loans lack transparency
37 Ibid ss 46-50. 38 Ibid s 62 (to alter the original contract requires the parties‘ agreement). 39 Indian Contract Act 1872 (India) s 63. 40 Banking Regulation Act 1949 (India). 41 Ibid. 42 Ibid. s 21A (―Notwithstanding anything contained in the Usurious Loans Act, 1918 (10 of 1918), or any other law relating to indebtedness in force in any State, a transaction between a banking company and its debtor shall not be re-opened by any court on the ground that the rate of interest charged by the banking company in respect of such transaction is excessive.‖).
22
and distort the pricing of loan products. Such products do not give the borrower a
clear picture regarding the applicable interest rate.
At the time of contracting, the lender must disclose to the borrower the monthly and
annual nominal and effective interest rates as a percentage. Indian law also requires
the lender to disclose all fees, including application, operational and administrative
fees. Lenders must also disclose repayment terms, penalties for late payment and
the acceleration terms. If applicable, lenders must also disclose any repayment
holidays, gestation periods, taxes, and subsidies. 43
In India, there are no legal limits to the amount that a lender can lend to a borrower.
The law also does not limit the type of collateral that the lender can accept as
security, but the collateral should be free from encumbrances.44 In the case of
microfinance, there is no obligation to register the lender‘s security interest in the
collateral due to small amounts of the loans.45 The customer retains possession of
the collateral while repaying the loan; thus the asset remains productive. The
customer, however, also bears the risk of any deterioration or diminution in the
value of the collateral. The secured lender is not limited to the value of the collateral,
but has the right to collect the entire principal amount of the loan and its interest.
2.2 Non-transactional Regulation
2.2.1. Data Regulation
India lacks regulations that govern collecting, sharing, or selling business data.
Typically, the financial institutions collect personal information, such as gender and
address, and financial information about debts, but do not collect information about
deposits, bill payments, rental payments, legal proceedings or bankruptcy.
A model deposit policy guides banking secrecy in India. All products and services
offered to individual customers are covered under banking secrecy practices.
According to these practices, the banks shall not disclose the details of customers‘
accounts to a third party without the customer‘s express or implied consent.
However, exceptions to this rule exist, such as when disclosure is compelled under
the law, when there is a duty to the public, and if the interest of the bank requires
disclosure.46
India lacks a regulated credit bureau or a regulated central system to gather
consumers‘ business information. Nonetheless, there is a an unregulated credit
bureau: the Credit Information Bureau India Limited (CIBIL).While unregulated,
CIBIL conforms to ISO 27001: 2005, which means that it is certified in Information
Security Standards. CIBIL currently collects only consumer and commercial borrower
information that is reported by member institutions, but it intends to expand its
coverage to include a broader range of information. CIBIL operates on the principal
of reciprocity; only members who have shared all their information are able to obtain
credit reports from CIBIL. Borrowers are also entitled to obtain copies of their own
credit report. To correct discrepancies in their credit report, however, borrowers
must contact the lender and request the necessary changes.47
43 Banking Regulation Act 1949 (India). 44 Transfer of Property Act 1882 (India) ch IV. 45 Indian Registration Act 1908 (India) ss 17, 18. 46 Indian Banks‘ Association, <http://www.iba.org.in/model_depositpolicy.asp>. 47 Credit Information Bureau India Limited (CIBIL), FAQs, <http://cibil.com/faqs.htm>.
23
2.2.2. Use of Agents
In India, the financial institution-agent relationship is regulated as a common law
principal-agent relationship. Therefore, if a financial institution employs an agent,
known in India as a business correspondent (BC), whether as a service provider or to
undertake collections, the financial institution is liable for the conduct of the BC. Due
to the lack of a specific regulation, the operational and technical capacity required of
a BC is governed principally by contract between the institution and the BC.
Financial institutions need to be authorized by its regulator to appoint an agent.
Once a financial institution obtains approval to appoint an agent, however, the
supervisory authority does not approve individual agency relationships. Recently, the
RBI has expanded the field of possible BCs to include individuals, NGOs, cooperative
societies, post offices and companies with retail outlets.48 However, the RBI does not
allow NBFCs to serve as BCs. Some people have suggested that NBFCs are restricted
from serving as BCs because allowing them to mobilize deposits for banks while
continuing their own lending operations may create a conflict of interest.49
In other words, who may serve as a BC is mostly subject to the banks‘ comfort level
after completing their due diligence.50 Each bank is also responsible for instituting
additional safeguards, as may be considered appropriate by the bank, to minimize
the agency risks.51 These safeguards should protect confidentiality of customer
information in the custody or possession of BCs.52 Also, banks should put in place a
mechanism to redress grievances and display the details of this mechanism at the BC
premises as well as at the base branch.53
Agents in India are not expressly prohibited from providing any financial service, and
they typically perform a wide range of services. According to the Circular on the use
of BCs, to help ensure the viability of the BC model, BCs may offer a wide range of
products and services including small savings, micro-credit, micro-insurance, and
small value remittances.54 Despite the liberal guidelines, the BC model in India is
struggling to be sustainable, mostly because of its high operating costs. The
challenge for banks and BCs is to find the right product mix that will make business
sense. Due to such challenges, many companies have stopped acting as a BC,
choosing instead to focus on their core businesses.55
2.2.3. Advertising
India has no overarching law regulating the advertising practices of financial
institutions. However, marketing practices are addressed in other ways, such as
through the Fair Practice Codes. These regulations prohibit false indication about the
48 A Roy and S Shankaran, ―RBI permits corporations to work as rural agents of banks,‖ Mint, 29 September 2010, 1. 49 Ibid. 50 Reserve Bank of India, Circular on Financial Inclusion by Extension of Banking Services - Use of Business Correspondents (amendment) 2010. 51 Ibid. 52 Reserve Bank of India, Circular on Financial Inclusion by Extension of Banking Services - Use of Business Correspondents 2009. 53 Ibid. 54 Ibid; A Roy and S Shankaran, ―RBI permits corporations to work as rural agents of banks,‖ supra note 48, 3. 55 Ibid.
24
supplied product or provided service, as well as false representations of material
facts. These prohibitions apply not only to intentional misstatements and
misrepresentations, but also to statements made recklessly. In its advertising, a
financial institution is allowed to make fair comparisons between the quality, price, or
terms and conditions of its product and the product of another provider.
2.3 Supervision and Enforcement
Before a secured creditor can collect against the collateral securing the defaulting
loan, the creditor must petition a competent court to receive an order of attachment
against the collateral. Likewise, an unsecured creditor must also petition a competent
court to receive an order of attachment against the defaulting borrower. If a debtor
has written an uncovered check (i.e., a bad check), the creditor‘s only recourse is to
file a lawsuit against the debtor for not honoring the check.
To improve consumer protection, the RBI introduced the Banking Ombudsman
Scheme in 1995 (now formulated in the Banking Ombudsman Scheme, 2006). The
Scheme applies to all commercial banks, regional rural banks (RRBs) and scheduled
primary cooperative banks. Its object is to enable the resolution of complaints
relating to banking services and to facilitate the settlement of such complaints.
Under the Scheme, any person may file a complaint with the Banking Ombudsman
alleging a deficiency in banking services. While the Scheme lists various grounds for
a complaint, the most commonly occurring types of complaint relate to levying of
charges without adequate prior notice and non-observance of RBI guidelines on the
engagement of recovery agents.
To file a complaint with the Banking Ombudsman, the complainant must first make a
written complaint to the bank. To facilitate this, banking institutions are required to
place a complaint form on their website and clearly state how they should be
contacted in case of a grievance. Only after the bank rejects the complaint or fails to
respond within one month after receiving the complaint, or if the complainant is not
satisfied with the bank‘s reply, may the complainant file a complaint with the
Ombudsman. In addition, the complaint must be filed with the Ombudsman within
one year after receiving a reply from the bank, or within one year and one month
from the date of the written representation to the bank in case the bank failed to
reply. The form of the complaint is specified in Annex A of the Banking Ombudsman
Scheme, and reproduced in Annex II of this report. The Scheme also provides that
the Ombudsmen shall entertain complaints covered by the scheme which have been
received by the Government of India or the RBI and which have been forwarded by
them to the Ombudsman for resolution.
The Ombudsman is responsible for promoting a settlement between the parties, and
he ―may follow such procedures as he may consider just and proper and he shall not
be bound by any rules of evidence.‖56 If the complaint is not settled with an
agreement between the parties within one month, or such extra time as the
Ombudsman may allow, then the Ombudsman may make an award or reject the
complaint. The Ombudsman ―shall take into account the evidence placed before him
by the parties, the principles of banking law and practice, directions, instructions and
guidelines issued by the Reserve Bank from time to time and such factors which in
his opinion are relevant to the complaint.‖57 The Ombudsman cannot issue an award
56 Reserve Bank of India, The Banking Ombudsman Scheme 2006, s 11(2). 57 Ibid s 12(2).
25
directing the payment of an amount greater than the actual loss suffered, or Rs 1
million, whichever is lower.
Since May 2007, complainants as well as banks can appeal the decision of the
Banking Ombudsmen to the Appellate Authority. Of the 251 appeals made in 2008-
2009, the vast majority of appeals were lodged by complainants, while banks lodged
18 appeals.58 This trend might suggest that consumers of banking services in India
are increasingly aware of their rights and are willing to fight where they see
deficiencies.
The majority of the complaints (88%) received during 2008-2009 were received from
individuals, and about a third of the complaints (32%) concerned private sector
banks, which is part of an upward trend.59 The consumer grievances pertained
mostly to credit cards, failures to meet commitments, and loans and advances.60
Notably, during 2008-2009, there was a 65% increase in the number of complaints
received from rural areas and a 48% increase in the number received from semi-
urban areas.61 This may be the result, at least in part, of numerous outreach
activities carried out by the Banking Ombudsmen, such as awareness camps
(particularly in rural areas), the showing of slides in movie theaters and newspaper
advertisements.62
The statistics showing a steady annual increase in the number of complaints in 2008-
2009 might indicate that the authority of the Banking Ombudsmen has a good
reputation and social approval. In order to handle this growth, the 15 Ombudsmen
offices in India had to recruit additional staff. The total expenditure of operating the
offices is fully borne by the RBI. In order to ensure that the Banking Ombudsmen
Scheme is effective, the RBI understands that more emphasis should be placed on
an outcome-based approach, where outcomes are quantitatively measured, and a
regulatory response is formulated accordingly.63
3. Field Research
3.1 Methodology - Research Design
The analytical framework is based on determining if borrower rights are being
abused by possible significant shortcomings in the contracting and debt recovery
practices of MFIs. The following five broad questions needed to be answered in order
to make a determination:
1) What are the legal requirements governing lending by MFIs, particularly in relation
to protection of consumers in the contracting, dispute resolution, and debt recovery
processes?
2) Are there any gaps in the regulatory framework in relation to international
obligations or ―accepted international practice‖?
58 Reserve Bank of India, The Banking Ombudsman Scheme 2006, Annual Report 2008-2009, 17. 59 Ibid 6, 8. 60 Ibid 10. 61 Ibid 5. 62 Ibid 21-22. 63 Ibid iii.
26
3) To what extent are current practices consistent with legal requirements (or ‗good
practice‘ more generally)?
4) What areas of inconsistency are most significant?
5) What factors underlie each major problem?
Along with these five questions, there were more detailed technical questions which
had been incorporated into questionnaires for each stakeholder category. This
research focuses on three groups of stakeholders: MFIs, Clients, Judges and
Ombudsmen. Unfortunately, of all the Judges and Ombudsmen contacted by the field
research group, only three Ombudsmen agreed to participate in this survey.
However, it must be noted that in other jurisdictions, IDLO encountered similar
problems in involving Judges in research activities linked to sensitive topics such as
consumer protection, though in India this condition may have been exacerbated by
the tensions within the microfinance sector.
Following analysis of Questions 1 and 2, it was possible to construct a set of
standards for what might be considered ―good practice.‖ This framework provided
the basis for analysis of actual practices in Question 3. Question 3 identified a wide
range of problems, and question 4 allowed an examination of the significance of
those problems in terms of their level of incidence. This was important in order to
ensure that subsequent, more in-depth analysis (Question 5) was focused on those
issues that were likely to yield the most significant benefit.
Table 1. Research Questions and Methodological Tools
Research Questions
Methodological tools
Regulatory Framework — what standards of
performance are expected?
What are the legal requirements governing
lending by MFIs, particularly in relation to
protection of consumers in the contracting,
dispute resolution, and debt recovery
processes?
Literature Review
Stakeholder
Interviews
Are there any gaps in the regulatory
framework in relation to international
obligations or ‗accepted international
practice‘?
Desk analysis
Stakeholder
Interviews
Current Practice — what standards of
performance are being delivered?
To what extent are current practices
consistent with legal requirements (or ‗good
practice‘ more generally)?
Literature Review
Stakeholder
Interviews
Borrower Survey
What areas of inconsistency are most
significant?
Literature Review
Stakeholder
Interviews
27
Research Questions
Methodological tools
What factors underlie each major problem? Literature Review
Stakeholder
Interviews
Structured interviews were used with clients to confirm or provide more insight on
the factual information collected from other sources. In these interviews, a pre-
determined list of questions was asked, with the interviewee not asked to elaborate
beyond his or her answers to those questions. Semi-structured interviews were used,
using open-ended questions, with MFI employees. In these interviews, a topic or
issue was introduced, and a conversation ensued, facilitated by the interviewer.
3.2 Microfinance Institutions
Five Indian MFIs were selected, taking into account two variables: (1) legal status
(NBFC, Section 25 Company, society, etc.) and (2) market share. The goal was to
select a sample of MFIs with large market share representing each of the major
types of legal entity.
For each MFI, at least two employees were interviewed: an agent/credit officer (at
least one of whom processes a borrower‘s individual credit request) and a manager
(or legal counsel, with knowledge of the MFI‘s overall portfolio and credit request
process).
Table 2. Sample of MFIs
Financial Institutions Gross Loan Portfolio (in
USD)
Number of Active
Borrowers
Regulated64
Bandhan (NBFC) $332,462,204 2,301,433
Ujjivan (NBFC) $82,447,140 566,929
Largely Unregulated65
BISWA (Society) $58,971,572 305,679
Cashpor MC (Section 25
Company) $59,461,459 417,039
Humana People to People
India (§ 25 Co.) N/A N/A
Source: MIX Market, 2009
Based on interviews conducted using the methodology described above, we found
that group loans targeting poor women, per the Grameen Bank model of lending,
64 Financial regulation and supervision by the RBI. 65 Registration required with the Registrar of Societies and the Registrar of Companies, respectively, but not subject to financial regulation and supervision by the RBI.
28
were the primary microfinance product offered by the MFIs we interviewed. Some
MFIs had piloted individual loans, including home loans and education loans. Other
innovative loan products included loans for products such as mobile phones, water
purifiers and solar lamps.
3.2.1. Assessment of Customers‘ Ability to Repay
Triangulation is the most common method used by all MFIs to assess customers‘
ability to repay their loans. The method involves obtaining information about the
borrower from family members, neighbors, and group members. The information is
also discussed at group meetings (Group Recognition Tests (GRT)) to foster truthful
answers.
In some areas, particularly where competition is high, like in the city of Kolkata, MFIs
are beginning to informally share information about their borrowers to avoid multiple
borrowings and to prevent over-lending. Since MFIs do not secure their clients'
approval to do this, these informal practices do not conform to India‘s model deposit
policy that guides banking secrecy, and may pose some serious privacy issues. Some
MFIs mentioned an initiative, led by MFIN, to formalize the information-sharing
procedures. The goal is that a formal credit bureau will eventually be established to
serve MFIs.
3.2.2. Use of Client Information
Even without formal credit information sharing, sharing of client information has
already taken place. A significant difference between how the use of client
information was dealt with by regulated MFIs, on the one hand, and by unregulated
MFIs, on the other, was evident. NBFCs chose to include provisions regarding
information-sharing in the loan contract and receive the client‘s signature in
acceptance. On the other hand, unregulated MFIs do not discuss information-sharing
with the client, because information is not being shared formally.
3.2.3. Information Provided to Consumers
Information is provided to consumers at several different times, and in several
different ways. Information is provided orally at Continuous Group Trainings (CGT)
and in writing in the CGT brochure. Clients are encouraged to take the brochures,
analyze them while at home, discuss the terms with family, and return with any
questions or concerns. The loan specifics are discussed once more at the GRT, and
again at the time of disbursement. Each time the terms are discussed, the loan
officer or branch manager is trained to gauge or ―test‖ the client‘s understanding and
ask for the client‘s agreement. In addition to loan terms, the consequences of
missing a payment are explained to the borrowers in the CGT, GRT and at the time
of disbursement. Lastly, key information, such as the interest rate, is written in the
loan application filled out by clients and also in the client's passbook or loan card.
3.2.4. Debt Collection Practices
There is a difference between the debt collection practices of regulated MFIs (in this
case, NBFCs) and unregulated MFIs. The NBFCs we interviewed were able to
articulate a clear policy about how default is categorized and action is taken and
evaluated based on the type of default. For the NBFC, the use of force or coercion
was not acceptable. On the other hand, the procedure of one of the unregulated
29
MFIs interviewed was more one-size-fits-all, and action taken by the borrowing
group to ensure repayment was seen by the MFI as acceptable because it was not
carried out by the MFI.
To explain more fully, the NBFCs we interviewed categorize a default as either
intentional, unintentional (short and long term), technical or mass default. If the
default is intentional or unintentional and short term, a loan officer or branch
manager will visit the client and try to persuade the client to pay while also
contacting other group members to convince them to pay on behalf of the defaulting
member. It was clear that using force or coercion would be unacceptable. If the
default is unintentional but long term, the client is visited by members of the NBFC‘s
credit and vigilance team and the debt is rescheduled or the borrower is given a
repayment holiday. If the NBFC experiences mass defaults, the head office and
regional representatives take steps to contact the leaders of the instigating group
and encourage them to change the defaulting behavior. Technical defaults are
accounting and information system errors, which are corrected by the NBFC.
Contrast this with the case of one unregulated MFI. The MFI‘s branch manager
indicated that the group had to pay on behalf of the defaulting member before
leaving the group meeting. MFI staff will then visit the defaulting member to
determine why he or she defaulted. However, in a situation where the client has
absconded, the group will put pressure on the borrower‘s family members to repay
the loan. In extreme cases, if the group is unsuccessful in attempts to convince the
borrower or her66 family to repay the loan, the group will seize business or household
assets and sell them to recover the amount. The MFI manager did not seem to view
this as a problem, because the MFI is facilitating group responsibility and the
recovery activity is carried on by the group.
MFIs do not normally resort to legal enforcement because the process is too lengthy
and too costly. At least one MFI, however, has initiated legal proceedings in rare
instances (only individual borrowers, typically with high balances) to demonstrate its
seriousness. The full costs of litigation could not yet be assessed, because the policy
was enacted recently. The MFI recognized that it can take several years to obtain a
decision.
3.2.5. Redress Mechanisms for Consumer Complaints
If a client has a complaint, he or she is invited to speak with a manager or to call a
dedicated helpline. Some branches even have dedicated customer service staff that
borrowers are encouraged to speak to. The helpline numbers are displayed in
branches and included in the loan cards given to borrowers. The phone numbers are
also in the information discussed and/or distributed at the CGT and GRT. Group
leaders are encouraged to use the helpline and to remind other group members to
use it as well.
The regulated MFIs regularly audit the redress mechanisms to ensure that they are
working effectively. Customer service issues are raised at meetings of the board of
directors. All MFIs interviewed noted that loan officers have started receiving soft
training on how to treat customers and handle customer complaints. If an employee
misbehaves, the MFIs have clear policies to provide a written warning, followed by
disciplinary notice, and finally dismissal.
66 As stated in section 2.3, all clients in our sample are women.
30
3.3 Clients
For each MFI, 10 clients were interviewed. Overall, 86% of the clients were non-
defaulting borrowers. The sample size was determined by a number of factors
including the extent to which there were distinct subpopulations within the total
target population. In particular, the sample was constructed in such a way as to
include all the key sub-populations across the five MFIs, in similar proportions as
they exist in the total population. As such, the survey has been a non-random or
―purposive‖ survey.
Key sub-populations were determined with these categories and given appropriate
representation:
Different age groups;
Different geographic areas, particularly where those areas coincide with socio-
economic differences; and
Defaulting and non-defaulting borrowers.
A detailed methodology for administering the survey was developed by M-CRIL,
which tested the survey with a small group of respondents. After some changes to
tailor the methodology to the Indian context, the testing process confirmed that the
questions were clear, and that the correct range of possible responses had been
included for each question.
3.3.1. Client Selection of MFIs
More than a third of the clients interviewed admitted that they did not know the type
of institution from which they borrowed; however, many of the clients who did
attempt to identify the type of institution were wrong in their classification. For
example, 40% of the clients interviewed had borrowed from an NBFC, but none of
the clients were able to identify that they had in fact borrowed from an NBFC. More
than one-third of the clients answered that they borrowed from a bank, but banks
were not even part of the sample. In an industry where an institution‘s reputation is
important to potential clients, a regulator‘s ―stamp of approval‖ can be a symbol of
that reputation and may help to reinforce norms and best practices. However, clients
have to know what type of institution they are borrowing from to determine whether
or not it is regulated. If not, then the reputational benefits of regulation may be lost.
Consumers often do not have a choice of financial institutions to borrow from.
Whether the lack of choice is real or only perceived, the result is the same: the
consumer believes that other credit alternatives do not exist, so she may be more
likely to accept abuses.67
67 Whether or not an MFI client chooses to seek redress through the consumer or civil courts is a different problem. That problem is rooted in the level of awareness of legal rights, ease of access to courts, and costs of adjudication.
31
Figure 1. Did you have the choice between several financial institutions?
Where consumers did had a choice, the reason most often cited for choosing the
financial institution was a lower interest rate or a shorter repayment schedule.
Among the clients who did have a choice, the vast majority did not have loans with
another financial institution.
Figure 2. Did you have loans at other financial institutions?
Consumers first learned about the MFI from which they borrowed exclusively from
friends or MFI salespersons, with about 85% of defaulting borrowers learning about
the MFI from salespersons. Overall, in our sample, a borrower was less than twice as
likely to have first learned of the MFI from a salesperson.
Figure 3. How did you first hear about the MFI’s services?
0% 20% 40% 60% 80%
Defaulting borrowers No
Yes
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Yes
No Non-defaulting
Defaulting
0% 10% 20% 30% 40% 50% 60%
Advertisement
Friends
Salesperson
Other
Non-defaulting
Defaulting
32
Surprisingly, all of the consumers interviewed indicated that all of the information
provided to them about the MFI, whether through friends or salespersons, was
completely accurate.
3.3.2. Requirements for Receiving Credit
Every borrower in our sample had a loan secured by a personal guarantee. Often,
the personal guarantee was used in the group lending mechanism, whereby each
member of a group guaranteed the loans of all members of the group.
