Consumer protection services; empowering the poor in Microfinance

Microfinance is supposed to help reduce poverty, to “put poverty in museums” as GrameenBank’s founder and Nobel Peace Prize winner Muhammad Yunus once stated. Strange that in the Millennium Development Goals the United Nations only mentions loans to the poor for halving poverty by the year 2015. Will the failure to achieve that result lead to real accountability for the UN, for donors or for governments of countries with massive poverty? I dare say not.

As a strong supporter of Microfinance in poverty alleviation it is clear to me since 2005, the United Nations’ Year of microcredit that its goals cannot be achieved. Also I failed in my work over the last ten years to have Microfinance defined in a way that the beneficiaries can effectively hold us all accountable regarding implementing strategies, policies and laws. In our debates leading up to 2005 we succeeded to convince the UN to add a subtitle “Building inclusive financial systems”. But subsequently, the “social responsible lenders and investors” regained a firm hold on everything called Microfinance; lending to people targeted for socio-political objectives is the dominant definition of Microfinance. Rich people have an opportunity to redeem themselves by giving to charities that fund microlending, governments and political hopefuls have an efficient instrument to get political power or to hold “soft power” over other governments. Even greedy businesses of all kinds, including commercial banks, use Microfinance in the Corporate Social Responsibility (CSR) activities but continue “profit-maximising” for short-term shareholder and management goals as their core business.

The “drivers of microfinance” state that they are “pro poor” but in a way that does not make them responsible for failing to demonstrate sustained results in making poor people less poor, which is what they state they do. They claim such success in their public claims, in their advertisements to get more funds and in their claims that they work “for the good of all people”. But they clearly and adamantly refuse to take responsibility for lack of evidence that the poor have more money in their accounts, which would clearly mean that they are less poor. That reminds me as a lawyer of definitions on “providing misleading information”.

The champions of socio-political microlending know very well how to “take the wind out of the sails” of the poor. They promote that MFIs should have voluntary “Codes of Conduct” and that there should be “Transparency” on data which should also include non-monetary data provided by “Social Performance Measurement (SPM)”. Firstly, Codes of Conduct give no legal claims of rights to the poor, they remain dependent on the good “will” of the socio-political lenders. Secondly, by forcefully demanding as an absolute condition for their funding that non-financial results be included in performance data a (micro) financial institution can never be held responsible. But let us assume that Microlenders, their financiers and authorities that share their theories and claims so publicly do not have bad intentions, that indeed they want to empower the poor; what should they do?

The first thing that people, organisations and authorities are absolutely required to do if they want to help the poor with Microfinance is to put the wishes of the poor people first and last. What can be argued against that? Secondly if Microfinance is a tool to help the poor then it should be recognised as a FINANCIAL tool, not to deliver non-financial goods and services as a part of core business. Added non-financial services make MFI’s operations more expensive and will make them less focused on what they should be responsible for. It should be understood that money that keeps value is the main pillar for ensuring that all citizens can purchase all goods and services they need for living and enhancing their lives, realising their desires and pursue their happiness and that of their families. And thirdly, all stakeholders accept that fair competition ensures that consumers get the best service at the best price, but fair competition can only be ensured in the same market of one kind of service. Finally, what can be argued against providing beneficiaries with legal and institutional tools that ensure their rightful needs?

It seems that the above-mentioned points can be quite easily agreed upon; isn’t it? Now, Consumer Protection can support the three abovementioned issues when:-

I. Microfinance stakeholders allow to have Microfinance services providers limit themselves as operators in the Financial (services) Market;
II. That a Financial Services Market is a “place” where similar services (comparable in usage and interchanged in one geographic area) can be freely exchanged under conditions of fair competition and with fair rules for providers and consumers;
III. That providers, consumers and government have equal rights and obligations that can be effectively enforced within an impartial judicial system and together build an inclusive market of (commercially sound) sustainable (micro-finance) businesses.

