With 700m new accounts opened between 2011 and 2014, more people than ever have a bank or mobile money account. But many of the new consumers are in poor countries, and people with low incomes are often more vulnerable to abuses when they borrow, save or send money.
The Smart Campaign, a consumer movement, surveyed 4,000 microcredit borrowers in four countries. Their responses were documented in a report, It’s My Turn to Speak.
The study looked at Peru and Georgia, where there is relatively good protection for consumers, and Pakistan and Benin, where protection is less robust.
Some good news emerged: most people are satisfied. Borrowers rated their microlenders as good as, and sometimes better than, schools, hospitals, and governments. Grievous abuses were few – about 3% of those surveyed.
But there were cautionary tales. Too many borrowers don’t understand what they are getting into. “I borrowed blind,” one Peruvian woman was quoted as saying in the survey.
In Benin, Pakistan and Peru, only about half the respondents said they fully understood the terms and conditions of their loans. In all four countries, only a quarter knew the interest rate of their latest loan. This can lead to nasty surprises.
In Georgia, many customers took out loans in US dollars – in some cases without understanding that the loans were dollar-based. When the Georgian currency dramatically depreciated, these customers found higher loan repayments eating up their grocery budget.
Understanding of insurance was particularly spotty. A woman in Peru bought theft insurance at a street kiosk only to find, after a robbery, that she did not know and could not find out how to claim against the policy. In Benin, customers lost their savings when they could not distinguish between legitimate microfinance organisations and fly-by-night scammers.
And even in Peru, where the markets are more sophisticated, few customers understood how they were affected by their credit rating. Not many customers knew how to lodge a complaint or believed complaining would do any good. Only a third of clients said their lenders told them how to file a complaint.
“If you go to complain to the office, or elsewhere, you won’t get another loan,” said a man from Benin.
The report shows there is an urgent need to rethink transparency and customer communications. Beyond requiring lenders to disclose all the terms, regulators should ensure that the borrower understands them. Microfinance clients may need simple language that highlights essential information. Responsible lenders and regulators should verify that clients understand key facts before signing off loans.
People who use microfinance value respectful treatment highly, be it from teachers, police or financial institutions, because they so seldom get it. But harsh treatment is more likely when borrowers fall behind on their repayments.
In Benin and Pakistan, where regulations on microfinance are either non-existent or poorly enforced, clients spoke of providers holding customers hostage at the office, placing a defaulter in a wheelbarrow and trundling her through town, and broadcasting defaulters’ names on the radio. Borrowers who are part of groups, as were nearly all the respondents in Pakistan, said groups often apply intense social pressure. The humiliation can be devastating.
In their responses, customers wanted flexibility and humane treatment, advocating measures like grace periods or leniency for long-time customers facing emergencies. Fortunately, in Peru and Georgia, extreme abuses have largely disappeared, thanks to strong market conduct laws and enforcement. And perhaps equally important, well-functioning credit bureaus in these countries give lenders an alternative way to motivate clients to repay, without resorting to social shaming.
If regulators listen to people who use microfinance, they will hear that regulation, genuine transparency and humane treatment are prerequisites to successful financial inclusion for people on low incomes.
If lenders listen, they will realise that protecting consumers makes business sense. We found that even a few examples of abuse did disproportionate damage to the reputation not only of the abusive provider but of the whole sector.
But customers who understood their services tended to rate them highly. Clients are so hungry for respectful and dignified treatment that they will become loyal customers, and even brand ambassadors, for lenders that explain things clearly and treat them with respect.
- Elisabeth Rhyne is managing director of the Center for Financial Inclusion at Accion