In order to obtain their loans, all of the borrowers needed to provide identification,
and a few also needed to provide proof of address. Also, the borrowers were required
to attend meetings prior to loan disbursal. This requirement ranged from as few as
two meetings to as many as six months of group meetings coupled with savings.
Borrowers at both ends of the spectrum had defaulted. Most borrowers indicated that
they had received their funds within one to three weeks after completing their loan
application.
Figure 4. Time from Loan Application to Disbursal of Funds or Denial
3.3.3. Information on Contract Terms and Conditions
Every client interviewed indicated that the loan agreement was clearly explained to
them, and about 40% indicated that they had been given a copy of the agreement in
writing. A large majority, nearly 86%, of defaulting borrowers indicated that they
had received a written copy of the loan agreement.
Figure 5. Were you given a copy of the loan agreement?
0% 10% 20% 30% 40%
Less than a week
Between 1 and 2 weeks
Between 2 and 3 weeks
More than 3 weeks
Non Defaulting
Defaulting
0% 15% 30% 45% 60% 75% 90%
Defaulting
Non-defaulting
Yes
No
33
Of those clients who had received a copy of the loan agreement, all of them indicated
that they still retained a copy of the agreement.
All clients said that they had received information about key terms such as interest
rate, fees and repayment terms. Invariably, however, the clients did not receive any
information about loan modification or the protection and/or use of customer
information by the financial institution. Importantly, the clients of the regulated
NBFCs in the sample had also received information about events of default,
consequences of late or missed payments, options for recourse if unsatisfied with the
MFI, and other general information about borrowers‘ rights. Some unregulated
societies and not-for-profit companies provided this sort of information to clients, but
others did not provide it.
Table 3. Communication of Terms and Conditions
The borrowers had extremely poor knowledge and understanding of the annual
percentage rate (APR). First, when asked if they knew what APR their loan carried,
the borrowers responded that they did not know and proceeded to explain that they
knew either the monthly interest rate or the annual flat rate. Only one borrower was
able to unequivocally state that she borrowed at an APR of 26 percent. Moreover, all
of the borrowers interviewed stated that they were unable to explain what APR
means.
3.3.4. Consequences of Late Payment
Nearly all of the defaulting borrowers in our sample cited dissolution of the borrowing
group as the consequence of missed or late payments. Only one interviewee,
however, stated that the consequence would be an increase in the interest rate
changed on the loan. This suggests that the group lending mechanism is the primary
incentive for repayment in the Indian microfinance sector.
What information, if any, was conveyed
to you by the MFI regarding:
Defaulting
Non-defaulting
Yes No Yes No
Interest rate 100% 0% 100% 0%
Fees 100% 0% 100% 0%
Repayment terms 100% 0% 100% 0%
Consequences/penalties for late or
missed payments 85.71% 14.29% 96.88% 3.13%
Events of default and consequences 100% 0% 100% 0%
Procedure for modifications to the
agreement and the possibility of unilateral
changes by the MFI
0% 100% 0% 100%
Options for recourse if unsatisfied with the
MFI 85.71% 14.29% 75% 25%
Protection/use of customer information 0% 100% 0% 100%
34
All of the defaulting borrowers indicated that the group guarantee was an avenue of
recourse when payments were late or missed. However, only one of the defaulting
borrowers actually resorted to using the group guarantee. All the rest of the
defaulting borrowers suggested that they couldn‘t pay for others and/or others
wouldn‘t pay for them. As a result, we observed that where a borrowing group is
made up of individuals who are often economically related, one member‘s inability to
repay will often mean that other members are also unable to repay.
In each instance of default, the MFI or third party collector contacted the borrower
by personal visits. In these contacts, the MFI or agent communicated that if the
borrower failed to pay, further loans would cease. The MFIs did not make any
attempt to restructure the loan. Two of the defaulting borrowers, however, did
request restructuring only to have their request denied by the MFI.
Figure 6. In case of complaints, from whom could you get assistance?
In instances where the borrowers had complaints, nearly every borrower turned to
the MFI management for assistance. Only about 16% of borrowers also took
advantage of a helpline. No borrower in our study was involved in formal
adjudication related to her loan. This data reveals that the MFIs are in a prime
position to deal with customer complaints and disputes, and the MFI is most often
the only source of help that borrowers turn to.
3.4 Ombudsmen
After we attempted to contact all 15 Banking Ombudsmen in India, three of them
eventually responded. The questions were designed to elicit answers that would draw
on the Ombudsmen‘s experience, helping us to develop a deeper understanding of
the Banking Ombudsman Scheme.
3.4.1. Disputes
Indian Banking Ombudsmen often hear disputes stemming from credit cards and
loan products and services. The most common cause for grievances is a lack of
transparency regarding the contractual terms of the product or service. The lack of
transparency leads to customer misunderstanding and disputes. With regards to
0% 15% 30% 45% 60% 75% 90%
A financial ombudsman
MFI management
MFI …
Private legal counsel
Legal aid
Customer service helpine
Defaulting
Non-defaulting
35
loans, the grievances are often due to changing interest rates or other terms, as well
as foreclosure and alleged misbehavior of the recovery agent. While the Ombudsmen
hear disputes related to the misuse of personal information or misleading promotions
or advertising, it is unusual for such disputes to come before the Ombudsmen.
Disputes before the Ombudsmen seem to be lodged against the different types of
institutions in proportion to the institutions‘ market share. Therefore, with public
banks having the largest market presence, most complaints were against public
banks. However, at least one Ombudsman answered that most complaints were
against private banks.
3.4.2. Procedures
Resolving a complaint may take as little as one month, or as long as three months if
the complaint filed is unclear. In cases where it takes longer to resolve a complaint,
it is usually due to the banks needing to investigate the complaints against them and
gather and submit documentary evidence. Also, where it is necessary to provide the
complainant with an in-person, hearing there needs to be reasonable notice, which is
usually considered to be 10 days. If the complainant does not accept the bank‘s
proposed resolution, then further conciliation efforts are needed which results in
delay.
Attorneys are not allowed to file complaints on behalf of consumers before the
Banking Ombudsmen, according to Article 9 of the Banking Ombudsman Scheme.
According to the Ombudsmen interviewed, this is to prevent the process from
becoming complex and costly. The Banking Ombudsman Scheme is intended to
provide consumers with a cost-free and hassle-free mechanism for the redress of
grievances related to service deficiencies. Proceedings before the Banking
Ombudsmen are summary in nature and do not involve complicated legal processes.
Also, because most complaints are adjudicated on the basis of documents enclosed
with the complaint and the bank‘s response, an attorney is considered an
unnecessary cost. It is possible, however, that some of the complainants get their
complaints drafted by an attorney, but they submit the complaint personally or
through a family member who is not an attorney. Complainants usually represent
themselves in mediation before the Banking Ombudsman, although they can also be
represented by friends or relatives. The banks are represented by their customer
service executive (Nodal Officer) and/or other managers or officers who are familiar
with the complainant‘s case.
Instances of parties having difficulty producing documentation or evidence are
relatively rare, though they occur from time to time. Banks are required to have a
record management policy and, in majority of the cases, all material records
regarding the disputed transactions are produced by the banks. However, difficulties
do arise where a complainant claims to have made service requests by telephone or
in writing for which he or she is unable to produce evidence and such claims are
denied by the bank.
3.4.3. Awards and Enforcement
It is possible to issue an award against a party in absentia during a mediation
procedure. The conciliation process in the Banking Ombudsman Scheme is an
opportunity given to both parties to resolve their dispute by mutual agreement.
According to one Ombudsman interviewed, banks usually attend the conciliation
36
proceedings. Article 10(1) of the Banking Ombudsman Scheme empowers the
Banking Ombudsman to request information from the banks. If a bank fails to
comply with the request for information without sufficient cause, the Banking
Ombudsman may infer that the information, if provided, would be unfavorable to the
bank. Whether or not either party attends the conciliation proceedings, the Banking
Ombudsman adjudicates the complaint taking into account the evidence and other
material on record.
While proceedings before the Banking Ombudsmen are summary in nature, and the
Ombudsmen are not bound by rules of evidence, the decisions of the Banking
Ombudsmen are based on the evidence placed before them, conform to the
principles of banking law and practice, and are consistent with public policy.
An Ombudsman‘s decision is enforced through a ―name-and-shame‖ mechanism.
Under the regulatory framework, banks are required to report all awards by a
Banking Ombudsman to the Customer Services Committee of their Board of
Directors. Banks are also required to disclose the number of unimplemented awards
in their annual report as part of the mandatory disclosures. Therefore, banks have an
incentive to implement Ombudsmen decisions to avoid public disclosure of
unimplemented awards.
3.4.4. Content and Clarity of Financial Contracts
Loan contracts are drafted by the banks‘ legal specialists; consequently, all
provisions favor the bank. For example, one Ombudsman noted that some loan
contracts call for a floating interest rates, but don‘t mention how the rate will be
calculated.
To improve the transparency of contracts, the Reserve Bank of India has issued
guidelines requiring banks to highlight the most important terms and conditions
(MITC), particularly relating to interest and fees and to obtain the customer's
signature in acknowledgment. One Ombudsman suggested that a sample contract be
posted on bank websites so that customers can read and understand it at his or her
convenience prior to signing the contract.
3.4.5. Other Recourse and Applicability to Microfinance
The valid grounds for complaints are enumerated in Article 8 of the Banking
Ombudsman Scheme. Under the Scheme, the Banking Ombudsmen have no
authority to reduce a debt or absolve a debtor. In addition to the Banking
Ombudsmen, customers who have complaints can file a suit in the Consumer Court
or Civil Court.
Customers of NGO-MFIs have recourse to the full range of legal remedies under the
CPA and other relevant statutes, but they cannot bring their complaints before the
Banking Ombudsmen. NGO-MFIs in India are not under a robust regulatory and
supervisory framework, as banks are. The Ombudsmen interviewed agreed that such
regulation and supervision is necessary before a redress mechanism similar to the
Banking Ombudsman Scheme could be put in place for NGO-MFIs. However, there
have been Ombudsmen schemes established elsewhere for unregulated financial
services sectors that have worked well.
37
4. Recommendations
It appears evident that the technologically challenged and the illiterate poor find it
difficult to access consumer protection authorities. Consequently, complaint and
grievance procedures should be made simpler and more rapid by not requiring
customers to file complaints in writing, thus making the procedures more accessible
to illiterate customers and those who reside in remote rural areas. Redress
mechanisms need to be more effectively advertised to raise consumer awareness on
options available to them. Moreover, when grievance redress and complaint handling
are outsourced by the MFIs, consumer protection and financial literacy campaigns
are particularly needed.
To improve the contracts‘ transparency, the RBI has issued guidelines requiring
banks to highlight the Most Important Terms and Conditions (MITC), particularly
relating to interest and fees and to obtain the customers signature in
acknowledgment. IDLO‘s research has indicated the need for a further step: contract
specimen must be accompanied with standardized information conveyed in plain
language, in a way easily comprehended by poor people, some of whom struggle
with illiteracy. For instance, the MFI should provide the client with a clearer payment
schedule, translating interest rates into payments per month, clearly differentiating
between principal and interests. Also, placing this kind of information and contract
specimen on the MFIs‘ websites would allow customers to read and understand them
at their convenience prior to signing the contract. This option, obviously, should be
available to low-income clients with a minimal degree of education and information
technology and internet knowledge. Perhaps for illiterate consumers, lenders should
be required to convey the standardized information orally to them.
Estimates from the Banking Ombudsmen indicate that the cost of dealing with
appellate complaints is Rs 2,600.68 The cost is now fully borne by the RBI, but
financial entities should be asked to bear part of this burden, thereby transferring
the responsibility for customer protection from the regulator to the banks. The
initiatives taken for voluntary adoption of codes of conduct and fair practices through
industry associations and the BCSBI are a good start. Financial institutions, however,
should consider consumer protection as an investment, boosted by consumer
awareness campaigns led by the government and RBI.
Although customers of NGO-MFIs have recourse to the full range of legal remedies
under the CPA and other relevant statutes, they cannot bring their complaints before
the Banking Ombudsmen. Considering that NGO-MFIs in India are not under a robust
regulatory and supervisory framework as banks are, this study fully endorses the
recommendation of the interviewed Ombudsmen that such regulation and
supervision is necessary before a redress mechanism similar to the Banking
Ombudsman Scheme could be put in place for NGO-MFIs. However, even before
regulation and supervision is implemented, the NGO-MFIs would benefit from
adopting a Banking Ombudsman Scheme.
In general, to establish a comprehensive consumer protection regulatory framework
for financial services, India may also consider the following recommendations:
68 Approximately, US$59.
38
Prohibiting reckless lending (similar to the provisions in South Africa‘s
National Credit Act (NCA)). The South African Act protects consumers from
reckless lending, and provides them with an understandable credit agreement
in plain language and several other consumer protections.
Requiring financial services firms to explain clearly to potential borrowers the
key features (including any fees, commissions or other charges) of products
and services.
Ensuring clear, fair and full disclosure of interest rates and charges (e.g.,
APRs or total cost of credit).
Ensuring that debt recovery expenses charged to the consumer, if any, are
reasonable.
Requiring that any advice given by a financial services entity to a consumer
should be suitable for the consumer and take into account his or her
circumstances.
Prohibiting conditional sales. A conditional sale is an arrangement in which a
buyer takes possession of an item, but the title remains with the seller until
some condition is met, such as payment of the full purchase price.
Instituting a cooling off period for certain loans, e.g., loans above a certain
value and for a duration greater than a specified period of time.
Requiring that financial firms periodically issue financial statements to
consumers at stated intervals.
Requiring that notifications be sent to consumers when an institution makes
changes in the terms and conditions of financial products.
Requiring proper training, professional standards and supervision of relevant
staff of financial entities or their agents.
Requiring that financial entities treat consumers fairly, and enacting
prohibitions on unfair, deceptive or aggressive practices.
39
Annex I- Regulatory Framework for Relevant Subjects
Banking:
Primary Regulator:
1) RBI
2) NABARD, supervises RRBs
Primary Laws:
1) Reserve Bank of India Act 1934
2) Banking Regulation Act 1949
3) National Bank for Agriculture and Rural Development Act 1981
4) Regional Rural Banks Act 1976
5) Banking Companies (Acquisition and Transfer of Undertaking) Act 1969
6) Recovery of Debts Due to Banks and Financial Institutions Act 1993
7) Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002
Microfinance: Microfinance in India is provided by commercial banks, RRBs, SHGs
(with special linkage programs to banks), cooperative societies, and other MFIs. MFIs
generally take a variety of forms, including NGOs (registered as societies, trusts or
Section 25 companies) and NBFCs. Each type of institution is subject to different
oversight and supervision.
Most MFIs register as NGOs, rather than NBFCs, and as a result, they fall outside of
the regulatory framework. Hundreds of MFIs, however, have joined network
organizations such as Sa-Dhan and MFIN. MFIN has created a Code of Conduct in
order to prevent over-lending to individual borrowers, while Sa-Dhan has developed
a Code of Conduct as well. Leading NBFC MFIs have also joined forces to form Alpha
Micro Finance Consultants P Ltd, in order to establish a credit bureau that will
provide related services to MFIs in India.
Banking and Microfinance Regulations:
1) Master Circular on Micro-Credit (enacted in 2008)
2) Master Circular on Lending to Micro, Small and Medium Enterprises (MSME)
Sector (enacted in 2008)
3) Master Circular on Lending to the Priority Sector (introduced in 2009)
NGOs and Non-Banking Financial Companies (NBFCs)
1) Indian Trusts Act No. 2 of 1882
2) Charitable and Religious Trusts Act 1920
3) Societies Registration Act No. 21 of 1860
4) Companies Act, 1956, Section 25
5) Master Circular on Fair Practices for NBFCs (adopted in 2009)
6) Each state in India typically has a version of a societies act
Payment Systems:
Primary Regulator:
1) RBI
2) The National Payment Corporation of India (NPCI), under the authority of the
RBI, is responsible for building and consolidating a nationwide payment
system in India.69
69 National Payment Corporation of India (NPCI) http://www.npci.org.in/home.aspx.
40
Primary Laws:
1) Negotiable Instruments Act 1881
2) Payment and Settlement Systems Act 2007
Telecommunication:
Primary Regulator:
1) The Department of Telecommunications
2) The Telecom Regulatory Authority of India (TRAI) is responsible for oversight
of the telecom industry and enforcement of telecom laws.
Primary Laws:
1) The Indian Telegraph Act 1885
2) The Indian Wireless Telegraphy Act 1933
3) The Information Technology Act 2001
4) Mobile Banking Transactions in India Operative Guidelines (introduced in
2009)
Financial Consumer Protection: Consumer protection in India is regulated by both
statutory regulation and monitored by voluntary membership bodies. Key players in
consumer protection include the RBI, the BCSBI and the Indian Banking Association.
Pursuant to RBI circulars, banks have established internal customer service
mechanisms to receive and address complaints in a fair and efficient manner. Where,
in the opinion of the customer, complaints have not been fully or adequately
resolved, the RBI has set up local Banking Ombudsmen, who act as mediators and
arbiters of customers‘ disputes. Also for the resolution of customer disputes, the
Consumer Protection Act 1986 established consumer courts that do not require
consumers to have legal representation in order to press claims, as well requiring
banks to establish internal customer service mechanisms.
Primary Regulators:
1) RBI
2) Central Consumer Protection Council and the State and District Consumer
Protection Councils
3) BCSBI
Primary Laws:
1) Consumer Protection Act No. 68 of 1986
2) RBI Circular on Grievance Redressal Mechanism in Banks (enacted in 2008)
3) RBI Circular on the Use of Business Facilitators and Business Correspondents
(introduced in 2006)
4) Competition Act 2002
5) Prize Chits and Money Circulation Schemes (Banning) Act 1978
6) The Chit Funds Act 1982
The following are applicable to BCSBI member banks:
1) Code of Bank‘s Commitments to Customers (adopted in 2009)
2) Banking Code Rules
41
Interest:
Primary Regulator:
1) RBI
Primary Laws:
1) Indian Moneylenders Act 1918
2) Banking Regulation Act 1949
3) Usurious Loans Act 1918
4) Master Circular on Interest Rates on Advances (enacted in 2007)
E-money: India does not yet have laws governing e-money. Retail banking outlets,
however, have already started introducing the use of e-money. The RBI oversees the
use of e-money.
Competition:
Primary Regulator:
1) The Competition Commission
Primary Laws:
1) Competition Act 2002
2) Competition Commission Act 2005
3) Essential Commodities Act 1955
Consumer Business Information:
Primary Regulator:
1) RBI
Primary Laws:
1) The Prevention of Money Laundering Act (PMLA) 2002
2) Combating Financing of Terrorism under Unlawful Activities (CFT Prevention)
Act 1967
3) Banking Secrecy Act
Deposit Insurance:
Primary Regulator:
1) DICGC
Primary Laws:
1) Deposit Insurance Act 1961
2) Deposit Insurance and Credit Guarantee Corporation (DICGC) Act 1961
Guarantee Funds:
Primary Regulator:
1) SIDBI
2) The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
Primary Laws:
1) Credit Guarantee Fund Scheme for Micro and Small Enterprises
42
Anti-Money Laundering:
Primary Regulator:
1) RBI
2) The Financial Intelligence Unit, reporting to the Economic Intelligence Council,
which is headed by the Finance Minister
Primary Laws:
1) The Prevention of Money Laundering Act (PMLA) 2002
2) Combating Financing of Terrorism under Unlawful Activities (CFT Prevention)
Act 1967
3) Master Circular on Know Your Customer Norms/Anti-Money Laundering
Standards/Combating of Financing of Terrorism Obligations of Banks Under
PMLA of 2002 (introduced in 2009)
43
Annex II- Form of Complaint (to be lodged) with the Banking Ombudsman
(To be filled up by the Complainant)
To:
The Banking Ombudsman
Place of BO‘s office……………………………
Dear Sir,
Sub: Complaint against ……………………… (Name of the bank‘s branch) of
………………………………………………………………………………… (Name of the Bank)
Details of the complaint are as under:
1. Name of the Complainant ……………………
2. Full Address of the Complainant ……………………
……………………
……………………
Pin Code ……………………
Phone No/ Fax No. ……………………
Email ……………………
3. Complaint against (Name and full address of the branch/bank)
……………………
……………………
Pin Code ……………………
Phone No. / Fax No. ……………………
4. Particulars of Bank or Credit card Account (If any)
…………………………………………………………………………
5. (a) Date of representation already made by the complainant to the bank
(Please enclose a copy of the representation)
………………………
(b) Whether any reminder was sent by the complainant? YES/NO
(Please enclose a copy of the reminder)
………………………
6. Subject matter of the complaint (Please refer to Clause 8 of the Scheme)
……………………………………………………………………………………………………………………
7. Details of the complaint:
(If space is not sufficient, please enclose separate sheet)
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
8. Whether any reply (Within a period of one month after the bank concerned
received the representation) has been received from the bank? Yes/ No
(If yes, please enclose a copy of the reply.)
44
9. Nature of Relief sought from the Banking Ombudsman
………………………………………………………………………………………………
(Please enclose a copy of documentary proof, if any, in support of your claim.)
10. Nature and extent of monetary loss, if any, claimed by the complainant by way
of compensation (please refer to clauses 12 (5) & 12 (6) of the Scheme)
Rs. …………………
11. List of documents enclosed:
(Please enclose a copy of all the documents.)
12. Declaration:
(i) I/We, the complainant/s herein declare that:
a) The information furnished herein above is true and correct; and
b) I/We have not concealed or misrepresented any fact stated in the above
columns and in the documents submitted herewith.
(ii) The complaint is filed before expiry of period of one year reckoned in
accordance with the provisions of Clause 9(3)(a) and (b) of the Scheme.
(iii) The subject matter of the present complaint has never been brought before
the Office of the Banking Ombudsman by me/ us or by any of the parties
concerned with the subject matter to the best of my/ our knowledge.
(iv) The subject matter of the present complaint has not been decided
by/pending with any forum/court/arbitrator.
(v) I/We authorise the bank to disclose any such information/ documents
furnished by us to the Banking Ombudsman and disclosure whereof in the
opinion of the Banking Ombudsman is necessary and is required for redressal
of our complaint.
(vi) I/We have noted the contents of the Banking Ombudsman Scheme, 2006.
Yours faithfully,
(Signature of Complainant)
Nomination — (If the complainant wants to nominate his representative to appear
and make submissions on his behalf before the Banking Ombudsman or to the Office
of the Banking Ombudsman, the following declaration should be submitted.)
I/We the above named complainant/s hereby nominate
Shri/Smt…………………………………………………………… who is not an Advocate and whose
address is …………………………………………………………………………………………………………………………
as my/our REPRESENTATIVE in all proceedings of this complaint and confirm that
any statement, acceptance or rejection made by him/her shall be binding on me/us.
He/She has signed below in my presence.
ACCEPTED
(Signature of Representative)
(Signature of Complainant)
Note: If submitted online, the complaint need not be signed.
45
References
Banking Regulation Act 1949 (India).
