Q&A: How do MFIs Mainstream Client Protection?

Microfinance Focus, October 15, 2010 (Colombo) : Another engaging session facilitated by Kelly Hattel, SEEP Network Consultant from USA.

Kelly: Leah in your experience, what are the most challenging issues for MFIs in client protection?

Leah: Many feel that client protection is all about avoiding over-indebtedness and how to set their policies. Smart Campaign defines over-indebtedness as “carefully establishing a borrower’s ability to repay a loan and the borrower must be able to carry out their debt services without compromising their quality of life.”

For example, we have to provide loan officers explicitly with clear guidelines to carry out a loan contract/collection. Also, MFIs also tend to forget the power of their internal auditors to prevent over-indebtedness. The internal audit department should monitor the sample of clients (the delinquents) who have under/non-performing loans. The auditor’s should check the client’s self reports on why they cannot repay the loan, then they should go back to the management to see if the loan officers are giving the same feedback to management about these repayments.

Kelly: This question is to our investor, Matteo. For example, you have an MFI with good outstanding portfolio but not so good client protection, and for another MFI, you have great social performance but not so good financial returns. Which MFI do you choose to fund? Do you have a sense of how this affects you bottom line?

Matteo: In the past, we were strong and to say no to MFIs who lack in client protection. But we have to pay returns to our investors so there is some challenges in making our decisions. But we are still hard against the poor treatment of clients, so if we’re not satisfied with the lending practices, we will definitely not lend to the MFI.

On one side, we have private investors and on the other side the MFI. So we have to be transparent and accountable in our information. You do want socially responsible investors. You do not want market funders, you do not want capital hunters to exploit microfinance. We do not want a buy and sell asset class. We want committed investors and we consider MF buy and hold asset class.

First, we do look at credit quality. Then management, governance etc and whether they can pay us back in 24, 36, 48 months. Then we look for good social performance.

Social performance may not equate to credit quality but we tend to see a trend that client protection can lead to good credit quality. Hence, when we conducted assessments in East Timor, the credit quality is not outstanding there but we are willing to take a risk because we see good management.

Kelly: What about you Mr Ruben, any comments on the Philippines?

Ruben: In the case of Laguna where CARD MRI operates, our agreement is that if we find anyone doing inappropriate practices and mistreatment of clients, we will fire them.

Kelly: I’d like to turn the discussion over to the audience.

Question: My question is for Matteo. I had many opportunities yesterday to meet investors in this conference, today as well, I think most investors are eager to participate in equity, and would like to understand why is this so?

Matteo: I believe you want to understand the investors point of view in taking equity stakes in MFIs? As this is not related to the topic of client protection, I will make it brief. Our work involves differentiating between profit maximisers and social responsible equity funds. To achieve a double bottom line in financial and social objectives, we do also want to strengthen the methodology, the management of MFIs. As an equity player, investors have to look at the principles clearly for both a debt player and equity player.

Leah: What you are saying is that investors have the decision to reject or accept an MFI.

Question: When the MFI is smaller, the client protection practices seem to be better, when the MFI grows, this area of client protection seems to deteriorate and we tend to forget about it. That is the reality we face.

Leah: It sounds like you have done some thinking about it. Indeed when MFIs grow, we tend to see a mission drift, we tend to forget client protection. I think it is about creating a corporate culture. Meaning, one training for staff is not enough. One training at the start when the officer enters the institution is not enough. It is important to have renewal of trainings.

Question: We also have problem on how we deal with savings. It is difficult to withdraw savings for the members as our MFI grows too big.

My question is, how regularly should we go to the clients and get their accounts checked? They may be illiterate, but they understand figures so it is not difficult to get them to attest to their balance. How do we get feedback from them on a regular basis?

How about technology? Most of the corruption of staff takes place in savings. Is there any way we can use technology to make sure staffs do not take savings from the clients for themselves?

Leah: Maybe you can think about MIS (Management Information System), Fraud detection built into your MIS.

Matteo: Cash insurance for the officers. Also, you can outsource to external firms apart from your own audit department to check the savings accounts. Your observation is very real. We’ve seen alot of MFIs growing and failing. It is a monstrous war in grow grow grow. It is again looking at who are your investors, your mission and vision. It is fine to grow 10% a year if that is your capacity. You don’t have to grow 100%, even if your investor is pushing you. You need to select who are your investors and equity shareholders.

Question: Is an investor mostly looking at financial returns?