If poverty reduction in Microfinance is about poor people having more money safely at their disposal, that they have the understanding and institutions to soundly manage that money and legal instruments at their disposal for insisting on safety and soundness, then I don’t see any obstacles for Microfinance to achieve its enormous potential. Effective access to legal instruments does not mean that all conflicts need to be resolved by lawyers and judges. Indeed the “rule” should be that most misunderstandings and conflicts are indeed resolved “amicably”, “out of court”. But we can also agree that without rules, without a legal system that effectively binds all citizens, including when they operate as businesses or as public officials, it is impossible to structure and stabilise society.

So, if we agree then the last question remains of how to provide the poor, the alleged beneficiaries of Microfinance, with effective Consumer Protection?

1. Consumer protection promoting the rights (and obligations) of Microfinance beneficiaries, clients, requires that local government is committed to providing citizens these rights and enabling them (the clients) to fully understand also all their obligations. It also means that government explains citizens that they have an obligation to inform themselves and compare before making decisions (which is challenging when understanding that poor people need money always and often act opportunistically);
2. The promoters of Microfinance who now dominate the sector defining it as socio-political lending and promote access to credit need to change their definition to integrating so far unbanked people into professional financial management. They also need to allow local governments and final beneficiaries to claim and enforce their rights and obligations, also against the promoters if they commit gross errors or violate laws;
3. National Constitutions that in most countries (if not all) give all citizens “Equality under Law” and “Equal Access to the Society and its Economy” need to be recognised and understood as the basis for all other laws and for economic and social activities;
4. Laws on economic and entrepreneurial activities need to recognise and enforce consumer rights and, thus, prohibit abusive practices (which includes usury), avoid over-indebtedness, combining such rules with rules of “free (autonomous) enterprise”;
5. Microfinance needs to be a full and exclusive part of the formal financial sector and thus obliged to apply with all the rules of this (market) sector. Activities that use Microfinance terms but mainly include socio-political activities that undermine the financial market need to be clearly and legally separated from Microfinance and the Financial sector[1];
6. Microfinance laws and regulations, included under financial sector laws and regulations need to include consumer rights (and conditions, including obligations, for their practical and full application);
7. Microfinance institutions, including banks providing microfinance services, need to create a specific department for consumer complaints. Such department needs to work according to pre-established rules and procedures;
8. A public body needs to exist that ensures effective access and reinforcement of consumer rights under law. Such a body needs to have adequate authority (legal power), credibility (technical competence) and sustainability ( sufficient human and financial resources);
9. Civil society organisations need to be encouraged and supported by both local government and foreign donors to play an active role in consumer education, consumer protection and in assisting over-indebted consumers;
10. Because only (accurate) “measurement makes science”, local academic institutions need to play an active role in verifying data provided by (micro-) finance institutions, other businesses, governments and foreign donors and discuss them (the data and their verification) publicly. And, finally,
11. Involve public and specialist media in improving and widening understanding of the importance of professional finance and consumer protection for society in general and for poor and marginalised people, businesses and areas in particular.

Effective consumer protection in Microfinance will contribute to democratisation in a sense that all citizens, businesses and public authorities will actively contribute to a stable inclusiveness of society and in a sense that enhances chances of all people to safeguard even the smallest financial means they have at their disposal to improve their lives and protect those of their dependents. This is what the United Nations also decreed in its 1985 Guidelines for Consumer Protection, already 25 years ago. I feel it is high time that the UNO, their experts and the member states that signed these guidelines make some work of implementing them for the benefit of the weakest in our societies: microfinance clients.
Peter van Dijk, Jakarta, September 2010

[1] They can be part and in fact absolutely need to be part of the National Strategy, Policy and Regulatory Framework to build a market-oriented inclusive financial sector, but with activities outside that market, for instance for « market preparation activities », for support measures of all kinds such as financial literacy, education of public officers (including accountants, auditors, magistrates, social services agents and provincial authorities), etcetera.