Central Intelligence Agency (CIA), The
World Factbook: India
https://www.cia.gov/library/publicatio
ns/the-world-factbook/geos/in.html
CGAP (Consultative Group to Assist the
Poor), Consumer Protection Policy
Diagnostic Report: India 2010.
Clinton Global Initiative, Annual
Meeting Special Session: Profiting from
the Poor? A Discussion on Microfinance
IPOs (2010)
http://www.clintonglobalinitiative.org/
ourmeetings/2010/meeting_annual_m
ultimedia_player.asp?id=83&Section=
OurMeetings&PageTitle=Multimedia
summarized at
http://www.clintonglobalinitiative.org/
ourmeetings/2010/pdf/session_summa
ries/Tuesday,%20Microfinance%20SS
%20Summary.pdf
The Constitution of India.
Credit Information Bureau India
Limited (CIBIL), FAQs,
http://cibil.com/faqs.htm
Indian Banks‘ Association,
http://www.iba.org.in/model_depositp
olicy.asp
Indian Contract Act 1872 (India).
Indian Registration Act 1908 (India).
A. Kazmin, ―Microfinance warns of
collapse over credit freeze‖, Financial
Times, 26 October 2010.
E. Kinetz, ‖Indian microfinance warns
of crisis after suicides‖, The Associated
Press, 28 October 2010.
E. Kinetz, ‖SKS Launches India's First
Microfinance IPO‖, The Associated
Press, 28 July 2010.
P. Krar and R. Kumar, ‖RBI puts
microfinance players on notice‖,
Economic Times, 16 October 2010.
G. Mathew, ―We are okay with new
microfinance regulator: RBI‖, Indian
Express, 1 November 2010.
Negotiable Instruments Act 1881
(India)
Ministry of Finance, Government of
India, Economic Survey 2001-2002.
Reserve Bank of India, The Banking
Ombudsman Scheme 2006.
Reserve Bank of India, The Banking
Ombudsman Scheme 2006, Annual
Report 2008-2009.
Reserve Bank of India, Circular on
Financial Inclusion by Extension of
Banking Services - Use of Business
Correspondents 2009.
Reserve Bank of India, Circular on
Financial Inclusion by Extension of
Banking Services - Use of Business
Correspondents (amendment) 2010.
Reserve Bank of India, FAQs
http://www.rbi.org.in/scripts/FAQDispl
ay.aspx
Reserve Bank of India, Guidelines on
Fair Practices Code for Lenders, 6
March 2007
Reserve Bank of India, Master Circular
- Fair Practices Code 2009.
Reserve Bank of India, Non-Bank
Financial Companies in India (2001).
Reserve Bank of India, Report of the
Task Force to Study the Cooperative
Credit System and Suggest Measures
for its Strengthening (2000).
46
A. Roy and S. Shankaran, ―RBI permits
corporations to work as rural agents of
banks,‖ Mint, 29 September 2010, 1.
Sa-Dhan, Existing Legal and
Regulatory Framework for the
Microfinance Institutions in India:
Challenges and Implications, (2006).
Specific Relief Act 1963 (India).
Transfer of Property Act 1882 (India)
47
COLOMBIA COUNTRY REPORT
Matteo Mandrile*
(Microfinance Research Officer, International Development Law Organization)
Emilio Garcia Rodriguez*
(Associate Professor, Universidad Sergio Arboleda; Director, Emilio García Abogados
Asociados)
Daniel Mauricio Alarcón Lozano
(Legal Director, CREDIVALORES – CREDISERVICIOS)
1. Introduction
In Latin America, consumer protection has become a central topic of debate as the
microfinance industry continues to grow in terms of clients and products. In 2009,
under its ―Legal Empowerment Program‖ financed by the Bill & Melinda Gates
Foundation, IDLO identified the need to increase awareness of principles which
protect consumers' rights in the microfinance industry and to promote the
implementation of these principles. This document summarizes the results of the
research work conducted in Colombia in collaboration with Universidad Sergio
Arboleda.
Over the last decade in Colombia, new public policies and regulations have been
adopted to raise levels of access to credit and to strengthen financial consumer
protection. Before 2009, protection mechanisms for financial consumers were
derived from regulations contained within the Organic Statute of the Financial
System, various regulatory decrees and Circulars of the Financial Superintendence.
After the enactment of Law 1328 of 2009, a comprehensive framework of consumer
rights and obligations for financial entities supervised by the Financial
Superintendence was established, including regulations on the minimum information
that should be provided to consumers, the prohibition of abusive clauses, procedures
for resolving complaints and penalties.
The analytical research summarized in this report was intended to test whether the
regulatory framework and its practical application to microfinancial entities'
relationships with consumers provide adequate protection in the pre- and post-
contractual stages. The research also assessed whether collection practices
implemented by the institutions that offer microfinance provided adequate consumer
protection. To these ends, IDLO conducted surveys and interviews with three
The authors want to thank IDLO and the Business School of Universidad Sergio Arboleda for their
support throughout our research. We want to extend special thanks to Dr. Luis Angel Madrid Berroteran, professor at Universidad Sergio Arboleda, for translating the research into English. Finally, we thank all the stakeholders interviewed during the field research, who provided strong support for this project; this research would have been impossible without them. Notably, among the microfinance institutions managers and officials were: Rafael Fernando Orozco Vargas and Andrés Mauricio Novella of Bancamía; Orlando Toro Maldonado of Banco Caja Social Colmena; Alejandro Mosquera Arbeláez of Bancolombia; Jorge Luis Mayans of ProCredit; Efrén Lozano of Banco Agrario de Colombia; Mauricio Osorio of Crezcamos; Daniel Meléndez and Maria del Carmen Salas of FinAmérica; Miriam Paredes of Oportunidad Latinoamérica Colombia; James Javier Saavedra of FMM; and Manuel Olaga of FMM Bucaramanga. Among the Judges were: Elber Narango, Alba Lucía Goyeneche, Diego Fernando Salas, Esteban Vargas Benavides, and Martha Inés Díaz Romero.
48
different stakeholder groups: microfinance institutions (bank and non-bank), clients,
and the judiciary.
The research found that microfinance consumer protection regulations made
adequate provision for the protection of consumers and that the supervisory
infrastructure appears to be adequately resourced. However, in some instances,
debt-collection practices failed to comply with rules or policies because some staff
members who manage customer relationships lacked knowledge of written rules and
policies.
Overall, it is important to highlight that the regulatory framework is applicable only
to supervised financial institutions. It does not apply to non-bank financial
institutions, which are not supervised even though they play an important role in the
provision of microcredit. Thus, non-bank financial institutions are not subject to
requirements relating, for example, to minimum contractual content, abusive
clauses, permissible collection practices or dispute resolution mechanisms.
Consumer protection can only be achieved when financial institutions provide
consumers with relevant, clear and timely information, and when consumers who
consider that a financial entity has treated them unfairly have access either to the
courts or to effective alternative dispute resolution systems. This paper‘s conclusion
includes some operational suggestions and regulatory proposals to respond
effectively, efficiently and economically to the needs of Colombian microfinance
consumers, especially when dealing with non-regulated financial institutions.
2. Protection of the Financial Consumer in Colombian Legislation and
Regulation
2.1 Consumer Protection in Colombia’s Financial Services Sector
Since 2000 in Colombia, important changes were made in how public policies are
developed, strategies are implemented, and regulations are issued to increase credit
access levels and to strengthen consumer protection laws for financial consumers.1
To place the principal characteristics of relevant institutional and normative
frameworks in context and to explain the level of consumer protection in Colombia‘s
financial services sector, it is important to describe the sector‘s main regulatory and
supervisory public authorities. Two executive branch institutions regulate Colombia‘s
financial services sector: the Ministry of Finance and Public Credit (Ministerio de
Hacienda y Crédito Público or ―MHCP‖), which draws-up credit policies, regulates the
financial industry based on congressional laws and directly intervenes in the financial
sector in accordance with its constitutional powers, and the Superintendence of
Finance of Colombia (Superintendencia Financiera de Colombia or ―SF‖), which has
the mandate to develop constitutional functions assigned to the President regarding
the supervision of the ―management, use and investment of funds raised from the
public.‖ Its purpose is to maintain stability and public trust in the sector. The
Congress, for its part, is responsible for passing laws that regulate financial
activities.2
1 Laws 590 of 2000, 1151 of 2007 and 1328 of 2010 and Decrees 2233 of 2006 and 4590 of 2008. 2 In Colombia, Financial Law is formed from a set of constitutional, legal and administrative regulations applied to financial institutions. The finance system is made up of financial intermediaries, the stock market, insurance companies, and authorities involved in financial markets, such as the Ministry of
49
The key players channelling microcredit resources in Colombia include banks and
financial cooperatives, which are regulated by the Financial Superintendence. In
addition, there are financial institutions or financial cooperatives (other than banks),
which are entities that are not authorised by law to take deposits from the public and
are therefore not regulated by the Financial Superintendence.
Figures consolidated as of May 2010 as part of the government program ―Banca de
las Oportunidades‖ (the ―Opportunity Bank‖) show that non-bank financial
institutions earn double the number of microcredit investments equivalent to less
than 25 times the legal monthly minimum wage (LMMW)3, compared to controlled
financial entities. For loans between 25 and 1204 times the LMMW, controlled banks
make more investments.5
As far as microfinance regulation is concerned, some incentives to encourage loans
to micro, small and medium-sized enterprises (in Spanish, MIPYMEs) are noteworthy.
Law 590 of 2000 defines microcredit as ―the MIPYME funding system,‖ and grants
benefits to financial intermediaries and ―organisations specialised in MIPYME
financing‖ that channel resources for loans of less than 25 times the LMMW. The law
authorises them to charge fees and commissions of either 7.5 percent or 4.5
percent6, depending on whether the loan is below or above four times the LMMW, to
compensate any additional costs. Decree 919 of 2008 defines microcredit as a loan
granted to a MIPYME whose global debt does not exceed 120 times the LMMW, and
whose total outstanding loans from the same financial institution are not worth more
than 25 times the LMMW.
For purposes of this research, the term ―microcredit‖ is not used in the strictly legal
sense explained above. Instead, the term ―microcredit‖ will be used in a broader
manner to refer to a financial product offered by banking and non-banking
institutions to different borrowers, including MIPYMEs in the informal sector. This
type of microcredit requires specialised management from the lending institution to
provide ongoing support and advice on finance matters, and a personalised banking
relationship with clients.
Regulations have been issued that allow the provision of financial services through
agents called non-bank correspondents (―Corresponsales no Bancarios‖).7 These
regulations created a new class of savings accounts called electronic savings
accounts (―Cuentas de Ahorro Electrónicas‖). In this regard, in July 2007, Congress
enacted Law 1151, which included the National Development Plan for the presidential
period 2006-2010. Article 70 of this law states that one of the government‘s main
objectives was to allow the ―low income sector‖ access to banking services. It thus
called for the implementation of low-cost savings accounts, exempt from the
compulsory investment requirement, and created incentives for financial institutions
to offer such products.
Finance and Public Credit, the Bank of Colombia, the Financial Superintendent‘s Office and the Financial Institutions‘ Guarantee Fund. 3 Law 590, Article 29. Approximately $7,100 in 2010. 4 Approximately $34,200 in 2010. 5 See http://www.bancadelasoportunidades.gov.co/contenido/contenido.aspx?catID=300&conID=690. 6 Superior Council of Microenterprise (Consejo Superior de Microempresa), Resolution 01, 26th April 2007. 7 Decree 2233 of 2006.
50
In addition to allowing entities to charge loan fees on top of interest fees (which are
subject to legal limits)8, other policies have been implemented to improve the access
of low-income populations to financial services. These include centralising policies on
financial inclusion in the Opportunities Banking Investment Program (Banca de las
Oportunidades)9 and the creation of microcredit rediscount lines.10
2.2 Financial Consumer Protection: A Legal and Regulatory Overview
The Colombian regulatory framework to protect financial consumers seeks to
improve consumer confidence in the sector, by ensuring that they receive sufficient,
timely and accurate information and feedback on any complaints they may lodge. It
also provides protection against: fraud; lack of diligence or misrepresentation of
services on the part of financial entities offering the loan products; misleading
advertising; and abuse of financial institutions' position of power.
Before 2009, protection mechanisms for financial consumers came from regulations
contained within the Organic Statute of the Financial System, various regulatory
decrees and Circulars of the Financial Superintendent‘s Office.11 Law 1328 of 2009
introduced a new level of protection for financial consumers, with two main
components: the ―Defender of the Financial Consumer‖ and the ―System for
Attending to the Financial Consumer (SAFC).‖ The former is responsible for resolving
complaints and conflicts between financial entities and their clients (that the financial
entity fails to resolve to the satisfaction of the client), and serving as a mediator to
ensure the just application of legal and contractual regulations. The SAFC imposes
requirements on financial institutions with regard to establishing policies aimed at
protecting consumers. In addition, the Financial Superintendent‘s Office has a
Consumer Protection Directorship, which coordinates the implementation of public
policy and the monitoring of tools used by financial entities to adequately address
their clients‘ needs. The recent regulations laid down in Decree 2555 of 2010 also
help to promote the legal rights of financial consumers.
For supervised financial institutions and their clients, Law 1328 of 2009 established a
series of consumer rights, special obligations of the entities, and the minimum
information that should be provided to consumers. Additionally, it also introduced a
series of consumer obligations, known as ―Self-protection practices on the part of the
financial consumer.‖ Although the consumers‘ failure to follow these obligations does
not entail the loss of any of their rights, these practices are an important element of
consumer protection.
In addition, Law 1328 of 2009 prohibited abusive clauses in financial contracts and
abusive practices that threaten the consumers‘ interests. The law established a list of
unfair terms and practices in relationships between financial entities and consumers.
The following are considered abusive clauses:
8 Law 590, Article 39. 9 Decree 3078 of 2006. 10 Law 1328, Article 38. 11 Among other regulatory decrees, noteworthy are Decree 690 of 2003 and Decree 4759 of 2005, concerning the so-called ―Client Defender‖, which is available for clients of financial entities controlled by the Superintendence of Finance. Legal Basic Circular 7 of 1996, Chap. VI, modified by External Circular 15/2007. Since the enactment of Law 1328 of 2009, the ―Client Defender‖ has been renamed ―Defender of the Financial Consumer‖ (see section 1.4).
51
Limiting or removing the exercise of financial consumer rights;
Shifting the burden of proof to the detriment of the financial consumer;
Leaving blank spaces in the contracts, unless there is a detailed letter of
instruction to complete these; and
Limiting the contractual rights of financial consumers and the duties of
controlled entities, or exonerating, mitigating or limiting the responsibility of
such entities in a manner that will be detrimental to the financial consumer.
The Financial Superintendent‘s Office is at liberty to add other abusive clauses to this
list or to define new practices as abusive. Law 1328 of 2009 also ruled that abusive
clauses in a contract are void as far as the financial consumer is concerned.
The following are considered abusive practices:
Conditioning financial consumers by encouraging them to use, or invest in,
products or services directly provided by the supervised MFI or by its affiliate
institutions, which are not necessary for the loan;
Initiating or renewing a service without the request or explicit authorisation of
the consumer; and
Shifting the burden of proof in cases of fraud to the financial consumer.
If an MFI undertakes an abusive practice, the Financial Superintendent‘s Office can
sanction the MFI and order it to refrain from undertaking the practice.
Colombia lacks specialised courts or judges for resolving financial disputes or for
protecting the rights of financial consumers. Similarly, there are no small case judges
for such disputes, only for resolving criminal matters. Consequently, only ordinary
judges (municipal judges, circuit judges, court judges and Supreme Court judges)
have the jurisdiction to resolve disputes between financial entities and their
consumers. This takes place without prejudice to extra-judicial proceedings, which
may be taken to the Defender of the Financial Consumer. The Defender‘s decisions
are not legally binding for the financial entity, unless the entity has adopted them as
binding in its policies or unless this has been explicitly agreed in advance with the
client.
2.3 Consumer Protection in Transactional Regulation
2.3.1. Financial Contracts
Contracts used by regulated financial entities must be clear and comprehensible and
must be available for prior reading and acceptance by consumers. Such documents
should contain the terms and conditions of products and services, the rights and
duties of both parties, the interest rate, fees or commissions charged, and how these
are determined.12
Financial entities must provide consumers with a loan repayment plan, which sets
out the exact value of each payment, together with the split between repayment of
the principal and interest. This is consistent with Basic Legal Circular, Title II,
Chapter 1, Numeral 1.1.1.(h)(9) which states: ―When the nature of the loan means
that the total payments, including principal and interest, can be established, the
entity will provide the client with a payment projection. This clearly establishes how
the loan will be repaid, distinguishing capital and interest in each of the payments.‖
12 Law 1328, Article 7.
52
Financial services contracts do not need to be registered to be binding. However, real
estate collateral contracts, such as mortgages, do need to be registered for
completion.13 The regulations do not impose any restrictions based on gender or
education, though they do provide that minors under the age of 18 may not enter
into financial services contracts.14
The Financial Superintendent‘s Office must approve the standard contracts used by
regulated MFIs and, where contract clauses are not clear, the latter are interpreted
in favour of the financial consumer. The Financial Superintendent‘s Office also
requires regulated institutions to publish the contracts on their websites and to
provide clients with the following:
Background information to permit proper comparison with other options
available in the market.
The consequences of breaching a contract (through failure to make payments,
late payments, etc.), Law 1328, Article 9.
Reference to the existence of the Defender of the Financial Consumer, Law
1328, Article 7 (a). Regulated MFIs should also state whether they accept the
Defender‘s decisions as binding, and the range and types of complaints to
which this applies.
Following the conclusion of the contract, financial institutions must notify the
customer before making any changes in the contract‘s conditions. If they fail to do
so, the financial consumer may cancel the contract unilaterally without any sanctions
or penalties.15
There are no specific financial sector regulations that exempt consumers from
payment obligations in cases of force majeure (such as serious illness or other
circumstances). However, any dispute over contractual imbalance should be treated
as covered by the Trade Law, which would lead to the review of the contract due to
unforeseen circumstances after completion.16
Finally, the debtor can possibly invoke corporate insolvency mechanisms, which aim
to restore and protect the enterprise as an economic entity through reorganisation
and judicial liquidation, permitting the normalisation of credit relations through the
payment of obligations or liquidation of assets.17
2.3.2. Credit Conditions
Regulations set limits for individual credit transactions made by financial institutions.
In general, when a credit transaction does not include a guarantee other than the
borrower's equity, the financial institution cannot lend more than 10 percent of the
latter‘s equity. If there is a guarantee admissible under current regulations, loans of
up to 25 percent of the lender‘s equity may be made.18 However, if the loan
13 Colombian Civil Code, Article 2434. 14 Colombian Civil Code, Article 1504 and Law 27 of 1977. 15 Law 1328, Article 10. 16 Commercial Code, Article 868. 17 Law 1116 of 2006. 18 Decree 2360 of 1993.
53
applicant owns more than 10 percent of the financial institution‘s shares, credit
transactions are prohibited.19
Regulated limits on interest rates that may be charged on loans indicate another
mechanism of financial consumer protection. The interest charged can only be up to
1.5 times the Current Bank Rate (Interés Bancario Corriente or ―IBC‖), certified by
the Superintendence of Finance for the corresponding period. If no interest rate is
stipulated in the contract, then the IBC applies. If the borrower defaults, the creditor
cannot charge interest in excess of 1.5 times the interest rate specified in the
contract, and in any case it cannot exceed 1.5 times the IBC. An interest charge
above this rate is considered the crime of usury.20 The law states that any
commission or fee charged shall be deemed as interest.21
2.3.3. Guarantees
Regulations establish the conditions required for contracts to serve as records of
loans granted by regulated financial institutions. Regulations state that the loans
must be backed by collateral worth the value of the loan. Several guarantees are
accepted: mortgages, security schemes, cash deposits, trust funds or guarantees
granted by companies that have shares in the stock market, etc.22
Since the regulations do not stipulate additional limitations on guarantees, financial
institutions may or may not choose to hold the collateral. When the creditor decides
to hold the collateral, it will then incur depreciation expenses. In any instance of
default, the lending institution must pursue judicial proceedings in order to sell the
collateral and cover the debt.
The Financial Superintendent‘s Office stipulates that financial institutions must have
a Credit Risk Management System (CRMS). Controlled institutions must keep records
of loan guarantees in order to mitigate the risk of economic loss in the event of
default, among other reasons.
2.3.4. Savings Deposits
With regard to savings, financial institutions are obliged to provide consumers with
regular information on the funds deposited. Consumers are free to transfer their
savings between institutions. There are no regulations limiting the fees that financial
institutions may charge for opening and managing accounts. Savings accounts must
not be overdrawn. For checking accounts with an approved overdraft, the institution
may charge overdraft interest up to the maximum default interest calculated on the
amount of overdraft. It is illegal to charge fees for failure to maintain a minimum
account balance.
Savings deposits are insured by the Financial Institutions‘ Guarantee Fund (Fondo de
Garantías de Instituciones Financieras or ―FOGAFIN‖). The Fund‘s main objective is
to promote depositors' confidence in the financial system. It offers a guarantee on
deposits up to 20 million Colombian pesos (COP) per depositor23, for each financial
institution registered with FOGAFIN.
19 Decree 1886 of 1994. 20 Commercial Code, Article 884. Modified by Law 150 of 1999. Criminal Code, Article 305. 21 Law 45 of 1990, Article 68. 22 Decree 2360 of 1993. 23 $10,960 in August 2010.
54
2.4 Consumer Protection in Non-transactional Regulation
The Congress and the country‘s regulatory and supervisory bodies have recently
issued a series of standards relating to credit risk analysis, the advertising of
financial products and the treatment of customer information by financial institutions
and their agents (known as non-bank correspondents or ―corresponsales no
bancarios‖). These are mandatory standards only for entities supervised by the
Financial Superintendent‘s Office and do not apply to non-bank entities. Although
this difference between supervised and unsupervised institutions could be deemed
unfavourable to the customers of non-bank entities, in practice it has had a positive
impact on the development of microfinance in Colombia.24
2.4.1. Credit Risk Analysis
The principal objective of the mandatory standards is to protect the deposits received
from the public, through regulations which relate to the means by which public
savings are captured and the financial institutions that capture them. The regulations
do not apply to non-bank entities that offer financial products (such as loans) but are
not authorized to take deposits.
Regulations on loans made by financial intermediaries seek to ensure that credit is
granted only to individuals with sufficient financial stability to pay them back, thus
preventing excessive financial risk-taking with consumers‘ deposits. As for
institutions that do not take deposits from the public, they only need to comply with
regulations regarding the maximum interest rate.
Financial institutions are required to undertake a credit risk analysis using various
documents submitted by the client. Colombia‘s Tax Code stipulates that, when
granting loans, financial intermediaries must look carefully at the Declaration of
Income or Certificate of Income and Withholdings, and use this to clearly establish
the applicant's income level in the previous year.25 In practice, this limits the ability
of financial institutions to offer financial products to people who may have enough
income to meet credit obligations, but who cannot prove it due to informal work
activities. The same rules do not apply to unsupervised entities offering loans or
micro-loans, because they are not obliged to base their risk analysis on such
documents.