Matteo: There is a need for investors to have financial returns, but we do ask for social performance reports and documents on quarterly and yearly basis from MFIs. We do provide confidential newsletters to our investors about the outreach, returns etc. It is important to balance both financial and social objectives and so we have a social questionnaire built into our due diligence process (refer to Matteo’s speech).

Kelly: I think both financial and social objectives are important. I don’t think one precludes the other. If you are committed to social return, and utilise the principles set out for client protection, I think that adds value and counts for something.

Matteo: In Eastern Europe, there was a major crisis. One or two MFIs survived the crisis because they had good staff ethics, principles built into their operations. As an MFI, you could give up some of your short term financial gains and focus on social objectives and client protection in order to preserve long term gains.

Reject investors who are not buying this proposition and reject clients who do not buy proposition. Because it will cause you to fail. Because client protection is what that is going to make you stand out in the future among competitors. Give up some short term financial gains to preserve long term gains.

Question: I appreciate your efforts of client protection. On the field, loan officers are getting killed, some drowning in floods while doing their work, some are being raped in the field.

Are there any initiatives on how we can ensure that they are protected in the process of doing microfinance? How do we ensure that they do not get corrupted in the process?

Ruben: The way TSPI conduct staff operations, regarding savings and deposits, we do not allow officers to collect cash. All collections are done through borrowers/clients. A system where deposit collections for the week are first pre-collected among themselves before the meeting. The clients receives the enjoyment of the protection of the community. When the staff does the collections, that’s when staff start getting corrupted. And also when they get exposed to the village environment where they may not be familiar with the area, they get robbed and mugged. We provide insurance for them, but of course their safety is still our concern.

Question Where do they deposit the money? You’re saying loan officers don’t collect the cash so where do the clients deposit?

Ruben: It is a group approach. 20-30 of them, where they first collect savings among themselves the day before the weekly meeting. They go to the bank. They get deposit slips. We then have weekly meetings with them at where the borrowers reside, they turn over the deposit slips. Meeting is held on the day after they made the deposit so we know the defaulters before hand.

Leah: Staff should always maintain interaction with clients. That’s why our Smart campaign has a Staff Appraisal System to identify how they are treating the clients. The organisation must have a robust internal audit and fraud system to detect corruption and disappearance of savings & deposits.

Question: How do you make client protection not only to your borrowers, but also to savers? In the Philippines, the savers represent the most important portion of the investment. How do you protect clients who are money savers?

Ruben: TSPI is a non-profit, we cannot generate savings from the public, only from our existing credit clients. This is allowed by the central bank. While we are capable of allowing them to deposit as much as they want, because many want to do that since we pay them 5% interest annually whereas banks interest is less than 2%. To protect these savers, what we require is that the passbook that they maintain must always be with them at all times. And should not be turn over to officers at any time.

While technology will help significantly, we have been trying that for years without avail so at the moment we have to be satisfied with the book/paper system that we have. We ask them to see that whatever is reflected in the pass book is exactly what reality shows.

Also despite regular seminars and despite many initiatives such as putting more auditors to check saving accounts, it can still be very frustrating. The corruption continues. I think that auditors do not solve the problem, because by the time you find out the problem (auditors report only comes 3-4 months after problem arises), it is already so late.

Another solution that we started about 2 months ago, was to form a team that can replace half the existing staff so that those staff can go on vacation. The feedback I am getting is excellent. We are able to provide relief and rest for staff as well as the environment to check savings account balances. We can now discover things that otherwise could not be discovered when those staff are in their places.

Leah: That’s great ideas. I just want to speak about savings quickly. We have technical tools in Smart Savings tools. 10 different points of contact in client savings, for example, 1^st point of contact is sales of savings etc.

Question: I am from a rating agency, you mentioned that after you disimburse the loans, you come on annual or quarterly field visits to the MFI, how do go about regulating the MFI who are starting to show unhealthy practices in the field that is against client protection?

Matteo: When a loan has been extended, we conduct regular visits, if loan repayments are not implemented; we will not recall the loan or force them to make an early repayment just because we are not satisfied. It involves lobbying the stakeholders and being vocal and straightforward to the Chairman and the Board of the MFI, telling them “This is what we have seen in the field, you still have 12 months to pay the loan. Thanks to Smart Campaign, and us, here, you have resources to work with to solve the problem.

Kelly: About improving market discipline, we have agreed on 6 principles, it can be overwhelming, but it is exciting, there are tools available and the Smart Campaign is very active. It is warming to know that there are organisations doing client protection. And we heard from Ruben and Matteo about what is happening on the ground in terms of implementing the principles. I thank everyone for putting in your participation and thoughts.

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