The Financial Superintendent‘s Office also stipulates that financial institutions must
check their loan applicants‘ credit history. However, given the difficulties in accessing
the financial system for the first time, the vast majority of poor people accept loans
from family, friends or institutions (often at rates above the usury limit) to finance
their businesses, and as a result, they often have not established a credit history.
Nonetheless, the absence of a formal credit history does not mean that informal
businesses cannot obtain funding from a regulated entity. In practice, MFIs deem a
borrower‘s non-appearance in a credit bureau database as a higher risk factor that
lowers the applicant‘s credit rating. This, in turn, leads financial institutions to set
aside more capital during the loan period. Since this can be costly, financial
24 This point on the development of microfinance in Colombia is analysed in more detail in the Conclusion section. 25 Article 620, Tax Code; Article 120, paragraph 1, Organic Statute of the Financial System (―Estatuto Orgánico del Sistema Financiero‖).
55
institutions usually transfer that cost to the client through interest rates that are
higher than what their most creditworthy clients are charged.
The regulation regarding the treatment of database information does not limit the
type of data that can be stored: other than number of loans, borrowing behaviours,
instances of default, etc., credit bureaus can hold additional information associated
with a borrower‘s ability to pay. It may include information that is not related to
strictly financial matters, such as borrowers‘ previous behaviour in paying utility bills,
the purchase of mobile telephones or the receipt of government subsidies. This
information can be used by financial institutions to conduct credit risk analyses,
focusing on financial and non-financial records of potential customers. The Habeas
Data Law26 lays down comprehensive principles regulating the processing, storage
and publication of such information, mainly referring to the veracity and restricted
circulation of data. It also stipulates that the information should be handled securely
and published within specified time limits.
2.4.2. Non-bank Correspondents
Since 2006, the Colombian Government has been working hard to increase the
financial system‘s coverage. This process has been led by the government program
―Banca de las Oportunidades,‖ which has among its objectives the presence of a non-
bank correspondent in each of the country‘s 1,100 municipalities. At present, there
are active non-bank correspondents in more than 315 municipalities previously
without any provision of formal financial services. This leaves fewer than five
municipalities without formal financial coverage. Non-banking correspondents mainly
serve lower income citizens.
It is important to note that when financial institutions make the decision to expand
their networks through non-bank correspondents, they must take the necessary
technological and security measures to ensure that transactions made by such
means are recorded in real time, minimising the risk of fraud. Financial institutions
must compensate consumers for any losses they have incurred as a result of fraud or
error.
The regulations that apply to financial products which are sold through non-bank
correspondents are the same as those applying to institutions supervised by the
Financial Superintendent‘s Office. Consumer protection regulation, especially
provisions contained in recent financial reform (Law 1328 of 2009), stipulates that
clients and potential clients should receive clear, correct and concise information on
the conditions pertaining to financial products. As for advertising, financial
consumers must receive standardised information so that they are able to compare
the costs and terms of the products of different institutions.
2.5 Supervision and Enforcement
The current regulatory framework in Colombia provides several safeguards against
unfair treatment by regulated financial institutions of their clients. As mentioned
above, some of these safeguards (namely the Defender of the Financial Consumer
and the Financial Superintendent‘s Office) do not apply to clients of non-regulated
entities, which are used mostly by low-income customers. Customers of these
26 Law 1266 of 2008.
56
institutions can enforce their rights only through ordinary courts, in which the
procedures are long, complicated, and often costly.
In summary, to resolve their disputes with the MFI, clients of a regulated entity have
four possible avenues available to them:
The financial institution itself, which is obliged to respond to consumer
complaints;
Under state supervision, the Financial Superintendent‘s Office;
Ordinary courts; and
The Defender of the Financial Consumer which, despite being paid by the MFI,
must by law be objective in its decisions.
Unfortunately, these mechanisms are limited. The processing of complaints by the
―Defender of the Financial Consumer‖ (even though handled in a swift and timely
manner), as well as the ultimate decision made by the Defender, is not mandatory
unless the MFI has voluntarily opted for it in its policies. As mentioned earlier,
regulated MFIs should also state whether they accept the Defender‘s decisions as
binding, and the range and types of complaints to which this applies.
The Financial Superintendent cannot order a financial institution to compensate a
consumer, because this falls within the exclusive jurisdiction of the judges. Having
said that, its intervention in cases of abusive practices encourages MFIs to solve
problems directly with customers. This is because the Financial Superintendent‘s
Office supervises regulated institutions and has the power to impose penalties
ranging from warnings to monetary fines. This thus encourages financial institutions
to resolve a consumer‘s complaint or problem, because the Superintendence‘s
penalties depend on the attitude of the financial entity in attempting to resolve its
problems with clients.
In summary, for a consumer to obtain a decision which obliges a financial institution
to provide payment or compensation for damages, the intervention of a judge is
needed. However, as already stated, the judicial process for settling claims is slow.
There are only a small number of relevant criminal offences. These relate, in
particular, to banking secrecy violations, excessive charging of interest, and
improper handling of customer information.
3. Field Research
3.1 Methodology – Research Design
The analytical process of research was intended to test the following hypothesis: the
regulatory framework and its practical application in the consumer-MFI relationship
provides adequate protection in the pre- and post- contractual stages, as well as in
the debt-collection processes.
To test this hypothesis, the research focused on five broad areas:
1. The relevant regulatory framework for the Colombian financial system,
including consumer protection;
2. Possible gaps in the regulatory framework in relation to international
obligations or ―accepted international practice‖;
57
3. The effective application of the regulatory framework;
4. The most important areas in which practices are incompatible with the law;
and
5. The factors that appear to underlie each major problem.
Table 1. Research Questions and Methodological Tools
Research Questions
Methodological tools
Regulatory Framework — what standards of
performance are expected?
What are the legal requirements governing
lending by MFIs, particularly in relation to
protection of consumers in the contracting,
dispute resolution, and debt recovery
processes?
Literature Review
Stakeholder
Interviews
Are there any gaps in the regulatory
framework in relation to international
obligations or ‗accepted international
practice‘?
Desk analysis
Stakeholder
Interviews
Current Practice — what standards of
performance are being delivered?
To what extent are current practices
consistent with legal requirements (or ‗good
practice‘ more generally)?
Literature Review
Stakeholder
Interviews
Borrower Survey
What areas of inconsistency are most
significant?
Literature Review
Stakeholder
Interviews
What factors underlie each major problem? Literature Review
Stakeholder
Interviews
To answer these questions and focus on the highlighted areas, IDLO and its local
counterpart, Universidad Sergio Arboleda, conducted surveys and interviews with
three different stakeholder groups: MFIs, clients, and the judiciary. Interviews were
conducted in a consistent manner over a specified time period, and all researchers
used the appropriate techniques taking into account the information to be collected
and the Colombian context.
Structured interviews (surveys) were conducted with consumers. In these surveys, a
list of predetermined questions was asked to which the respondent could not provide
responses beyond those offered. For MFI employees and judges, semi-structured
interviews with open questions were utilised.
58
To begin, managers and loan officers of 10 MFIs were interviewed.27 They answered
a 12-question survey, which was aimed at providing an understanding of the
development of the entity-client relationship in five key areas: the assessment of the
ability to repay and the protection of clients against over-indebtedness; calculation of
the applicable interest rate, as well as the information on credit terms provided to
the client; debt-collection practices and internal policies on them; the mechanisms to
address customers complaints; and how information about individual consumers is
stored and used.
The interviews targeted both managers and loan officers in order to assess whether
regulatory requirements, together with the consumer protection policies of each
institution, are effectively applied to the customer. In addition, the interviews also
tried to assess whether each category of staff is sufficiently familiar with these
regulations and policies. The outcome was that some gaps between MFI policies and
their implementation by staff became apparent, as will be discussed in the
conclusion.
After conducting these interviews, 100 customers of the 10 sample institutions were
surveyed to learn first-hand about their perceptions of the issues mentioned above.
The surveys included these questions:
a) How do customers become aware of financial products and services offered by
MFIs?
b) What documents are required in order to obtain credit?
c) Are contractual terms and conditions clear? Do customers have the
opportunity to check and understand them and do they keep a copy of the
contract?
d) What are the consequences of late payments, collection practices, the use of
refinance instruments, insolvency, default or bankruptcy mechanisms?
Finally, the research also included surveying five judges to determine the precise
scope of disputes between financial institutions and their clients in areas such as:
Issues that regularly come before the courts;
Possible causes of delay in legal processes;
Issues relating to the appearance in court of financial clients as lawsuit
defendants;
Causes of lawsuits launched by customers;
Their views on the content of financial contracts, together with possible gaps.
In the sections below, field research results are divided and presented by different
categories of stakeholders.
3.2 Microfinance Institutions (MFIs)
Ten financial institutions were selected to build a sample with different legal status
(banks, foundations, NGOs) and relevant market share.
For each MFI, at least two employees were interviewed: a credit officer and a
manager (or a legal advisor with a comprehensive knowledge of the credit
27 The study involved six MFIs regulated by the Superintendence of Finance and four unregulated non-profit institutions. See Table 2 ―Sample of MFIs‖.
59
application process). In each of the entities, loan contracts, together with other
documents which were commonly provided to the customer, were reviewed.
Table 2. Sample of MFIs28
MFIs Gross Loan Portfolio (in
Millions of USD)
Number of
Active
Borrowers
Regulated
Bancamía 240.7 285,765
Bancolombia Microfinanzas 28.5 28,665
Banco Caja Social Colmena 2,507.7 976,229
ProCredit – Colombia 42.3 10,700
FinAmérica 80.3 42,575
Unregulated
Crezcamos 6.3 8,148
Women's World Banking Cali 229.1 179,701
FMM Popayán 203.9 293,079
Oportunidad Latinoamerica
Colombia
1.2 6,406
Source: MIX Market, 2009
Based on the interviews conducted using the methodology described above, it
appeared clear that the most common microfinance product in the Colombian market
is individual credit for working capital or fixed asset acquisition.29 Two organisations
offer a form of collective or group credit that consists of providing loans to a number
of micro-entrepreneurs for a joint productive project, where each borrower is jointly
liable.30
3.2.1. Assessment of Client‘s Ability to Repay
All entities explained that they carry out a preliminary analysis of the customers'
credit history through information provided by credit bureaus, but they pointed out
28 The nine MFIs listed in Table 2 report their data to the Microfinance Information Exchange, Inc. (MIX), which is the source of information contained in the table for gross loan portfolios and for active borrowers. Banco Agrario de Colombia, the 10th MFI in the research sample, is not included in Table 2 because it does not report its data to MIX. However, since Banco Agrario de Colombia is a supervised financial institution, the website of the Superintendence of Finance shows some aggregated microcredit figures: in Banco Agrario de Colombia‘s financial statements as of September 2010, the sum of microcredits linked to various types of guarantees accounted for a total of $1,155.4 Million. 29 Under Article 38 of Law 590 of 2000, the Government encourages the establishment of credit lines for the capitalization of micro, small and medium-sized enterprises (in Spanish, MIPYMES), which can be designated for loans and investments. However, as mentioned previously, the concept of microcredit for the purpose of this investigation is broader, with institutions providing loans for other purposes. 30 The public bank Banco Agrario de Colombia, for joint productive projects in the agricultural sector; and the foundation Oportunidad Latinoamerica Colombia, for microenterprise projects.
60
that this is not the sole decisive factor in deciding whether or not to grant a loan.
Taking into account that micro-entrepreneurs often do not keep regular accounts, a
sales adviser usually visits the customer and its premises in order to analyze cash
flows and the cost structure, thereby establishing the client's ability to repay a loan.
Nonetheless, supervised financial institutions still have to require the client to submit
a Declaration of Income or Certificate of Income and Withholdings, as explained in
the non-transactional regulation section (1.3.1.).
3.2.2. Information on Interest Rates and Payments
When they grant credit, financial institutions provide their customers with
information on applicable interest rates and the repayment process. This information
is expressed in nominal and real terms and is accompanied by an amortization plan
that contains the value of each payment, together with the split between repayment
of the principal and interest payments, or any additional fees or charges. This type of
disclosure appears to be particularly appreciated by clients, who indicated that the
amortization plan enables them to understand the main terms of the loan because it
reflects clearly their monthly payments.
3.2.3. Collection Practices
Before granting a loan, MFIs make clear to a borrower the collection practices used
in the event of default; with few exceptions, they also have written debt-collection
principles and policies. Out of 10 entities interviewed, seven reported that they had a
written collection policy and the remaining three claimed to have a collection policy,
though it had not been set down in writing. In our research, financial institutions
supervised by the Superintendence of Finance seemed to have a clearer
understanding of debt-collection behaviors which the Superintendence, in its Circular
N. 48 of 2008, had categorized as acceptable or unacceptable.
3.2.4. Consumer Complaint Mechanisms
Under Colombia‘s regulations, client options for submitting complaints, claims and
petitions are the Defender of the Financial Consumer (for supervised MFIs), free
phone lines, mailboxes located in their premises, attention centres, and web pages,
among others. All institutions interviewed reported that they have written procedures
for the complaint-handling process.
3.2.5. Use of Client Information
Finally, all sample entities use credit bureaus, both for assessing clients‘ ability to
repay and reporting them in case of default. The credit bureau report mechanism is
recognized by the MFIs as a tool which helps to persuade borrowers to repay,
because clients know that failure to do so would affect their ability to obtain credit in
the future. The entities indicated that they do not share customer information.
3.3 Clients
Ten clients were interviewed for each of the sample MFIs. In the overall client
population, 60 percent of consumers were non-defaulting borrowers and 40 percent
were defaulting.
61
Universidad Sergio Arboleda School of Business undertook an initial pilot with a small
group of respondents. Despite a few changes that were made to tailor some
questions for the Colombian financial sector, the pilot showed that questions were
clear and that the correct range of possible answers had been included for each of
them.
3.3.1. Choice of Microfinance Institution
More than 70 percent of microfinance consumers choose their financial institution on
the basis of recommendations from friends or relatives, or following contact with
salespersons. Advertising and other mechanisms have relatively low impact on how
an institution is selected.
Figure 1. Choice of MFI by Non-Defaulting Borrowers
Figure 2. Choice of MFI by Defaulting Borrowers
8.93%
37.50%
37.50%
16.07%
How did you first
hear about the MFI
services?
Advertising Salemen/Sales advisers Friends Other
11.11%
44.44%
27.78%
16.67%
How did you first
hear about the MFI
services?
Advertising Salemen/Sales advisers Friends Other
62
3.3.2. Credit Application Requirements
Clients indicated that MFIs required them to provide identity documents, and that
credit history is normally checked. Some customers claimed that financial institutions
also required documents other than financial statements or work certificates - this is
because micro-entrepreneurs are usually informal workers who do not keep regular
accounting books. Finally, most interviewees agreed that the time between the start
of the loan application process and contract signing did not exceed two weeks.
3.3.3. Knowledge of Contract Terms and Conditions
An overwhelming majority of respondents stated that contractual conditions were
adequately explained when they applied for credit, and only about 5 percent of
defaulting borrowers disagreed with this. Likewise, the vast majority of customers
also stated that they received a copy of the financial contract and were allowed to
keep it.
Figure 3. Contract Delivery to Non-Defaulting Borrowers
Figure 4. Contract Delivery to Defaulting Borrowers
96.36%
3.64% Were you given a
copy of the loan
agreement?
No Yes
85.71%
14.29% Were you given
a copy of the
loan agreement?
No Yes
63
Figure 5. Contract Conservation by Non-Defaulting Borrowers
Figure 6. Contract Conservation by Defaulting Borrowers
Finally, most of the interviewed clients stated that they received sufficient
information from financial institutions about interest rates, loan repayment terms,
MIPYME fees and commissions, and the consequences of late payments. However,
surveys show that there were gaps in the information provided to clients regarding
amendments of contracts, opportunities for redress, ways of expressing
dissatisfaction with the institution, and protection of consumer data. Also, the
information provided by MFIs to clients was not always conveyed in plain language,
i.e., in a manner that is easy for poor people to comprehend, some of whom struggle
with illiteracy.
3.3.4. Consequences of Late Payment
Raising the applicable interest rate and the imposition of collection fees were the
consequences of late payment. According to clients, the most frequently used
87.04%
12.96% Do you still have
a copy of this
contract?
No Yes
52.94%
47.06% Do you still have a
copy of this
contract?
No Yes
64
collection strategies were phone calls, visits (given the personal and relational
character of microcredit), and written communications. On a smaller scale, MFIs
used electronic means such as e-mails and text messages. Collection communication
used by MFIs alerts the debtor to the consequences of a negative report to the credit
bureaus. To a lesser extent, it warns of possible legal actions to secure the collection
and enforcement of the collateral, or seeks additional guarantees.
About 60 percent of customers said they did not receive proposals from the MFIs to
restructure their loans or begin a new payment plan; additionally, 80 percent of the
customers did not request debt restructuring. In this regard, it is important to note
that more than 70 percent of the customers who actually asked for restructuring
received a favorable response from the MFIs.
Figure 7. Loan Restructuring for Defaulting Borrowers: Proposals by MFIs
Figure 8. Loan Restructuring for Defaulting Borrowers: Proposals by Clients
37.14%
62.86%
No Yes
Did the MFI make a
proposal to
restructure the loan
or suggest a new
payment schedule?
20%
80% Did you require
debt
restructuring?
No Yes
65
Figure 9. Loan Restructuring for Defaulting Borrowers:
MFIs’ Answers to Clients’ Requests
Fewer that than 23 percent of defaulting borrowers said that they had asked for debt
relief. They turned to the institution‘s management or to the Defender of the
Financial Consumer for debt relief, and did not use other channels such as
consumers associations, private legal advice or legal assistance. Almost 95 percent
of defaulting borrowers reported that they did not know how to use mechanisms of
bankruptcy or default. Finally, more than 72 percent of clients said that they did not
have problems with the return or release of the guarantee once they had ceased to
be in default.
3.4 Judiciary
Five judges with extensive experience in handling cases of disputes between financial
institutions and customers were selected and interviewed:
Alba Lucia GOYENECHE, Judge Nineteen, Civil Circuit of Bogotá;
Elber NARANJO, Judge Tenth , Civil Circuit of Bogotá;
Diego Fernando SALAS, Judge Thirteen Civil Municipal;
Stephen VARGAS BENAVIDES, Judge First Civil Municipal; and
Martha Ines DIAZ ROMERO, Judge Fourteen Civil Municipal.
3.4.1. Recurring Controversies Between MFIs and Customers
All five judges agreed that collection processes of financial institutions represented
most of the cases brought to their attention. In 95 percent of cases brought by
financial institutions against their customers to recover the loan, the decision is
favorable to the MFI.
Cases where the customer is the claimant are few, and they do not exceed 10
percent of the total volume of disputes that judicial offices receive. Most of the cases
0.00%
28.57%
71.43%
If so, what was
the answer of the
MFI?
An agreement was reached on a new payment schedule or loan
The MFI was open to renegotiate but no agreement was reached
The request of debt restructuring was denied
66
initiated by customers against MFIs involve legal actions to protect the information
reported to credit bureaus, defending the constitutional right of Habeas Data.31 In
this regard, the judges said that the Habeas Data Law had been an appropriate tool
to protect clients from the misuse of information held by credit bureaus as well as
from incorrect reports, or from permitting these reports to be kept beyond the time
indicated by law.
3.4.2. Probable Causes of Process Delay
Unpaid debts are dealt with by Colombia‘s civil courts and processes for collection
(executive in nature) are set by law to last from six months to a year, according to
the established procedure. However, delays are the norm and the main reasons for
the extension of the process, which sometimes lasts up to three years, are the
following:
High number of cases tried before courts.
Multiplicity of legal actions that can be used by parties, most of which can be
appealed.
Legal procedures aimed to make the judicial ruling effective, which involve an
appraisal of the collateral, its auction, and the adjudication of the property to
the bidder or the bank.
The party that initiates the court action assumes the expenses incurred during the
course of the legal proceedings, but the losing party must reimburse the costs after
the announcement of the verdict.
3.4.3. Defence Capability of Financial Consumers
Debtors who lack sufficient funds to pay legal counsel may turn to clinics at
universities‘ law schools, which provide free legal advice; moreover, civil procedure
law allows legal relief on poverty grounds. Therefore, judges may designate a lawyer
to represent the debtor. Over-indebtedness is not a valid defence for debtors to
avoid fulfilling their obligations.
If the debtor does not appear before the court, the judge must designate a legal
representative to ensure that the right of defence is safeguarded. The judges
indicated that in the enforcement (executive) processes, it is often necessary to
publicly summon the defendant and designate a legal representative, as defendants
frequently cannot be located, notified and brought before the court.
According to the interviewed judges, the only instances in which a consumer
defendant appears to be the winning party are those involving prescription of the
legal security. The judges said that evidence admissible to prove payment has to be
documentary (receipt of payment), thereby noting that customers usually have
difficulty providing this kind of evidence because they do not retain such
documentation. However, it is possible to request from the financial institution an
internal record relating to the debtor that could serve the same purpose as other
types of documentary evidence.
31 Law 1266 of 2008.
67
3.4.4. Content and Clarity of Financial Contracts
As for contract content, four out of five judges argued that the large number of
clauses, the size of the letter, and confusing technical language are the main causes
behind low-income clients‘ difficulties in analyzing contracts. Moreover, there is a
perceived structural deficiency due to the nature of contracts of adhesion, as the
clients do not usually read the entire contract because they cannot alter them. In
this respect, they recommended these improvements to the contracts‘ structure:
clearer, simpler and more concise writing; more information on credit conditions;
and a special focus on the applicable interest rates.
Finally, the judges did not notice problems with the effectiveness of collateral and
found them adequate to ensure loans. However, microcredits are often based on
personal guarantees, which are more difficult to enforce because they involve
pursuing guarantors or co-signers who, in most cases, have no assets. However, the
judges interviewed highlighted that under Colombian law, MFIs could pursue assets
of the debtor other than the collateral, as all his assets are considered a "general
guarantee to creditors,‖ subject to the relevant statutory limits relating to garnishing
wages, pensions, etc.
4. Conclusions and Recommendations
4.1 Conclusions
The following concluding remarks are organized into sections that respond to the
issues linked to the main hypothesis, namely that the Colombian regulatory
framework for financial consumer protection and its practical application provides
adequate protection in the pre- and post- contractual stages and in debt-collection
processes.
4.1.1. Regulatory Framework
Regulation on financial consumer protection has been strengthened with the
enactment of Law 1328 of 2009, which provides a series of definitions and principles,
consumer rights and obligations that apply to supervised MFIs and their clients. This
law includes regulations on minimum information to be provided to consumers, the
prohibition of abusive clauses, procedures for resolving complaints, and penalties for
any breach of the legislation. Yet this regulatory structure is applicable only to MFIs
supervised by the Superintendence of Finance, thus leaving an important regulatory
gap for non-bank financial institutions, such as foundations and NGOs, which play a
significant role in the allocation of microcredit. Additionally, successful policies and
regulations that were introduced to increase access to microcredit by MIPYMEs32
were not accompanied by more robust regulation to protect consumers in their
dealings with non-bank financial institutions.
As for the content of the contracts, apart from requiring that they must be clear,
legible and made available to the consumer, the law is very vague about the so-
called minimum content, which in turn means that the relationship between the MFI
and the consumer is usually formalised through a blank promissory note with a letter
of instruction. There is no standardised loan contract, though both regulated and
32 Law 1328/2009, Law 590/2000, Law 1151/2007; Decree 1119/2003, Decree 2233/2006.
68
non-regulated institutions usually provide a loan amortization schedule to the
customer. However, the client often ignores concepts such as effective interest rate,
default penalties and other financial and legal concepts that might be detailed in the
contract.
Both regulated and non-regulated institutions report information to credit bureaus
and use these to assess credit applications, as all financial institutions use credit
history reviews as a mechanism to prevent over-indebtedness. The majority of MFIs
adequately assess the capacity of the borrower to repay the loan, using legal
mechanisms that permit them to charge a fee and a commission. The former covers
the cost of granting the loan, while the latter is paid for the MFIs‘ analysis of the
proposed credit transaction, considering that there is commonly an absence of
financial statements and tax certificates. It is likewise linked to specialised assistance
to entrepreneurs, as well as technical visits to verify the actual situation of clients‘
business activities. The field investigation has shown that these practices are
essential in the provision of credit to micro enterprises, both by regulated and
unregulated MFIs. Nonetheless, requiring regulated entities to check the Declaration
of Income or Certificate of Income and Withholdings remains a significant obstacle to
granting credit to informal customers. When an informal debtor has no elements to
prove his ability to repay and the MFI decides to proceed with the loan, a portfolio
provision (Loan Loss Reserve) equal to the total amount of the credit must be set
aside, thus increasing the costs for the MFI.
4.1.2. Regulatory Gaps
This research has clearly shown that regulated financial institutions have adequately
developed mechanisms for consumer protection. This is in contrast to the lack of
specific regulations for other types of entities that do not fall under state legislation
because they do not take deposits from the public, though they offer other financial
services such as credit. The absence of specific regulations for non-supervised MFIs
means that there are various regulatory gaps in areas such as minimum contractual
content, abusive clauses, permissible collection practices, and dispute resolution
mechanisms. The protection of consumers against possible abuses of non-bank
financial institutions is thus quite limited. Unfortunately, the consumers most at risk
from this lack of regulation are the poor, because non-bank financial institutions
usually target the low-income population.
4.1.3. Effective Application of the Regulatory Framework
Customers of regulated financial institutions can bring disputes to the financial entity
itself, the Defender of the Financial Consumer, the Financial Superintendent‘s Office,
or to ordinary judges. According to Article 24 of Law 795 of 2003, all supervised
entities must have a unit dedicated to financial client protection (Defensoría del
Cliente Financiero), which is responsible for receiving complaints and ruling on them.
The Defender of the Financial Consumer‘s decisions have no binding force. Decisions
from the Financial Superintendent can only point out administrative violations by the
supervised entity, but cannot rule in favour of consumers. Judges, who have full
authority to settle conflicts between institutions and their customers, may declare
void abusive clauses and order payment or compensation. Clients of both regulated
and unregulated financial institutions can take legal action to resolve disputes arising
from their contractual relationships. However, while judges enjoy a broad authority
69
to fix and order payment of damages, the judicial process is slow and courts are
chronically congested. This results in delays in dispute resolution processes.
The Colombian judicial system lacks specialized courts for resolving financial
disputes. Additionally, there are no small claims processes for financial disputes. In
the interviews with judges, it appeared evident that cases initiated by financial
consumers were few because most cases were for collection purposes, where the MFI
sought to recover the outstanding amount. The most common cases brought by
customers concern excessive charging of interest,33 protection of information
reported to credit bureaus or privacy issues regarding personal data.
4.1.4. Gaps Between Law and Practice
As for debt-collection procedures, responses during the field research revealed a
gap, in some instances, between regulation and MFI policy management, due to lack
of knowledge of written rules and policies by some salespersons who manage direct
customer relationships. Finally, it is important to highlight that it may be too early to
state that Law 1328 of 2009 is contributing to strengthened consumer protection in
Colombia, because the specific regulations on consumer protection only came into
force on 1st July 2010.
4.2 Recommendations
Looking at a possible follow-up project in Colombia, this research could be expanded
to rural areas, as the field work mainly focused on urban consumers. A special focus
on the rural population would possibly generate additional knowledge on the most
common problems that vulnerable customers face as clients of small local institutions
that are not subject to the regulation of the Superintendence of Finance.
Colombian non-bank financial institutions offer wide access to microcredit resources,
though they are not subject to the Superintendence of Finance‘s regulation and
supervision. Indeed, one of this study‘s key recommendations is the standardisation
of financial consumer protection to include MFIs not regulated by the
Superintendence of Finance. Furthermore, there is a need to incorporate the
Superintendence of Industry and Commerce in this broader regulatory framework.
This Superintendence currently has general competence in the area of consumer
protection, but it lacks a clear legal framework to investigate possible violations of
the rights of customers of non-bank financial institutions. Finally, this broader legal
framework should clearly define the minimal information to be provided to the client
and the basic content of a ―standard‖ loan contract.
The ability to offer microcredit should be the same for both non-bank and bank
institutions. The Declaration of Income or the Certificate of Income and Withholdings
are not always available for informal entrepreneurs, in which case the informal
entrepreneur is unable to obtain a loan from a regulated institution. Thus, informal
entrepreneurs tend to obtain loans from non-bank financial institutions. This
33 In Colombia, when a stipulated remunerative or term interest has not been determined, the current bank rate as certified by the Superintendence of Finance is adopted, and default interest is equal to one and half times the current bank rate. If interest is higher than these amounts, the creditor loses all interest received in excess, and pays an amount of equal value as a sanction. In such cases, the debtor may request the immediate reimbursement of the sums paid in excess. When it comes to regulated MFIs, the Superintendence of Finance has the power to order such a reimbursement; for non-regulated MFIs, a civil court would have to rule on it.
70
difference between regulated and non-regulated MFIs could be overcome by
specifying, in the case of micro enterprises, that ability to repay could be assessed
by regulated institutions on the basis of specialised technical assistance and technical
visits and that it is not necessary to obtain a Declaration of Income or a Certificate of
Income and Withholdings. This technical assistance could allow MFIs to define loans
granted to micro entrepreneurs as low risk, thus avoiding the need for MFIs to
accumulate big loan loss reserves for micro loans granted to informal entrepreneurs.
In terms of dispute resolution alternatives available to customers, it is recommended
that the same mechanisms should be made available to customers of both bank and
non-bank financial institutions. The lack of mechanisms available to clients of non-
bank institutions (e.g., the Defender of the Financial Consumer) is a concern for the
entire industry, as is the reluctance to delegate judicial power to administrative
bodies such as the Superintendence of Industry and Commerce, which adopts legal
decisions under the legal condition of res judicata. This would be a critical and
essential aspect of any regulatory reform, as the interviews with judges revealed
that very few financial consumers take legal action due to the legal system‘s
structural problems (a large volume of cases that often leads to long delays).
Some combination of the following alternative solutions, which are not mutually
exclusive, would represent new and concrete opportunities for the strengthening of
the Colombian legal framework, as well as advancing the legal empowerment of poor
clients:
Assign judicial functions to the Consumer Protection Division of the
Superintendence of Industry and Commerce;
Establish a Defender of the Financial Consumer for non-bank financial
institutions;
Introduce a special expedited process with specialised Judges;
Establish a special expedited process with small claims Judges; and
Any other instrument that would contribute to the justice reform proposed by
the current Government (for instance, the granting of judicial powers to
notaries).
In general, to establish a comprehensive consumer protection regulatory framework
for financial services, Colombia may also consider the following recommendations:
Prohibiting reckless lending (similar to the provisions in South Africa‘s
National Credit Act (NCA)). The South African Act protects consumers from
reckless lending, and provides them with an understandable credit agreement
in plain language and several other consumer protections.
Requiring financial services firms to explain clearly to potential borrowers the
key features (including any fees, commissions or other charges) of products
and services.
Ensuring clear, fair and full disclosure of interest rates and charges (e.g.,
APRs or total cost of credit).
Ensuring that debt recovery expenses charged to the consumer, if any, are
reasonable.
Requiring that any advice given by a financial services entity to a consumer
should be suitable for the consumer and take into account his or her
circumstances.
Prohibiting conditional sales. A conditional sale is an arrangement in which a
buyer takes possession of an item, but the title remains with the seller until
71
some condition is met, such as payment of the full purchase price.
Instituting a cooling off period for certain loans, e.g., loans above a certain
value and for a duration greater than a specified period of time.
Requiring that financial firms issue financial statements to consumers at
stated intervals.
This section of proposals represents a shortlist of tools that would help Colombia
achieve further development of its financial sector, and eventually sustainable
economic growth by responding effectively, efficiently and economically to the legal
needs of the poor. The authors wish that at least some of these tools become part of
policy reforms and initiatives of the current national Government over the next four
years.
72
References
Laws and Regulations
Congress of the Republic of Colombia,
Civil Code
Congress of the Republic of Colombia,
Law 27 of 1977
Congress of the Republic of Colombia,
Commercial Code
Congress of the Republic of Colombia,
Organic Statute of the Financial
System
Congress of the Republic of Colombia,
Law 45 of 1990
Congress of the Republic of Colombia,
Tax Code
Congress of the Republic of Colombia,
Law 590
Congress of the Republic of Colombia,
Law 795
Congress of the Republic of Colombia,
Law 1151
Congress of the Republic of Colombia,
Law 1266
Congress of the Republic of Colombia,
Law 1328
Congress of the Republic of Colombia,
Law 1395
Government of Colombia, Decree 2360
of 1993
Government of Colombia, Decree 1886
of 1994
Government of Colombia, Decree 690
of 2003
Government of Colombia, Decree 4759
of 2005
Government of Colombia, Decree 2233
of 2006
Government of Colombia, Decree 3078
of 2006
Government of Colombia, Decree 1119
of 2008
Government of Colombia, Decree 4590
of 2008
Government of Colombia, Decree 2555
of 2010
Superintendence of Finance, Legal
Basic Circular
Superior Council of Microenterprise,
Resolution 01 of April 26th 2007
Websites
http://www.bancadelasoportunidades.gov.co
http://www.fogafin.gov.co
http://www.minhacienda.gov.co
http://www.superfinanciera.gov.co
KENYA COUNTRY REPORT
Angela Ondari*
(Kenyan Advocate; Executive Director, Safe House and Empowerment Center
(SHEC))
Arthur Goujon
(Microfinance Researcher, International Development Law Organization)
1. Introduction
1.1 Country Overview
Kenya‘s financial sector is one of the broadest and most developed in sub-Saharan
Africa (SSA). There are 45 financial institutions, including 43 commercial banks and
two mortgage finance companies. These banks, along with the Kenya Post Office
Savings Bank, make up Kenya‘s formal banking sector and serve 22.6 percent of
Kenya‘s adult population of 17.4 million, according to survey results published in
early 2009.1 Kenya‘s financial services sector also has approximately 3,600 saving
and credit cooperatives (SACCOs) and up to 100 microfinance institutions (MFIs).2
Kenya‘s Central Bank reported that as of December 2008, the 36 retail MFIs
(excluding commercial banks) registered with the Association of Microfinance
Institutions (AMFI) had 1.44 million active deposit accounts/clients at their 825
branch offices, an increase of over 400,000 active deposit accounts/clients from
2007. Excluding commercial banks, the value of total deposits was $202 million at
the end of 2008, compared to $151 million a year earlier. These institutions had 1.27
million active loan clients at the end of 2008, an increase of over 30 percent from the
previous year, and a total of $443 million in gross loan portfolio.3
Non-bank financial institutions, including microfinance institutions (MFIs), savings
and credit cooperatives, and mobile phone service providers, serve another 17.9
percent of the population, bringing the total served by formal financial services to
40.5 percent.
In addition to traditional forms of microfinance, mobile banking has rapidly expanded
access to financial services in Kenya since Safaricom, the Kenyan affiliate of global
mobile telecommunications provider Vodaphone, launched its M-PESA service in early
2007. M-PESA allows customers to access an electronic payment and store-of-value
system through their mobile phones, and offers cash deposit and withdrawal access
at 16,900 Safaricom outlets throughout Kenya, nearly half of which are located
The authors would like to thank all those who contributed to gathering information for this publication:
• In Kenya: Strathmore University, for granting us access to their law and microfinance library; and
• At IDLO: Aline Séjourné, Aleksandra J. Kasprzycka, Aaron Pittman, and Elizabeth Acorn. The authors would also like to thank the editors who helped review and complete this paper. 1 Mix Market: Microfinance in Kenya: Country Briefing, at http://www.mixmarket.org/mfi/country/Kenya/report. 2 Financial Sector Deepening, 2009, at http://www.fsdkenya.org. 3 Mix Market: Microfinance in Kenya: Country Briefing, supra note 1.
74
outside of urban centers. As of January 2010, M-PESA had 9 million customers.4 In
May 2010, Safaricom and Equity Bank announced a partnership to enable M-PESA
customers to open a new Equity Bank ―M-KESHO‖ savings account that can be
accessed through their mobile phones.5 A few MFIs are also starting to develop
partnerships with telecommunication providers to operate some of their transactions
through mobile phones.
Another 26.8 percent of Kenyans rely on the informal financial sector, including non-
governmental organizations (NGOs), self-help groups and individual unlicensed
money lenders, and 32.7 percent of the population does not use any form of financial
services.6
Only recently have the SACCOS and the MFIs started to enter each other‘s markets.
As of this writing, the two types of financial institutions still offer different financial
products to different type of customers. For this reason, and because MFI and
SACCOs present strong differences in products and governance structures, this
research focused on the microfinance sector exclusively; the other providers are
discussed to provide a benchmark of practices.
SACCOs traditionally serve a population of employees, both in the private and the
public sectors, as well as agricultural workers. In contrast, MFIs are concentrated in
Kenya‘s larger cities, most with headquarters in Nairobi. SACCOs target a less-
affluent population, which traditionally would be the customer base of informal
financial services providers and Rotating Savings and Credit Associations (ROSCAs).
As a result, the average active loan amount for SACCOs ranges from Kenyan Shilling
(KShs) 21,000-50,000 and KShs 100,000-500,000, while for the MFIs, loans are
rarely above 20,000 KShs.7 MFIs currently serve only a relatively small part of the
Kenyan population8, but their market target of financially excluded population
actually represents roughly 35.2% of Kenya‘s estimated adult population of 17.4
million in 2006.
Several MFIs have filed applications for a license with the Central Bank of Kenya to
become deposit-taking institutions, with six receiving licenses to become deposit-
taking institutions as of this writing. As a result, MFIs in Kenya principally offer
credit.
As of May 2010, non-deposit-taking microfinance institutions are not under the
jurisdiction of the Central Bank‘s microfinance regulations, and as such they would
fall either under the SACCO category supervised by the SACCO Societies Regulatory
Authority (SASRA), or the informal microfinance category, which is unregulated
except for the licensing required of all NGOs in Kenya. The Central Bank is currently
consulting with a variety of industry stakeholders to determine the best practices for
incorporating non-deposit-taking MFIs into its regulatory framework.9
4 Ibid. 5 Ibid. 6 Ibid. 7 Financial Sector Deepening, 2009, supra note 2. 8 Only 1.7% of adults use MFI services according to Financial Access in Kenya, Financial Sector Deepening (FSD) Kenya, October 2007. 9 Mix Market: Microfinance in Kenya: Country Briefing, supra note 1.
75
MFIs also offer some technical assistance services, and in a few instances, insurance
products, mainly through partner institutions. Finally, one MFI developed the
capacity to offer a card-for-payment system. As a result, we examined these issues,
but focused on small-loan issuance.
2. Protection of the Financial Consumer in Kenyan Legislation and
Regulation
2.1 Financial Consumer Protection: A Legal and Regulatory Overview
Under Kenya‘s 2002 Constitution, the banking industry is governed by the
Companies Act, the Banking Act, the Central Bank of Kenya Act, and the various
prudential guidelines issued by the Central Bank of Kenya (CBK). In 2005, another
constitution was drafted, but subsequently rejected by Parliament. In August 2010, a
new constitution was approved by two-thirds of registered Kenyan voters in a
national referendum. The new constitution commits the nation to protecting
consumers.
However, Kenyan regulations still provide a dispersed and incomplete framework for
protecting consumers of microfinance services. For instance, the Microfinance Act of
2008 forbids institutions to provide services ―in a fraudulent or reckless manner
detrimental to the institution‘s interest or the interest of depositors or the general
public,‖ and includes ―know your customer‖ requirements. The Act, besides those
general statements, provides a framework for consumer rights.
Various elements relevant to consumer protection can be found in regulations
relating to specific aspects of microfinance transactions. Relevant legal sources
include, but are not limited to:
Chapter 28 - Chattels Transfer Act
Chapter 23 - The Law of contract
Chapter 526 - Auctioneers Act
Civil Procedure Rules of 2010
Chapter 128 - Chief Authority Act
Chapter 504 - Restrictive Trade Practices, Monopolies and Price Control
Act
Additional consumer protection recommendations were made in 2007 when Member
of Parliament Jakoyo Midiwo introduced the Jakoyo Consumer Protection Draft Bill.
The text had been debated for a few years, and was yet to be adopted in 2010, when
Kenya‘s change of constitution led to the drafting of an entirely new text.
The 2010 draft was still under discussion when this paper was completed. As
currently drafted, it introduced the objective of reducing disadvantages for low-
income customers, as well as those geographically isolated, who represent the
microfinance industry‘s traditional market, but does not provide specific tools for
financial services delivery. Rather, it established a list of general consumer rights:
Equality in consumer markets
The right to choose
Disclosure and information
Fair and responsible marketing
Fair and honest dealings
76
Fair value, good quality and safety
The right against unfair commercial practices
Supplier accountability
Consumer education and participation
Access to redress.
Although it is difficult to anticipate how courts will interpret this text, court cases
could possibly lead to improved protection for microfinance consumers. As clients
state their arguments in front of a judge, courts may make decisions that could
possibly establish legal precedent.
The most interesting suggestion in the Act concerns the establishment of new
redress mechanisms: a consumer claim tribunal, an alternative dispute resolution
mechanism, and the submission of claims to the Consumer Protection Commission
(which, notably, can be directly initiated by consumer associations).
Finally, the Association of Microfinance Institutions of Kenya (AMFI) has, in the past
few years, begun to develop a code of ethics for the microfinance industry. This
work, however, has not yet been completed.
2.2 The Institutional Framework
Kenya still lacks a regulatory entity with a full and complete mandate to protect
microfinance consumers. The mandate of the Central Bank of Kenya (CBK), for
instance, is elusive and incomplete. According to the Banking Act:
« (…) the Central Bank may have regard to the previous conduct and
activities of the person concerned in business or financial matters and,
in particular, to any evidence that such person (…) has contravened
the provisions of any law designed for the protection of members of
the public against financial loss due to the dishonesty or incompetence
of, or malpractices by, persons engaged in the provision of banking,
insurance, investment or other financial services »
This article seemingly provides the CBK a particular mandate with regard to
consumer protection, but two remarks can be made. First, Kenya still lacks a law
that ensures protection of consumers of financial services, so this mandate is yet to
be defined. Second, the article seems to refer to dishonesty and malpractice, which
would give a limited scope to consumer protection.
More promising, the 2010 Consumer Protection Bill proposed establishing a
Consumer Protection Commission with a mandate not only to promote and expedite
the creation of consumer rights, but also to monitor the enforcement of the existing
regulations, promote consumer associations and settle consumer complaints.
Interestingly, the draft would allow the Commission to receive complaints from
parties involved in disputes as well as from consumer protection groups.
3. Field Research
The empirical study of consumer protection practices in Kenya covers contracting
and disclosure, collateralization, and debt collection practices.
77
3.1 Contracting and Disclosure Practices
Contracting practices for microfinance lending involve significant consumer
protection issues. This includes advertising practices, first contacts with the
institution, the creation of self-help groups, as well as the drafting and signature of
loan contracts. Our main conclusions are: first, that the commercial practices of
microfinance institutions often leave customers with incomplete information on the
financial commitments they are undertaking; and second, that the contractual
elements are sometimes drafted with too much legal and practical imprecision,
redundancies or incoherence, that can result in increased confusion about the terms
of a particular transaction.
3.1.1. Commercial Practices of MFIs and Informational Asymmetries
About 90% of loans provided by microfinance institutions are still provided through
the group lending methodology (although this might be changing recently for some
institutions).
Self-help groups usually include five to ten clients. The group is encouraged by the
MFI to constitute itself as an association and register at the office of the District
Gender & Social Development Officer (DGSDO). That said, many groups seem to
ignore this requirement, although the proportion of associations to informal groups is
difficult to measure. The creation of a group, in any case, is formalized by the
drafting and signature of a constitution.
Provisions in the group‘s constitution usually establish the governance mechanisms
of the group by defining the tasks that will be the responsibility of the chairman, a
secretary, a treasurer, a ―discipline master,‖ a loan committee, and a coordinator.
The constitution‘s rules also establish the respective annual election process. It also
contains all rules relevant to the life of the group, such as the frequency and agenda
of meetings, as well as the fines imposed in case of failure to attend a meeting or the
misbehavior of a member.
Group constitutions are negotiated at the time the group is formed, with the
assistance of the MFI‘s loan officer and often from templates provided by the MFI.
From the few documents we observed, it appears that, despite best efforts, group
constitutions frequently employ unclear language and, sometimes, confusing
arrangements involving the respective duties and rights of members.
Besides the drafting shortcomings, the members of each group effectively waive part
of their contractual rights, as a three-quarters majority is sufficient to make
decisions for the entire group. The group constitution provides the right for each
member to leave the group at any time, but this becomes increasingly difficult in
practice, as a member‘s deposits with the institution grow and as a member becomes
the guarantor of one or more loans.
Indeed, the group‘s members put their deposits in one account at the MFI. Each
member retains proof of his or her savings (saving deposit slips). While savings
deposits are taken, loans can then be assigned to individual members with the
approval of the loan committee. The group always acts as a guarantor for each loan,
with each member risking his or her deposits to guarantee the loan balance. Each
debtor also pledges a certain number of chattels (electrical domestic goods or cattle,
for instance) listed in the loan agreement.
78
For individual loans, the relationship with the MFI is more straightforward. Clients
contact the MFI with a loan request and up to three guarantors are required. In case
of individual loans above a certain amount, chattels might be registered.
Some issues were noted during the field study, but they remain anecdotal and
difficult to measure. For instance, some MFIs report a serious problem with the way
they handle information in their portfolio. Most of the information of each group is
retained by a specific loan officer. When that officer leaves, the MFI loses crucial
information about the group‘s specific issues. Also, interviews have revealed
instances of fraud committed by loan officers, such as creating fictional client
records. Consequently, stricter management of an MFI‘s information system may
possibly limit abuses against the microfinance consumer.
3.1.2. Advertising and Price Display
One particular concern that was addressed by the field study was the type of
information accessible by potential customers of financial products available to them.
Interestingly, the research showed that advertising seems to play a relatively small
role in comparison to word of mouth and direct marketing.
Figure 1. How did you first hear of the MFI’s services?
To educate their clients, the MFIs we interviewed seem to provide mandatory
training (from one to eight hours) to each group as a condition for obtaining financial
services, but this often seems to be limited to the assistance provided by the loan
officer in drafting the group constitution.
In general, the customers we interviewed seemed to have a positive assessment of
the information that was communicated to them before they signed their loan
contracts. Still, 40 percent of the customers we interviewed said that the information
that was provided by the MFI was either incomplete, or not entirely clear. A more
Advertisement,
5%
Friends, 88%
Salesperson,
6%
Other,
1%
Advertisement
Friends
Salesperson
Other
79
detailed questionnaire might reveal the particular points that microfinance
consumers might want to see featured in their initial training and meeting with an
MFI representative.
Figure 2. Was the agreement clearly explained to you?
Figure 3. Was the information provided to you accurate?
3.1.3. Contracts
We found that the establishment of contracts is one of the weak points of the MFI-
customer relationship. Legal and financial illiteracy exists on both sides — the client
and, to a lesser extent, the loan officers — and sometimes it leads to diminished
clarity and efficiency in the drafting. Second, copies of contracts rarely seem to be
Yes, 94%
No, 5% Other, 1%
Yes
No
Other
Completely
accurate, 56%
Accurate but
incomplete,
31%
Accurate but
unclear to me,
13%
False, 0%
Completely accurate
Accurate but
incomplete
Accurate but unclear
to me
False
80
given to microfinance consumers. Clients are left with a copy of the payment
schedule, but never with the copy of the contract itself.
If a member defaults, the group chairman will receive a copy of the loan agreement.
The chairman will then use the loan agreement to exert pressure on the defaulter
and, in some instances, collect the chattels.
Figure 4. Were you given a copy of the loan agreement?
Figure 5. Do you still have a copy of the loan agreement?
Providing copies of loan agreements is a cost-free measure to protect the rights of
microfinance consumers, and this should rapidly become a standard in the industry.
Yes, 38%
No, 61%
Other, 1%
Yes
No
Other
Yes, 15%
No, 84%
Other, 1%
Yes
No
Other
81
3.1.4. Interest Rate Disclosure
The Banking Act of 2006 partially regulates the cost and remuneration of savings
accounts, but financial institutions are not required to disclose their interest rates. As
a result, each category of financial institution can use a different calculation method
or presentation method, making it nearly impossible for consumers to compare
prices.
While banks usually provide information on interest rates and other fees on a
percentage basis, a savings account opened at a SACCO will generate dividends,
which are unpredictable and impossible to compare with traditional interest rates or
fees.
As far as credit is concerned, both MFIs and SACCOs generally calculate interest
through repayment schedules, detailing the total amount to be repaid every month.
The FSD and the Central Bank of Kenya conducted a joint research initiative in 2009
to elaborate on scenarios designed to promote transparency in the disclosure of
interest rates. One of the study‘s key findings is that most consumers did not
comprehend interest rates when applying for a loan.
As a consequence, the report suggests a phased approach to reforming interest rate
disclosure, starting with the total cost of credit (TCC) and/or repayment schedules
(RS), and then moving onto an annual percentage rate (APR). Further, the
implementation of industry-wide standards for interest rate calculation and
mandatory disclosures needs to be done in collaboration with all other financial
services providers.
3.2 Collateral in Kenyan Microfinance
Almost all microcredit transactions given in Kenya are accompanied by a pledge of
security by the borrower. The field study revealed the cost, length and complexity of
establishing and enforcing security interests. The inefficiency of those tools has
several damaging consequences for the microfinance consumer, notably:
It limits access to credit;
It increases the cost of credit; and
It might lead microfinance institutions to securing their portfolio with
illegal or redundant security interests.
In our opinion, providing MFIs with a framework for registering and collecting
security interests that is easy, innovative, and, at the same time, strict, is an
efficient - albeit paradoxical - way to increase access to finance and strengthen the
protection accorded to the Kenyan microfinance consumer.
3.2.1. Typology of Microfinance Collateral
We asked MFI clients what type of collateral they had to secure in order to get credit.
Most of them had to find guarantors (members of the group in group lending
situations) and assets to pledge.
82
Figure 6. What type of collateral did you use, if any?
Excerpt from a loan agreement
List of chattels
ITEM Serial # Value (KSHS)
TV 24 inches 298739827397398 30.000
10 tables Mica and wood 8.000
5 Cows NA 30.000
Security interests can also be of a mixed nature. For instance, group members, or
guarantors in general, might be required to present a list of chattels to pledge in
addition to their personal liability.
Aside from collateralizing loans, peer pressure is another powerful pressure tool used
by MFIs to ensure that group members repay loans. Besides their personal
guarantee in such cases, the entire group knows that if one person in the group
defaults, it will prevent everyone from obtaining additional financing from the MFI.
This mechanism, often used by microfinance institutions across the globe, is a
powerful incentive in case of monopolies or quasi-monopolies. It loses some of its
significance in Kenyan‘s urban markets, where other financial providers might be
available.
Finally, as far as personal loans are concerned, urban MFIs also tend to charge,
besides chattels and guarantees, ―title deeds‖ (real estate) and logbooks (cars) as
security.
Personal
guarantee, 8%
Mortgage, 0%
Pledge of
movable asset,
92%
Other, 0%
Personal guarantee
Mortgage
Pledge of movable
asset
83
3.2.2. The Issue of Blocked Deposits
The Microfinance Act of 2008 gives the Central Bank of Kenya the responsibility to
license and supervise deposit-taking microfinance institutions. So far, six MFIs have
received a license to take savings deposits. Until 2011, Faulu Kenya was the only MFI
that had been licensed to take savings deposits.
While it is true that most of the MFIs collect deposits, they are used as collateral for
loans and blocked with a ―fixed deposit certificate.‖ In the MFIs we visited, the ratio
of collateral to savings is a leverage of 20 percent for individual savings and 30
percent in case of group guarantee.
Excerpt from a loan agreement
About blocked deposits
« I give (the MFI) and its agents authority to use my current and future
savings to offset my loan or (that) of any other person I have
guaranteed (…) » this mention is followed by « my current savings
pledged as security: 14,030»
(…)
―30 percent of the entire loan amount (is) requested to be deposited as
savings, which is refundable after the loan amount has been paid.‖
Several comments can be made about such deposits. First, according to the
language used in the loan agreement, it is not clear whether the block applies only to
a predetermined amount, or also to additional savings deposited in the future.
Second, since these funds cannot be characterized as savings, the clients who make
these deposits do not receive interest. Worse, as blocked assets, they represent a
hidden opportunity cost which is not calculated in the interest rate advertised by the
MFI. Indeed, frozen deposits would be generating a return if they were placed in a
bank account, or dividends if they had been placed in an account with a SACCO.
Third, MFIs that are not licensed by the CBK to accept savings are not subject to any
prudential supervision, nor do they participate in any savings insurance scheme. As a
result, and for obvious reasons, they are firmly prohibited from leveraging any
deposits on their books. Yet, interviews with microfinance practitioners reveal that
this prohibition is not systematically respected, and that loans, which are covered by
this ―portfolio‖ of deposits, are sometimes taken from commercial banks.
3.2.3. Collateral Regulation 1: The Protection of the Borrower
The Civil Procedure Act of Kenya grants some protection to the judgment debtor.
While all his property is liable for attachment and sale to resolve the debt, some
exceptions are envisaged:
―The necessary wearing apparel, cooking vessels, beds and bedding of
the judgment-debtor and of his wife and children, and those personal
ornaments from which, in accordance with religious usage, a woman
84
cannot be parted, the tools and implements of a person necessary for
the performance by him of his trade or profession, etc.‖
In the same way, an employee cannot pledge more than two-thirds of his or her
salary to the repayment of his or her debt.
This regulation was formulated to protect the borrower, but is not necessarily known
by the public or applied. For example, one judge we interviewed recalled having to
rule on a dispute involving group members because some of them had forcefully
removed the tin roof on the house of a defaulting debtor with the intent of selling it
to recover their debt. Although it is difficult to gather anything more than anecdotal
evidence on the topic, those examples should suffice to illustrate the need to
professionalize debt collection and train microfinance institutions and borrowers
about the law.
3.2.4. Collateral Regulation 2: Inefficiencies
FSD Kenya commissioned a study on the shortcomings of the collateral process, its
costs and delays.10 The first observation of the study relates to the dispersion of the
legal framework, as there are more than 20 statutes regulating the creation and
perfection of collateral in Kenya.
Laws relevant to the collateral process in Kenya (FSD, 2009)
1) Indian Transfer of Property Act, 1882
2) Law of Contract Act (Chapter 23, Laws of Kenya)
3) Registered Land Act (Chapter 300, Laws of Kenya)
4) Registration of Titles Act (Chapter 281, Laws of Kenya)
5) Government Lands Act (Chapter 280, Laws of Kenya)
6) Land Titles Act (Chapter 282, Laws of Kenya)
7) Sectional Properties Act (Act No. 21 of 1987)
8) Limitation of Actions Act (Chapter 22, Laws of Kenya)
9) Companies Act (Chapter 486, Laws of Kenya)
10) 10 Evidence Act (Chapter 80, Laws of Kenya)
11) Stamp Duty Act (Chapter 480, Laws of Kenya)
12) Registration of Documents Act (Chapter 285, Laws of Kenya)
13) Banking Act (Chapter 488, Laws of Kenya)
14) Traffic Act (Chapter 403, Laws of Kenya)
15) Land Control Act (Chapter 302, Laws of Kenya)
16) Chattels Transfer Act (Chapter 28, Laws of Kenya)
17) Advocates Act
18) Notaries Public Act
19) Arbitration Act (Act No. 4 of 1995)
20) Agriculture Act (Chapter 318, Laws of Kenya)
The study also reveals the inefficiency of the registration system, which is still
manual, dispersed, and does not forbid a client from pledging the same chattel to
different institutions. Finally, enforcement procedures tend to be lengthy and at a
cost that is disproportionate to the small loan amounts that the financial institutions
are trying to recover.
10 Financial Sector Deepening, 2009, supra note 2.
85
This defective legislation almost systematically prevents the regular registration of
chattels by MFIs, and seriously limits the use of mortgages. Interviews with MFIs
confirmed that chattels are not registered. As illustrated above, they consist of a list
of assets inserted in the body of the loan agreement. Before the client signs the loan
contract, the loan officer verifies the existence of the chattels. The chattel document
is prepared and signed by an advocate only for larger amounts, still with no further
registration.
The absence of a satisfactory legal and institutional framework for collateral is often
cited by practitioners as one of the great obstacles to their commercial development.
It is obviously one explanation for the weakness, illegality or redundancy of the
collateral practices we observed in the field.
3.3 Debt Collection and Judicial Procedures
Kenya‘s previous Civil Procedure Code included the possibility of a jail sentence of six
months for debtors. These practices have been removed in the new Civil Procedure
Code of 2010. As a result, the debt collection process now principally revolves
around procedures of foreclosure for chattels and mortgages.
With the group lending methodology, most of the debt-collection process is
conducted directly through the group. This model certainly presents many
operational advantages, but it can also be risky for a borrower, who often fails to
receive protection from the law in those informal processes.
A borrower who is in default first receives one, then two warning letters from the
MFI. A third warning letter is sent to the group‘s officials, the chairman and the
secretary. MFIs tend to hire lawyers only to draft the letters and follow the procedure
for amounts above 100,000 KSH.
Enforcement of contracts in Kenya requires an average of 40 procedures, usually
lasting for 465 days, and at a total cost equal to 42% of the claim, according to the
2011 Doing Business report for Kenya.11 According to the magistrates we
interviewed, procedural delay can vary from one to two years on average, followed
by a period of three to six months to enforce the decision, depending on how difficult
it is to locate the losing party. To enforce a mortgage in court, for instance, the
procedure can take five years or more. Still, the estimated cost of a judicial
procedure is around $300, according to the magistrates. The cost is paid by the
person who loses the case.
This probably explains why none of the officials at the MFIs we interviewed recalls
ever going to court for a default. Often, parties reach a private settlement before the
end of the proceedings. There also seems to be a divide between urban and rural
areas with regard to access to justice. Yet in general, it has proved particularly
difficult to draw conclusions on the frequency of cases going to trial. Contrary to the
assertions of the MFIs, some magistrates we interviewed recalled a few instances in
which they had ruled on an MFI case. However, independent confirmation of this is
difficult, as court records are not accessible to the public.
According to the magistrates we interviewed, most litigation brought by clients
concerned interest rates, and resulted from poorly drafted contracts.
11 See http://www.doingbusiness.org/data/exploreeconomies/kenya/#enforcing-contracts.
86
Unfortunately, the borrower often has difficulty finding an advocate to represent him.
In theory, a party who cannot find an advocate can file a pauper brief to obtain legal
assistance, but on our visits to courts we observed that many defenders represented
themselves.
3.3.1. The Role of Chiefs
In Kenya‘s old constitution, chiefs had the right to confiscate property. They
operated as the administrative police of the state. Chiefs would provide justice for
small civil issues. According to article 6 of the Chief Authority Act (Chapter 128):
―It shall be the duty of every chief or assistant chief to maintain order
in the area in respect of which he is appointed, and for such purpose
he shall have and exercise the jurisdiction and powers by this Act
conferred upon him over persons residing or being within such area.‖
Interestingly, nothing in the Act relates to ruling on civil litigation, let alone debt
collection. The responsibility of chiefs is linked only to issues relating to public order,
such as drinking in public, possession of weapons and the prevention of crime.
Nevertheless, many MFIs have admitted that chiefs played important roles (in
collaboration with self-help groups or their own branches) in settling difficult cases of
default.
The power of the chiefs is a remnant of the country‘s colonial history, and has been
removed by the new constitution of 2010. Citizens are expressing concerns on the
damage of such changes, with respect to access to justice for small claims.
For this reason, it seems to us that eliminating the chiefs‘ traditional roles should not
be done without a careful evaluation of its impact on access to local justice,
specifically on the issue of replacing the traditional system with a new one that is
both efficient and fair.
3.3.2. Auctioneers
Auctioneers should be, according to law, the only actors authorized to enforce MFI
collateral. The research team met with several auctioneers to explain the importance
of making the debt collection process more professional.
After an auctioneer is called by the lender or the guarantor (the group, in many
cases), he gives the defaulter a first notice of seven days. It is estimated by the MFIs
we interviewed that 50 percent of the cases were solved at this stage by negotiating
with the group. If the defaulter does not give an answer to the auctioneer within a
week, the auctioneer visits the defaulter‘s house and evaluates the value of his
chattels. If necessary, the auctioneer can request police escort.
Auctioneers offer many guarantees which should be considered as protective of the
consumer. First, they have to undergo a licensing process. Second, every step of
their intervention (the delays for action, the safety of the storage of the property,
the advertisement of the auction sales, etc.) is timed and monitored by the law. The
actions of the auctioneer are subject to appeal to the High Court.
87
Nonetheless, the field research unearthed some illegalities in contractual language,
as well as MFI practices. For instance, the following language can be found in a loan
agreement, in contravention of the law:
―This (asset pledge declaration) form gives (the group) express
authority to take pledged items of loan defaulters without necessarily
involving any public or private sector (actor) since the agreement was
entered (into) between the loan defaulter in arrears and the group.‖
Indeed, some MFIs we interviewed admitted that they would threaten to sell their
clients‘ collateral by advertising them in the MFI offices. According to them, this has
a strong dissuasive effect on the client, and the sale is rarely carried out.
Further, in the same loan agreement one can find:
―In case I am late in paying any installment I do hereby authorize (the
MFI) and/or (name of the group) or their agents to use any means at
their disposal to recover any late payment from me.‖
Such a general waiver dangerously induces confusion over the ―means‖ actually
available to the MFI or the group when recovering missing payment. The Law of
Contract, the Civil Procedure Act and Auctioneers Act already provide a framework
for debt collection. Therefore, any additional comment in the text of a contract
should either be a clear reference to the applicable articles or go unstated.
4. Conclusions and Recommendations
The following derive from the findings of this paper:
MFIs should seek legal advice with respect to drafting the constitutions of
self-help groups, so that they may produce and distribute improved
documentation.
Stronger management of the MFI information system is one possible way to
limit abuses against the microfinance consumer. Channels of communication
(that go above the loan officer, and enable the consumer and the MFI to
rapidly settle small disputes) should be established.
A more detailed questionnaire might inform efforts to improve microfinance
consumers‘ initial training and meetings with MFI representatives.
Loan officers should undergo specific legal training on the transactions they
process.
Providing a copy of a loan agreement is a cost-free measure to protect the
rights of the microfinance consumer, and this should rapidly become an
industry standard.
MFI should seek specialized legal advice in contract drafting. Lawyers can
review contracts, clarify the text, avoid redundancies and contradictions, and
make sure that contractual provisions are in line with the law.
The Central Bank should continue to promote uniform methods for calculating
interest rates and the education of the consumer.
The legislature, in partnership with industry, should streamline collateral
regulation and provide cheap and simple ways for (a) the registration of small
assets and (b) associated collection practices.
The legislature, in partnership with industry, should continue to provide an
environment conducive to the growth of alternative dispute resolution
88
mechanisms, and likewise develop small claims procedures that are cheap,
accessible and fair to the consumer. This can be elaborated within or outside
the framework of the upcoming Consumer Protection Act.
Auctions appear to be a valid approach to enforcing microfinance contracts,
according to our research. Their intervention is framed by the law, and often
leads to rapid mediation without further foreclosure or procedure.
Microfinance borrowers should be made more aware of the proper procedure
and their rights with regard to the foreclosure of chattels, which is both a way
to empower them and to dissuade defaulters.
In general, to establish a comprehensive consumer protection regulatory framework
for financial services, Kenya may also consider the following recommendations:
Prohibiting reckless lending (similar to the provisions in South Africa‘s
National Credit Act (NCA)). The South African Act protects consumers
from reckless lending, and provides them with an understandable credit
agreement in plain language and several other consumer protections.
Requiring financial services firms to explain clearly to potential borrowers
the key features (including any fees, commissions or other charges) of
products and services.
Ensuring clear, fair, and full disclosure of interest rates and charges (e.g.,
APRs or total cost of credit).
Ensuring that debt recovery expenses charged to the consumer, if any,
are reasonable.
Requiring that any advice given by a financial services entity to a
consumer be suitable for the consumer and take into account his or her
circumstances.
Prohibiting conditional sales. A conditional sale is an arrangement in which
a buyer takes possession of an item, but the title remains with the seller
until some condition is met, such as payment of the full purchase price.
Instituting a cooling off period for certain loans, e.g., loans above a certain
value and for a duration greater than a specified period of time.
Requiring that financial firms periodically issue financial statements to
consumers at stated intervals.
Requiring that notifications be sent to consumers when an institution
makes changes in the terms and conditions of financial products.
Requiring proper training, professional standards and supervision of
relevant staff of financial entities or their agents.
Requiring that financial entities treat consumers fairly, and enacting
prohibitions on unfair, deceptive or aggressive practices.
89
References
Laws and Regulations
Described on www.Kenyalaw.org
Microfinance Act of 2006
Banking Act of 2006
Chapter 28 - Chattels
Transfer Act
Chapter 526 -
Auctioneers Act
Civil Procedure Rules of
2010
Chapter 128 - Chief
Authority Act
Chapter 23 – The Law of
contract
Publications
Definition of a standard
measure for consumer interest
rates in Kenya, a scoping
study, FSD Kenya, March 2009
Cost of collateral in Kenya/
opportunities for reform, FSD,
September 2009
The strategic directions and
regulatory support for a strong
MFI sector, Prof. Njuguna
Ndung‘u, Governor, Central
Bank of Kenya
http://vle.worldbank.org/bnpp/
files/TF053594FinancialCoopera
tivesCaseStudyKenya.pdf
http://www.accion.org/Page.as
px?pid=1419
blogs.warwick.ac.uk/.../the_pro
spects_of_microfinance.doc
http://www.fsdkenya.org/pdf_d
ocuments/10-07-
12_Annual_Report_2009.pdf
http://www.fsdkenya.org/pdf_d
ocuments/10-07-
21_FinAccess_supply_side.pdf
http://www.fsdkenya.org/pdf_d
ocuments/10-10-
26_KCPA_roadmap_briefing_no
te.pdf
http://www.fsdkenya.org/pdf_d
ocuments/10-07-
21_FinAccess_supply_side.pdf
CAMEROON COUNTRY REPORT
Edwidge Tchaha*
(General Secretary, Caisse d'Epargne et de Credit du Littoral (CAPCOL))
Arthur Goujon
(Microfinance Researcher, International Development Law Organization)
1. Introduction
1.1 Country Overview
The population of Cameroon was approximately 18.2 million in 2009.1 Of this
population, approximately 40 percent was living below the poverty line, a
considerable improvement from 1996 when over 50 percent of the population was
living below it. This percentage varies greatly between rural areas, where about 50
percent of the population lives, and in Cameroon‘s urban areas, where 22 percent of
the population resides.
Because many people in Cameroon have relatively limited access to traditional
banking, and taking into account the large size of its informal business sector,
Cameroon is considered an ideal location for microfinance services. Furthermore, as
Ian Long observed in a recent paper, microfinance can serve as one solution for the
economic difficulties of the county‘s poorest citizens.2 That is, Long writes, the
inherent ‖bottom-up‖ approach of microfinance may have a better chance of
impacting the lives of Cameroonians living in poverty than other ―top-down‖
approaches, such as foreign aid to the Cameroonian government.3 In fact, Cameroon
had over 500 officially registered MFIs in 2009, and microfinance is commonly
regarded as an important influence on the country‘s development.4
2. Protection of the Financial Consumer in Cameroonian Legislation and
Regulation
Consumers in Cameroon benefit from all the protections granted by the Civil Code to
parties that make and implement agreements, as well as some consumer protection
regulations in a piece of 1990 legislation that established standards for conducting
commercial activity in Cameroon. Yet Cameroon‘s laws do not provide a broad
consumer protection framework that specifically regulates banking or other financial
services, such as microfinance. Complicating matters further, the few laws relating to
The authors want to thank all those who contributed to gathering information for this report:
• In Cameroon: Jean-Paul Ngoulou and the Association Renfort et Action, Vicaire Ouafo Bepyassi: and
• At IDLO: Aline Séjourné, Aleksandra J. Kasprzycka and Pauline Borczuch. The authors would also like to thank the editors who helped review and complete this publication: Gabriel Nzoyem, Executive Director of ANEMCAM, David Kengne, Microfinance Consultant, DG of Microfinance Academy, Michael Ndikum, Chairman of the Board of CAPCOL, and Vicar Ouafo Bepyassi. 1 IFAD. ―Cameroon Statistics.‖ Rural Poverty Portal. See http://www.ruralpovertyportal.org/web/guest/country/statistics/tags/cameroon. 2 Long, Ian, "Perceptions of Microfinance in Cameroon: A Case Study of UNICS, Yaoundé" (2009). ISP Collection. Paper 729. See http://digitalcollections.sit.edu/isp_collection/729. 3 Ibid. 4 Ibid.
91
the protection of financial services consumers are scattered among Cameroonian civil
law and some pieces of regional legislation, such as: the Organization for the
Harmonization of Business Law in Africa (OHADA) Uniform Acts, the Civil Code, and
the Banking Commission of Central Africa/Central African Economic and Monetary
Community/Central African Monetary Union (COBAC/CEMAC/UMAC) regulations on
microfinance activity and banking activity.
Cameroon is a member of the Central African Economic and Monetary Community
(Communauté Economique et Monétaire de l‘Afrique Centrale ‐ CEMAC), which is
composed of six member countries: Cameroon, Central African Republic, Chad,
Republic of Congo, Equatorial Guinea and Gabon. The CEMAC is composed of the
following four institutions:
Central African Economic Union (Union Economique de l‘Afrique Centrale -
UEAC)
Central African Monetary Union ( Union Monétaire de l‘Afrique Centrale -
UMAC or CEMAC)
Community Parliament
CEMAC Court of Justice
The UMAC/CEMAC, headquartered in Yaoundé, is responsible for the monetary policy
of its member countries. It also works with the UEAC in the coordination of economic
policies to ensure consistency between national budget policies and the common
monetary policy. The UMAC is administered through:
The Conference of Heads of States, created through the Agreement
establishing the CEMAC, the supreme authority of the UMAC;
The Council of Ministers;
The Bank of Central African States (Banque des Etats de l‘Afrique Centrale, or
BEAC), the common independent central bank;
The Regional Banking Commission (Commission Bancaire de l‘Afrique
Centrale, or COBAC), which harmonises and controls banking activities; and
The stock market (Bourse des Valeurs Mobilières).
Cameroon‘s bank of issue is the BEAC, which replaced the Central Bank of the State
of Equatorial Africa and Cameroon in November 1972. Its headquarters are in
Yaoundé. In 1993, member states of the BEAC created a supranational supervisory
authority (Commission Bancaire de l'Afrique Centrale) in order to secure the region's
banking system. The government's Exchange Control Office controls all financial
transactions effected between Cameroon and foreign territories. In 1999,
Cameroon's banking system consisted of nine commercial banks with 60 branches.5
In terms of Cameroon‘s banking regulatory structure, the BEAC regulates the
banking sector through the COBAC. COBAC has the authority to take disciplinary
action. Both COBAC and the Cameroon Ministry of Finance and Budget must license
banks, and there are special regulations for small‐scale credit cooperatives.
Cameroon‘s financial sector includes 10 commercial banks, 11 non‐banking financial
establishments, about 652 micro‐finance institutions and a growing number of
5 Kouassi, Armel, Akpapuna, Jennifer and Soededje: Camerooon, at http://fic.wharton.upenn.edu/fic/africa/Cameroon%20Final.pdf
92
foreign exchange bureaus. The banks operate in the country within the regulatory
framework of the COBAC which has established stringent prudential rules.6
2.1 Civil Law in Cameroon
Cameroon‘s Civil Code includes statutes regulating the protection of contracting
parties when forming and fulfilling obligations, particularly with respect to consent.
Furthermore, the Cameroon legislature introduced provisions for protecting
consumers in Law No. 90/031 of 10 August 1990, which regulates commercial
activity in Cameroon (Title IV). This law is complemented by Implementing Decree
No. 93/720/PM of 2 November 1993. However, while these regulations include a
requirement to display prices and govern some sales practices, they focus on the
sale of moveable tangible property and lack provisions on financial services.
The Minister of Trade was asked to submit a draft bill about consumer protection to
the Head of Government (Prime Minister‘s Office Meeting of 26 March 2009), but the
Minister has still not completed this request as of this writing.
2.2 Common Law and Customary Law
One characteristic of Cameroon‘s legal system is its pluralism, from both an
institutional and a material point of view. The country‘s judicial system includes both
modern courts that apply written law and traditional legal courts that follow
customary laws. We tried to discover if customary law has or could have some
influence on microfinance‘s procedures for settling disputes. Article 2 of the Decree7
on the Organization of the Judicial System, as well as the procedure before
traditional courts of Eastern Cameroon, explains:
1. Traditional courts are competent to deal with cases only if all interested
parties agree to it and if current rules do not reserve the matter to courts of
modern law.
2. If one or more interested parties are not agreeable, the case must be
dealt with before a court of modern law.8
In practice, only family issues are generally subject to customary law.
Common Law is applied only in the country‘s English-speaking northeastern and
southeastern regions, or by express request of the contracting parties. In this report,
for purposes of comparison, we have analysed contracts established under Common
Law.
2.3 International Law 1: OHADA Law
Cameroon adheres to the general trade laws of the Organisation for the
Harmonization of Business Law in Africa (Organisation pour l'Harmonisation en
Afrique du Droit des Affaires, or OHADA). It is an 18-year-old system of business
6 Ibid. 7 Decree N° 69-DF-544 of 19 December 1969. 8 1. La compétence de ces juridictions est subordonnée à l‘acceptation de toutes les parties en cause. Nonobstant toutes dispositions contraires, la juridiction de droit moderne devient compétente dans le cas où l‘une des parties décline la compétence d‘une juridiction de droit traditionnel. 2. Sous cette réserve, ces juridictions sont compétentes pour connaître des procédures civiles et commerciales que les textes en vigueur ne réservent pas aux juridictions de droit moderne.
93
laws and implementing institutions adopted by 16 West and Central African nations.
OHADA law applies directly and supersedes national regulations per Article 10 of the
Treaty on the Harmonization of Business Law in Africa.9
At present, OHADA law includes only a few standards directly related to consumer
rights. Two laws deserve mention in this report because they define the legal
framework for some microfinance transactions. These two standards are the Uniform
Act Organizing Simplified Recovery Procedures and Enforcement Measures and the
Uniform Act Organizing Securities.
A preliminary draft of The Uniform Act on Contract Law was written according to the
principles of Institut international de l‘unification du droit privé (UNIDROIT), and
transmitted to the Permanent Secretariat of OHADA in September 2004. This law
would undoubtedly concern consumers of financial products, because it — instead of
the current Civil Code — will regulate their conventional relationships with financial
services suppliers. In particular, it will deal with the conditions of contract formation,
and include public policy provisions that are protective of the parties, as well as any
eventual grounds for contract nullification. Finally, in the event of non-payment by
micro-entrepreneurs, this law defines the methods for eliminating obligations, which
complement the regulatory procedures in the Uniform Act.
OHADA announced a draft law about the issue of consumer sales. However, the
concept of ―sale‖ excludes activities of financial intermediation.
2.4 International Law 2: CEMAC/UMAC/COBAC Law
The law of CEMAC institutions has several provisions that indirectly concern
consumer protection. Regulation n°01/02/CEMAC/UMAC/COBAC on microfinance
activity makes a particular reference to MFIs‘ code of ethics.10 Article 65 of the same
regulation further stipulates: ―The microfinance institutions should regularly publish
their financial situation and display the relevant conditions to the client.‖11
The Plan of Action for Strengthening Financial Intermediation in Cameroon (Plan
d‘Action en vue du Renforcement de l‘Intermédiation Financière au Cameroun, or
PARIF) — conceived and drafted by senior officials of the Ministry of Finance
according to recommendations made by the Evaluation Programme of the Financial
Sector (Programme d‘Evaluation du Secteur Financier, or PESF), the International
Monetary Fund (IMF) and the World Bank in June 2007 — was validated during the
February 2008 review in Yaoundé and revised in April 2008 in Washington, D.C.
9 Article 10: The uniform acts are directly applicable and obligatory in contracting states, notwithstanding any contrary provisions of a previous or subsequent internal law. 10 Article 50: « Tout établissement est tenu de se doter d‘un système de contrôle interne susceptible de lui permettre de : Vérifier que ses opérations, son organisation et ses procédures internes sont conformes à la réglementation en vigueur, aux normes et usages professionnels et déontologiques ainsi qu‘aux orientations de l‘organe exécutif et délibérant ; (…) ». ―Any establishment is obliged to maintain an internal system of control that enables it to: verify that its operations, its organization and its international procedures are in line with the regulations in force, the standards and professional and deontological uses as well as the policies of the executive and decision-making branch of the government (…).‖ 11 ―les établissements de microfinance doivent publier périodiquement leur situation financière et afficher les conditions applicables à la clientele‖.
94
The PESF analysis revealed, in particular, the lack of transparency about the costs of
credit, problems in contract enforcement, and the lack of reliable information on the
quality of borrowers, among others.
In this context, the Ministry of Finance in Cameroon has pledged that it would
propose to COBAC the promulgation of new regulations that would require credit
institutions in the sub-region to regularly publish their lending terms, in order to
make credit operations transparent.
PARIF‘s implementation is overseen by a Committee established by the Ministry of
Finance and presided over by the General Director of the Treasury (Coopération
Financière et Monétaire and Monnaie et des Assurances) following Decision N. 869
MINFI/CAB of 9 April 2008.
In regards to the legal system, the Committee proposed various actions, notably:
A draft bill modifying and complementing the Law of 19 April 2007 (creating
the position of judge in charge of litigation). The bill sought to establish
emergency court procedures with respect to the collection of collateral of
borrowers who have defaulted on their loans.
The Monetary Authority‘s proposal relating to bankers, whose objective is to
regulate arbitration clauses and the determination of costs.
The Committee also produced a draft law on the creation of an MFI Deposit
Guarantee Fund (Fond de garantie des dépôts des EMF, or FOGAMIC) which, for the
time being, only focuses on cooperatives. As prescribed by COBAC, it seeks to
reimburse members in the event that their deposits are lost.
In our view, a quick review of the entire regulatory framework on consumer
protection demonstrates, on the one hand, the dispersed nature of regulations, and
on the other, their inadequacy. Despite the relevance of the subject, the Cameroon
legislature has never addressed the specific issue of protecting consumers of
microfinance services.
Nonetheless, if the laws described above were implemented, they would cover most
of the issues relating to consumer protection. However, Cameroon would still need to
improve its institutional framework to support the effective implementation of these
laws.
Some national and regional institutions could establish protection for consumers of
financial services and products, but none of them has yet taken on this role, and it
would require enabling legislation for them to be able to do so. In addition,
Cameroon has consumer protection associations, but these groups have not yet
included financial services in their mandate.
2.5 The Directorate of Consumer Protection
Decree n°2005/089 of 29 March 2005 of the Organization of the Ministry of Trade
established the Directorate of Consumer Protection within the Ministry. This
Directorate is, in particular, responsible for drafting and implementing legislation and
regulations on prices, consumer protection, collection, and the processing and
dissemination of price-related information, among other matters.
95
More specifically, the Sous-direction des Etudes et de la Législation (Sub-Directorate
for Research and Legislation) is responsible for, inter alia, international cooperation
with regard to prices, consumer protection, metrology and collection. The Cellule de
la Normalisation et de la Protection du Consommateur (Standardization and
Consumer Protection Unit) is responsible for collecting, processing and disseminating
information on consumer protection, the monitoring of national and international
consumer protection organizations, and identifying and classifying consumer
organizations.12
2.6 Bank of Central African States (BEAC)
At the regional level, a National Credit Council (Conseil National du Crédit, or CNC) is
established in each Member State, at the National Directorate of BEAC. CNC, which is
presided over by the Minister of Finance, includes representatives of BEAC and
primary banks. Its mission is ―to examine and monitor bank operations and the
distribution of credit within the national economy and to monitor if the financial
system as a whole (primary banks and financial institutions) complies with the bank
standards and conditions defined by NCC.‖
Some public or private institutions, therefore, have the mandate to uphold consumer
rights. Unfortunately, there are no institutions responsible for verifying that the
existing laws are applied, or for providing educational, legal and institutional support
to MFI clients.
The imbalance of trade relations between consumers and providers of credit is still
rooted in the fact that consumers are dispersed and unable to provide a united
common front. In our view, consumers will be able to promote their claims and their
interests only when one or several national institutions are established to gather and
process all of their grievances.
Accordingly, the second half of this article measures the gaps between Cameroon‘s
laws and microfinance practice to identify concrete steps that may improve client
relations.
3. Field Research
In a one-year research project in Cameroon, we conducted an analysis of primary
sources: bills and decrees and over 50 contracts. We also conducted more than 100
in-depth interviews with clients of microfinance institutions (MFIs), along with
approximately 30 directors and employees of large MFIs, and several judges in
Cameroon.
The first legal principle governing the relations between financial institutions and
their clients is that of contractual freedom, but in our research we found that the
relationship between the consumer and MFIs is clearly imbalanced. Clients are often
not familiar with their rights and do not necessarily understand the financial products
that they are buying. Therefore, Cameroon‘s first consumer law governs the
expression of consent. Consumers are not completely helpless, and consumer
protection laws can inform their decisions by dictating procedures for how the
agreements are reached.
12 Decree n°2005/089 of 29 March 2005 on the Organization of the Ministry of Commerce – Articles 40 and 48.
96
Yet, with respect to consumer protection, Cameroon‘s laws are nonetheless both
incomplete and not well applied, since they do not completely address the
contractual act. Further, clients often do not know their rights either because they do
not read their contracts or the financial institution does not provide them with copies.
Clients also often fail to request explanations of their rights by the MFI‘s
representatives before signing the loan contract.
3.1 Informational Asymmetries
We first sought to ascertain if there are informational asymmetries between MFIs
and their clients which make it difficult for consumers to make effective decisions.
Our research was based on a small sample of clients of MFIs in categories 1, 2 and
3,13 mainly in urban areas (Yaoundé and Douala). We began by examining the
subjective competence of consumers by asking them to estimate their own capacity
to understand the contracts. We then tried to objectively assess this level of
competence by asking them about the details of the contracts they have signed.
Figure 1. Was the information that you first received
exact, incomplete or unclear, or false?
In our research, we found that the clients we interviewed were generally satisfied
with the information available when they selected their financial services. 75 percent
of the borrowers we interviewed said that they considered the information they
received from their MFIs to be complete and exact; only 25 percent considered the
13 Explanation of MFI categories: Category one are cooperative institutions, which provide savings opportunities exclusively to members and then use these savings to offer credit for member-run projects. These organizations cannot seek profit and exist for the sole purpose of empowering their members. Category two microfinance institutions are profit-seeking institutions that offer savings and credit services to the public. Category three microfinance institutions are profit-seeking institutions which provide credit services to the public, but do not offer savings services.
75%
25%
0%
Exact Incomplete or Unclear False
97
information to be exact, but incomplete. None of the people we interviewed felt that
they had been cheated.
Figure 2. Have you clearly understood the terms of the contract?
On the other hand, this perception was substantially at odds with an objective
assessment of the clients‘ understanding of the contracts. Most of the clients
interviewed did not understand the credit terms they received. A large percentage of
the clients could barely understand their interest rate terms.
Indeed, the MFIs that we surveyed explained that most clients wish to obtain credit
at all costs. As a result, they often accept the conditions offered them without
dispute. Further, interest rates on loans are freely set by each MFI.
3.2 Advertising, Price Display and Sales Practices
In Cameroon‘s microfinance sector, advertisement does not seem to be the primary
form of marketing communication. Some large MFIs use posters or brochures, but
most stated that they primarily rely on customers recommending their services to
other people, or active canvassing.
70%
15%
15%
Yes No Not completely
98
Figure 3. How did you hear about MFI services for the first time?
The Cameroonian legislature has passed laws to regulate the reliability of information
that clients receive. Accordingly, Law 199014 prohibits misleading advertising.
Cameroon jurisprudence strengthens this obligation, making it mandatory to observe
the advertised price.15
To this ―prohibition on providing misleading information,‖ the Law of 1990 also adds
―the obligation to inform,‖ which provides consumers with information and guides
them in their consent. The law states, in relevant part:
Article 20: ―Any seller or service provider must inform the consumer
[of] the price, by marking, labelling or any other appropriate
means‖…―The specific methods of advertising prices, [and] the
essential characteristics and conditions of sale of some products or
services could be determined by law.‖16
With respect to financial services, this Article on particular methods of advertising
was not enforced for a period of 20 years, or until 2009. That year, the Ministry of
the Economy and Finance published detailed regulations regarding price displays in
MFIs.
The information received by the client on the conditions of his credit is often
presented in the form of a repayment schedule. Cameroon‘s regulations make it
mandatory for banks (and only banks) to communicate this document. Almost all of
14 Law °90/031 of 10 August 1990 specifying the conditions relating to the carrying on of commercial activity in Cameroon, Article 22. 15 TPI of Douala, 13 Dec. 1994. 16 Article 20 : « Tout vendeur ou tout prestataire de service doit, par voie de marquage, d'étiquetage ou par tout autre moyen approprié informer le consommateur sur le prix. » … « Les modalités particulières de publicité des prix, des caractéristiques essentielles et des conditions de vente de certains produits ou services pourront être déterminées par voie réglementaire. »
0%
36%
34%
30%
Advertising Friends Door-to-door Others
99
the MFIs we interviewed systematically use a repayment schedule or a simulation
table as a pedagogical tool to present sale conditions. The simulation table shows the
amount borrowed, the monthly payments and the interest rate.
However, it is difficult to compare interest rates offered by different organizations in
Cameroon‘s microcredit market. We in fact made an inventory of the numerous ways
— at least five — by which deposit interest rates were posted. Some show a
percentage of the total amount borrowed; others, a monthly rate; others still, an
annual rate. Finally, some only provide a nominal amount, not even taking the time
to express it as a percentage.
The idea of stipulating one method for calculating interest rates has already been
proposed, but the subject is controversial. On 22 July 2010, a sub-regional
conference was organized in Douala by BEAC on the topic, ―establishing an APR
(Annual Percentage Rate or TEG, Taux Effectif Global) and a usury rate in CEMAC‖ in
banking and microfinance. However, the MFIs prepared a memorandum addressed to
the Ministry of Finance that listed several reasons why they should be exempted
from such measures, including the sector‘s extremely high operating, collection and
recovery fees, and relatively small profit margins.
In our view, the key to this debate is to avoid dealing with the issue of APR and that
of the usury rate at the same time. While the usury rate has a strong risk of
handicapping a sector with low-profit margins (as in Mauritania or Benin), a standard
method of interest-rate calculation could help in increasing competition and
establishing a market rate.
We tried to evaluate overall customer interest pursuant to a uniform interest rate
calculation methodology, but we discovered that awareness about the usefulness of
annual percentage rates was quite low among the clients we interviewed. For
example, some people seemed to find annual percentage rates more confusing than
referring to nominal amounts. This awareness problem will have to be considered
when establishing a policy for calculating interest rates.
Inadequate legal provisions do not explain the variances in the microeconomic
behaviour of clients. Indeed, even when clients have information on prices, their
choices can often be influenced by other considerations. We therefore tried to
understand the process by which a client chooses an MFI. In the urban areas where
we conducted almost all of our research, the MFIs are highly competitive. The MFIs
are widespread in Douala, Bamenda and Yaoundé, and one is always within walking
distance of an agency.
Most of the clients we interviewed selected MFIs that had contacted them. Almost
half were canvassed by an employee, particularly the ―daily collectors‖ of urban
cooperatives. The members or clients often turn to their regular institution to seek
credit. Almost none of the clients we interviewed chose his or her MFI according to
research on credit or savings terms. Our interviews revealed that bankruptcies and
frauds in the microfinance sector in recent years have led clients to lose trust in
microfinance institutions. As a result, many of the interviewees selected institutions
where they know an employee, a family member, a neighbour or a friend, or those
―that are owners of their building‖ – meaning institutions that they consider to be
―serious.‖
100
To verify the conditions of consent, the parties are also required to comply with the
regulation relating to selling practices, provided for in Article 25 of the Law of 1990:
―It is prohibited to make the sale of a product conditional upon the
purchase of another product or of another service[,] as well as to
make conditional the provision of a service on that of another service
or the purchase of a product.‖17
In the case of financial services, such a provision could, for example, concern forced
savings, a condition sometimes imposed at the time a microcredit contract is signed.
―Forced savings‖ requires a microfinance borrower to put aside funds to enforce loan
repayment; it does not refer to ―deposits‖ in the conventional sense. It is difficult
from this perspective to judge the practice of blocked savings, which is widespread in
the microfinance sector throughout the world. This practice is particularly popular
with cooperatives as a form of guarantee.
Installing a cooling-off period could be a supplementary step, as introducing a time
condition to the contract creates a healthy period of reflection for the borrower.
While Cameroonian law does introduce a cooling-off period, it is applicable only in
case of door-to-door selling. In Cameroonian law, the place where the contract is
signed – the clients‘ home or the MFI‘s branch - is a key indicator of the consumer‘s
consent
The issue regarding the characterization of the work of daily collectors is often
raised. Indeed, these young women, employed by the cooperatives, perform tasks
that could clearly be referred to as canvassing, because they meet clients on the
street or at their place of work. If jurisprudence eventually qualifies it as such, those
transactions in the marketplace might be subject to the withdrawal power. In
practice, collectors‘ transactions are numerous, small in volume, and are supported
by very few written documents or records — the clients‘ savings books — which
make them difficult to regulate.
3.3 The Formal Requirements of Financial Contracts
Regulating the form of contracts is another way to ensure the honesty of
agreements. Having noted the reality of adhesion contracts in commercial practice,
the legislature deemed it useful to draw the consumers‘ attention to certain
contractual and Civil Code provisions that they may otherwise ignore.
Firstly, requiring a written contract for credit and savings transactions constitutes a
significant consumer protection mechanism. The written form provides some
measure of solemnity at the moment of signature, as well as evidentiary proof in
case of litigation. In Cameroon, the written form is therefore required for all amounts
over CFAF 500 (Art. 1341, 1342, 1344 of the Civil Code).
Moreover, OHADA law provides for the form of security: with pledges as the sole
exception, all liens on property must be in written form. The guarantee ―must be
declared in an act undersigned by both parties, which has the handwritten statement
17 ―Il est interdit de subordonner la vente d'un produit à l'achat concomitant d'un autre produit ou d'un autre service ainsi que de subordonner la prestation d'un service à celle d'un autre service ou l'achat d'un produit.‖
101
declaring the collateral and the maximum guarantee amount written in letters and
figures.‖18
In contrast, Cameroonian law does not include regulations that require an obligatory
statement in credit agreements, setting forth the rights and duties of consumers or
of the guarantee. Such compulsory statements are provided for, as an example,
under Article 819 of the Conférence Interafricaine des Marchés d'Assurances Code
(Code of the Inter-African Conference on Insurance Markets) for insurance products.
The written form of financial services contracts is generally respected by the MFIs we
interviewed, but not systematically so. We asked many clients if they had received a
copy of their contracts. Most responded that they had read their contract and
received explanations, but only 34 percent stated that they had been given a copy
thereof. A certain number of them received, in lieu of the contract, an amortization
table, with the statement ―read and approve.‖
Figure 4. Did you read the contract before signing it?
18 See Article 4 (2) Uniform Act Organizing Securities of the Organization for Harmonization of Business Law in Africa (OHADA). 19 See http://gaboneco.com/Docs/CIMA_Code_assurances.pdf.
48%
48%
4%
Yes No Others
102
Figure 5. Was the contract explained to you?
Figure 6. Did you receive a copy of the contract?
Several MFIs in Cameroon provided examples of the contracts they use. As a result,
we collected 57 sample contracts from nine of the country‘s prominent institutions.
These contracts cover all the possible legal relations between debtors, MFIs and
guarantors, including all types of security interests cited in this publication.
There is insufficient space in this report to present a detailed review of these
documents, but several preliminary remarks can be made. While it is clear that the
organizations attempted to use simple language, the legal language used in several
clauses in the contracts is still difficult to understand, even for lawyers.
72%
12%
16%
Yes No Other
61%
34%
5%
Yes No Other
103
Moreover, in many of the documents, it is difficult for customers to calculate the cost
of credit at one glance. One example is when a contract refers to general sales
conditions — such as costs or penalties — that are in a separate document. This is
also the case when the interest rate is indexed to the refinancing rate of the Bank of
Central African States (BEAC).
The MFI agents and directors often attribute misunderstandings with their clients to
bad faith. In our view, although this is difficult to measure, it is indeed very likely
that clients are as careless about terms and conditions when signing the contracts,
as they are serious about sales practices once the credit expiration date comes. In
this regard, it is likely that new strategies concerning information for clients, as well
as the establishment of cooling-off periods, could screen out uninformed clients prior
to litigation. The relevance of these options would need to be assessed from a
commercial point of view.
3.4 The Notion of Public Order
―…With the emergence of the theory of adhesion contracts, seeking consent free
from any defects undoubtedly leaves room for an agreement free from all defects.‖20
Beyond verifying consent, the Cameroon legislature will intervene, in a positive or
negative manner, in order to limit the contents of the contracts. This concerns the
classic notion of public order in civil law: the compulsory rules which the co-signers
may not deviate from by agreement.
Since 1990, Cameroon law has incorporated a public order dimension in contractual
undertakings, as follows:
Article 27: ―Clauses of agreed contracts between professionals and
consumers shall be deemed as not written when they are in fact
imposed on the consumers and confer an excessive advantage to
professionals, allowing them to withdraw in part or in full from their
legal or contractual obligations.‖ 21
Two comments can be made. First, the provisions infringing on public order are
simply deemed unwritten. They are not grounds for cancelling a contract. Second,
the Law of 1990 gives the judge the sole power of discretion in the domain of public
order, under vague terms of ―excessive advantage.‖
The contracts that we observed sometimes contain illegal clauses, or clauses that are
unclear, particularly concerning the establishment of security interests or the rights
of the parties under the Civil Code. These clauses, although null from a legal point of
view, mislead consumers with regard to the true extent of his or her rights. This is
the case, for example, when a clause states the right of an MFI to‖ directly‖ claim a
valuable asset, without it being clear to the debtor if this claim must be made in
court before a judge.
20 La protection du consommateur en droit camerounais. Tedondjio Rocisse Hilaire, 2004 21 Law n° 90/031 of 10 August 1990. Article 27 : « Sont réputées non écrites les clauses des contrats conclus entre professionnels et consommateurs qui sont en fait imposées aux consommateurs et confèrent un avantage excessif aux professionnels en leur permettant de se soustraire pour partie ou en totalité à leurs obligations légales ou contractuelles. »
104
This is also the case when a clause indicates that the debt shall be transferred to
eventual successors (e.g., ―[t]he debt of this contract could be claimed from the
borrower‘s inheritors‖) without specifying that the Civil Code of Cameroon, under
Article 775, clearly provides for the possibility of waiving the liability (or asset) of an
inheritance following an inventory.
3.5 Interest Rate and Usury
The public order provision for consumer protection that immediately comes to mind
is that relating to price regulation. The international media has repeatedly drawn the
public‘s attention to interest rates charged in the microfinance sector. We have tried
to answer the following questions: What are the interest rates applied by MFIs in
Cameroon? Are these interest rates abusive? Do these interest rates lead to effective
competition in the microcredit market? Finally, should microfinance rates be
regulated? If so, how?
3.5.1. Observed Interest Rates
In December 2009, a non-governmental organization (NGO) from Cameroon (ADEM,
based in Yaoundé), published a report about interest rates charged on loans made by
MFIs in Cameroon. This NGO carried out a review of interest rates charged by about
100 MFIs, and since then, has been dedicated to denouncing excessive rates
observed. The annual percentage rates reported by the NGO were generally very
high - an average of 42 percent, and as high as 78 percent.22
Our research did not completely confirm these figures. About half of the clients we
interviewed were able to provide us the monthly, annual or total tax rate that was
invoiced (56 clients in total). Using the assumption that credit was extended for a
duration of 12 months (which frequently seems to be the case),23 and the hypothesis
that the announced monthly rates are calculated using the decreasing balance
method (which most often seems to be the case, based on contracts obtained), we
estimated an annual average rate of 21.9 percent. Admittedly, this result does not
account for possible forced savings and fees. Even with those costs, the average was
still less than 30 percent per year.
However, the rate we observed does not exactly represent the market. Indeed,
although the rate is higher for merchants (between 2 and 4 percent per month, on
average), we interviewed many more salaried workers whose rates were generally
somewhat lower (rarely beyond 1.5 percent per month).
3.5.2. A Market Interest Rate?
In order to preserve contractual balance, legislators are sometimes tempted to turn
to price regulation - in this case, setting a usury rate.
In Cameroon, the deposit rate is regulated.24 But since 2008, there has been no legal
limit for lending rates. 25 As the MFIs regularly emphasized, a usury rate is a blind
22 ADEM, Taux d’intérêt débiteurs usuraires en microfinance au Cameroun, November 2009. 23 This figure was used for credits whose duration we do not know. 24 Article 53 of Ordonnance n. °85/002 of 31 August 1985 on the practice of credit instiutitons. Articles 7, 14, 15, 19, 20, 21, 22 and 28 of Arrête n°244/MINFI/DCE of 5 August 1989 on the conditions of bank modified by Arrête n°00001/MINFI/CSB/REP of 4 January1995. 25 Decision N°05/CPM/2008 of the BEAC Monetary Policy Committee.
105
tool. It does not take into account the fact that, for small credit, the set fees are
proportionally higher and the margins lower.
On the other hand, it is important to recognize that price competition, which should
be established on prices, does not really occur. Microcredit in Cameroon has not yet
established a market rate per se. This will only occur when the methods for
calculating interest rates are harmonized.
3.6 Array of Security Interests in Cameroonian Microfinance
We tried to verify the legality of the security interests used, and focused in particular
on the formal requirements of registration. We also sought to verify the adequacy of
these security interests with respect to the amount of credit committed.
Contrary to popular belief, the great majority of credit granted by Cameroon MFIs is
backed by security or collateral. Often, the clients even cite an accumulation of
security - for example, a guarantee and a mortgage.
The MFIs do not use all forms of security provided by the OHADA Uniform Act
Organizing Securities; on the contrary, they sometimes create new ones.
3.6.1. Security Interests: Authentic Pledges and False Mortgages
MFIs use all forms of security provided for by the Uniform Act Organizing Securities:
non-possessory collateral, possessory collateral (pledges) and mortgages.
Figure 7. What type of security interest was used?
Collateral — that is, the non-possessory charging of an asset — seems adapted to
most microcredit institutions. The collateral observed concerns professional
equipment, commercial stock, furniture, appliances and vehicles.
44%
29%
27%
Personal guarantee Mortgage Pledge
106
The pledge, however, involves a dispossession, which excludes a priori the factors of
production and stock. As a result, we observed pledges on objects of classic value:
e.g., motor vehicles or chain saws. A few MFI officials stated that they have
warehouses to store pledges, but admitted that it is extremely complicated to
manage the warehouses and settle disputes that arise about the deterioration or
degradation of the pledged assets.
In reality, when MFIs speak of pledges, they often mean the withholding of original
documents (e.g., car registration papers) while leaving the possession of the object
with the owner, or a mere non-possessory collateral.
One point we tried to understand is why many clients spoke of mortgages, or
pledges of property titles for operations, that seemingly were not registered.
The interviewees mentioned mortgages for ―the land title of my house‖, ―the
documents of my stall at the market‖, the ―documents of my house,‖ ―the papers of
my house,‖ ―the title property of my house‖ and ―land certification in the western
area of Cameroon.‖ The underlying practices reflected in these descriptions represent
an innovation found only in Cameroon: the pledge of assets of cultural value, and of
legal acts.26 From the accounts we collected, it seems that such pledges are confused
with real mortgage by clients or even by the MFIs themselves.
This practice provides no guarantee for the MFI because the client can easily obtain
duplicates or a certificate of loss of his ownership title, and sell the property or give it
in guarantee to another MFI elsewhere. Several MFIs have been victim of this
deception. The non-formalization of guarantees is a high risk for the MFI.
3.6.2. Personal Security
Personal security also seems indispensable to the development of microfinance in the
country, e.g., guarantees, as well as loan guarantees from acquaintances, colleagues
and friends. An interesting confusion was observed among several cooperative
members: the itinerant canvasser or daily collector allegedly guaranteed for them.
This, however, seems highly unlikely. At best, they benefited only from a ―moral
guarantee‖ with respect to the MFI.
One remark needs to be made. The interviews we conducted demonstrated the
general practice of associating personal guarantees with collateral - that is, the
allocation of a guarantor‘s asset, such as, notably, a mortgage guarantee.
3.6.3. Other Forms of Security
Salary domiciliation: Sometimes called the irrevocable certificate transfer of
salary, or the irrevocable certificate of salary transfer; similarly, domiciliation
of rent or delegation of rent.
The deposit check: A check deposited by the borrower with the MFI, but not
encashed. However, the practice of deposit checks is now prohibited in
Cameroon. Before this ban, it was common to accept a blank check, signed by
the debtor or his guarantor. In the event of a debit balance, an amount was
written on the check that was then presented for encashment. Since there
26 PETIPE Patern Aimé, La garantie des creances des COOPEC: le cas du reseau CamCCUL, Mémoire de D.E.S.S., Université de Yaoundé II, January 2008.
107
were no funds, it would then be marked as non-sufficient funds (NSF), which
would lead to legal proceedings against the borrower who wrote the check.
Today, legal proceedings could be undertaken for the beneficiary and against
issuer if it is established that the check was issued to guarantee a debt, i.e.,
at the time of the issuance, both parties knew that the account did not have
funds. In principle, all checks issued must be dated and encashed within eight
days. Although they can no longer undertake legal proceedings against the
issuing party, MFIs are still taking this risk, possibly because many clients
ignore the legal provisions.
An irrevocable sell order in the presence of a notary.
The delegation of power (power of attorney): This security grants the MFI,
through its president, the power to sell the property for payment of a debt. It
is sometimes accompanied by another agreement such as an ―obligation to
register the property.‖ This way, some MFIs will replace a proper mortgage
arrangement with a series of three to four contracts, which authorizes them,
if the creditor defaults, to register a property, sign a mortgage and then take
ownership. These contracts are a fragile legal construct. They are rarely
enforced, but are destined to intimidate the customer.
Trust: The debtor transfers the title of his immoveable asset to his creditor
until the debt is repaid. The trust, as reassuring as it can be for the creditor,
is not yet classified by OHADA law as a legitimate security.
Promissory note: A third party signs a promissory note that the MFI could use
against the borrower in case of default on the principal debt. This ―second
debt‖ is a kind of autonomous guarantee, completely disassociated from the
principal debt. The MFI could, in theory, resort to this second debt without
having to prove non-payment of the initial debt.
3.6.4. Registration and Inscription
In order to allow the enforcement of collateral and mortgages, the OHADA laws
provide both for their registration and their inscription. Registration is conducted at a
competent tax centre. Inscription is performed at an ad hoc administration: Registre
du Commerce et du Crédit Mobilier (Trade and Real Estate Credit Register, or RCCM),
Bureau des Domaines et de la Conservation Foncière (Office of Domains and Land
Conservation), Registre de la Propriété Intellectuelle (Register of Intellectual
Property), and Bureau des Transports (Office of Transportation).27
We asked the MFIs if they regularly registered their collateral. We received the
following answers:
27 Ibid.
108
Figure 8. What type of security did you use?
The MFIs explained their reluctance to register security interests due to cost, lack of
matriculation of buildings entitling them to the issuance of the property title, and the
building registration fee.
The MFIs deplore the fact that land is rarely registered. Indeed, the percentage of
registered lands in Cameroon is estimated at 15 percent - at least 10 percent in
urban centres, and 2 percent in the rural and semi-urban areas.28
A second complaint about the OHADA Uniform Act is the disproportional cost of
formal requirements. Yet, the cost of formal requirements associated with the
publication of security interest is borne by the client, who contributes to the credit
cost. Moreover, since 8 April 2008, collateral and mortgages for MFIs transactions
are registered free of charge.29 Unfortunately, this law is not widely enforced, so
many MFIs choose to ignore its provisions. Also, collateral is still subject to an
inscription tax of 1 percent of the value of the credit, including interest. Taking into
account the ratio observed between the value of security interest and the debt (see
below), we estimated that the registration fees range between 3 and 4 percent of the
credit amount.
Finally, with respect to mortgages, borrowers are also charged, along with the
registration fees, the costs of obtaining certificates of non-mortgage, or certificates
of ownership, the notary costs and possibly expert fees to evaluate property values.
Besides, the loans granted by the MFIs are generally short-term, while the time
needed to carry out these formal requirements is often long (on average, three
months). Frequently, the credit will be paid back even before the formal
requirements of registration are completed.
28 Ibid. 29 Circular N°125/MINFI/DGI/LC/L of 9 April 2008.
54% 30%
16%
Securities always registered Securities rarely registered Securities never registered
109
3.6.5. Over-collateralisation
Another topic of interest was the issue of disproportionate security interests. We
asked clients about the price of the security, on the one hand, and the amount of
their credit or loan, on the other. Twenty-one individuals answered with adequate
precision, making it possible to draw a comparison. The graph shows in ascending
order the ratio between security interests and debt.
Figure 9. Loan : Credit Ratio
The average ratio of security to debt is 3.56 — this means that the value of security
requested is, on average, 3.5 times higher than the established debts. Only one
value was below 1 (red line), meaning that we found only one instance of an MFI
accepting a security of lesser value vis-à-vis the debt.
3.7 Redress Mechanisms
The malfunctioning of redress mechanisms can be harmful for two reasons. On the
one hand, it can impact the quality of the MFI‘s portfolio, particularly its ability to
protect itself from borrowers of bad faith. On the other hand, borrowers themselves
are too often subject to illegal and intrusive recovery procedures.30
It is difficult to assess the proportion of disagreements associated with microfinance
services that are finally resolved through the Cameroon courts, but it seems to be
30 Laurent Lhériau, La microfinance commerciale en zone urbaine : quelles possibilités et quelles perspectives en zone franc? Epargne sans Frontières, Techniques financières et développement, n°68, September 2002.
110
the exception. Without doubt, the cost, slowness, and, to a certain extent, the
uncertainty of its outcome, explain the weak attractiveness of judicial conflict
resolution.
Although it may seem counter-intuitive, the weakness of redress mechanisms and
debt-collection tools eventually results in customer inconvenience, as the MFI is
forced to protect its portfolio with heavier collateral, higher costs, or sometimes
harmful procedures.
3.7.1 The Low Frequency of Cases
The judges we interviewed indicated that they knew only of a few cases in which
MFIs filed lawsuits against their clients. Indeed, the MFIs we interviewed seemed to
confirm this point. Among eleven MFI directors interviewed, six stated that they
never resorted to bringing legal actions, and three stated that they have been
involved in litigation but that it was uncommon. Clients and institutions that we
interviewed seemed to prefer out-of-court, or non-legal solutions.
In almost all the cases described, the MFI was the complainant, and the cases
concerned payment defaults on loans. The judges we interviewed could recall only a
few rare cases that concerned consumer complaints against abusive recovery
practices.
In our research, we also found that is very rare for grievances to be of a criminal
nature. This can only occur if the client engages in fraud, or even if the client is a
victim of fraud. Rather, the MFIs‘ grievances are most often judged under Article
1147 of the Civil Code (contractual responsibility) and sometimes — and this is good
news — under the Law of 1990 on consumer protection.
3.7.2. Elements of Proceedings
Considering information collected in other countries, we have focused in particular on
the transparency and fairness of legal procedures related to MFI clients in Cameroon.
In particular, we were interested in the issues of legal aid, judgment by default and
the production of proof.
The legal aid mechanism (i.e., when legal fees are paid for by the State) was
reformed by Law No. 2009/004 of 14 April 2009, on the Organization of Legal
Assistance, which widened the field of application of legal assistance. MFI low-income
clients, natural persons, and — an innovation since 2009 — moral persons, can also
benefit from compensation for legal fees.
The second concern was the procedure with respect to judging a client in absentia or
by default. This is a vital criterion in assessing access to justice in a geographical
area. It actually gives an indication of the density of the legal map, on the one hand,
and a measure of the right to be heard, on the other. And yet, according to the
judges interviewed, the right to be heard does not pose a problem in 90 percent of
the cases. In rare instances where the debtor is absent from court, the judge always
ensures that he was present in the first hearing. In default of the above, the case is
postponed.
The third concern we examined relates to the capacity of MFI clients to obtain and
save proof of their financial transactions. The judges, as well as the directors of the
111
MFIs, confirmed that the issue of proof has never been a particular problem for any
party; the clients generally properly store their account books, deposit receipts,
copies of checks and other vouchers.
The main concerns that we had over the fairness of trials have proven to be
unfounded. On the other hand, our research highlighted the courts‘ limited budgets.
In principle, the payment procedure should allow the creditor to recover his debt
within a few months;31 however, the MFIs we interviewed mentioned procedures that
are not only excessively long, but also unpredictable. They mentioned durations of
up to six years. Added to this excessive timeline is the clearly disproportionate cost
with respect to the amount of microcredits at stake. As the MFIs explained in the
interviews, the cost can be as high as 50 percent of the claimed amount.
3.7.3. The Outcome of Legal Procedures
As a result, the forced execution of contracts is expensive and inefficient. The MFIs
are rather pessimistic about the effectiveness of legal procedures. Half of the MFIs
interviewed which had litigated disputes in Cameroonian courts admitted having lost
their case, or having won but without being able to recover their debt, due to lack of
assets to seize. Only two stated having always won or almost always winning their
cases.
Furthermore, it is the losing party that assumes the costs of the entire procedure. As
such, whether the MFI loses or wins against an insolvent client, it nevertheless risks
getting involved in a process that would only add huge costs to the loss of its loan.
It is difficult to verify the MFI‘s negative perception. According to half of the judges
we interviewed, it is the MFI that generally wins, particularly due to better
management of cases and proof presented. However, it would be necessary to
request statistics at the court registry to properly draw a conclusion.
3.7.4. The Unsuitability of the Formal Justice Machinery in Microfinance Operations
We have examined some aspects of the legal system to determine if there are
possible harmful imbalances for MFI clients. In actuality, the opposite is true:
Cameroon‘s legal system seems to provide an expensive, protracted and inefficient
solution to the settlement of claims, which is rather unfavourable to MFIs. Justice,
being costly and overly delayed, proves to be unsuitable for the transactions of the
microfinance economy. The contracts, largely deprived of legal strength, lose their
significance.
Consequently, the consumer is indirectly, yet undoubtedly, the biggest loser in this
equation. Indeed, the same way that an inadequate provision of security deprives
him of credit or obliges him to provide excessive and illegal guarantees, the lack of a
system for enforcing obligations shifts the balance of power towards intrusive, illegal
and costly mechanisms.
31 PETIPE Patern Aimé, La garantie des creances des COOPEC: le cas du reseau CamCCUL, supra note 26.
112
4. Conclusion: Recommendations for Strengthening Consumer Protection
The following are key recommendations for strengthening consumer protection in
microfinance lending in Cameroon:
• Harmonize the calculation of interest on credit, through a technical expert
group (TEG).
• Ensure MFIs comply with the obligation to post bank conditions. Propose a
single grid model for posting and publicizing these conditions.
• Launch discussions on the timeline for withdrawal within the framework of
certain commercial practices, particularly canvassing.
• Open discussions on the imposed periods for reflection for the taking of
guarantees.
• Annually organize a group to reread MFI contracts, in order to warn the public
about illegal clauses and poorly written drafts.
• Make compulsory the provision of an original copy of the contract to each
party.
• Implement controls on unconventional means by which guarantees are taken
by MFIs.
• Create a think tank that will formulate a reform agenda with respect to the
OHADA Uniform Act for Organizing Securities, and begin international debate
on the subject with other stakeholders of the microfinance sector.
• Study alternative systems of dispute settlement specific to microfinance
transactions.
• Develop new ways of training and creating public awareness.
In general, to establish a comprehensive consumer protection regulatory framework
for financial services, Cameroon may also consider the following recommendations:
Prohibiting reckless lending (similar to the provisions in South Africa‘s
National Credit Act (NCA)). The South African Act protects consumers
from reckless lending, and provides them with an understandable credit
agreement in plain language and several other consumer protections.
Requiring financial services firms to explain clearly to potential borrowers
the key features (including any fees, commissions or other charges) of
products and services.
Ensuring clear, fair and full disclosure of interest rates and charges (e.g.,
APRs or total cost of credit).
Ensuring that debt recovery expenses charged to the consumer, if any,
are reasonable.
Requiring that any advice given by a financial services entity to a
consumer be suitable for the consumer and take into account his or her
circumstances.
Prohibiting conditional sales. A conditional sale is an arrangement in which
a buyer takes possession of an item, but the title remains with the seller
until some condition is met, such as payment of the full purchase price.
Instituting a cooling off period for certain loans, e.g., loans above a certain
value and for a duration greater than a specified period of time.
Requiring that financial firms periodically issue financial statements to
consumers at stated intervals.
Requiring that notifications be sent to consumers when an institution
makes changes in the terms and conditions of financial products.
Requiring proper training, professional standards and supervision of
113
relevant staff of financial entities or their agents.
Requiring that financial entities treat consumers fairly, and enacting
prohibitions on unfair, deceptive or aggressive practices.
114
References
ADEM, Taux d‘intérêt débiteurs
usuraires en microfinance au
Cameroun, novembre 2009
ATANGANA-MALONGUE Marie-Thérèse,
Le cautionnement réel dans l'acte
uniforme OHADA n° 872, p. 277,
Edition Juris Africa, Paris
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