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Improving Micro Finance Client Protection in Africa
National Consumer Forum
Improving Micro Finance Client Protection in Africa
Presentation to the Micro Enterprise Alliance conference
10 March 2005
Birchwood Hotel, Boksburg, Gauteng, South Africa
Ladies and gentlemen
I speak here on behalf of Consumers International, an international federation of about 260 consumer organisations from 120 countries.
I also speak on behalf of the National Consumer Forum (NCF), a non-governmental organization that campaigns for the promotion and protection of the rights of South African consumers. The NCF represents the aspirations of tens of thousands of poor and disadvantaged consumers who have for many years been victims of unscrupulous business practices.
The consumer movement worldwide promotes the recognition of consumer rights, and their translation into effective policies and practices by governments, international agencies and the business community. At the same time, we seek to empower individual consumers - through education, information and advice - to exercise their rights. The movement's role is also to constantly brief consumers about political and economic issues that affect the nature, quality and accessibility of goods and services.
Borrowers abused in the rush for super-profits
The issue of client protection in the area of micro finance has been on the priority list of the NCF for many years. In fact, the first consumer bodies in African areas such as Soweto were established in the seventies as a result of the abuse of poor people and low- income earners by credit grantors.
Micro finance plays an important role in the economies of many African countries. Many consumers, especially the poor and the disadvantaged, can only improve the quality of their lives - by starting a micro/small enterprises or by buying furniture and household goods - by making use of micro finance. This is due, of course, to the fact that institutions such as banks are unwilling to provide access to credit to the majority of our people, forcing them to get loans at vastly higher interest rates from less regulated lenders.
This industry has grown in recent years into a multi-billion dollar sector across our continent. Seeing the huge customer base and excessive profits, many new players have joined the industry - including the very same banking institutions whose restrictive lending practices led to its emergence. There are many players who are exploiting the fact that, in many countries in Africa, this is essentially unregulated industry and capable of delivering super-profits.
In South Africa, we have experienced massive abuse of poor, low and middle-income earners by unscrupulous micro lenders, due to the fact that our legislation was outdated and clearly inadequate to deal with the challenges of such a huge industry. For many years now, the NCF and other NGO bodies in the country such as the Black Sash and others, have made representations to government and the industry about the prevalence of bad practice such as exploitative interest rates, illegal collection practices (even threats of violence) and the withholding of the identity documents and bank cards of lenders.
We therefore welcome and fully support the initiative of the Department of Trade and Industry to introduce legislation to regulate the credit industry, to enforce consumer protection and to promote competition.
What the law must do
The first challenge of the new legislation is to ensure that contracts for micro finance, in fact all contracts, should be written in simple language. We need to be conscious of the fact that we come from different cultural, educational and language backgrounds. A simply written contract or agreement will make it easier for consumers to understand and will benefit both the consumer and business.
Another big challenge for the new legislation is the matter of reckless lending which is responsible for the vicious debt trap that many consumers find themselves in today. Government needs to develop guidelines urgently that will ensure that consumers' debt commitment does not exceed 33% of gross salary.
We need to fight to indebtedness at all costs. We have to ensure that micro finance service providers do not lend clients more than 33% of their gross salary. If we lend more than that, we are creating a debt trap for consumers and this may have very serious social implications.
The other issue is that of the regulation of the credit bureaus. Many consumers are forced to resort to unscrupulous providers of micro finance due to the practices of the credit bureaus related to the collection, sale and distribution consumer's personal information. As we write in our first edition of Consumer Fair, which will be published monthly to raise consumer awareness and to lobby for pro-consumer policies, this industry cannot be allowed to continue being prosecutors and judges in their own cases. This practice severely undermines the objectives of consumer protection and fair business practices.
More information to allow the right to more choice.
The other issue that we are concerned about is lack of access to information that will empower consumers to shop around for the best deal and to have access to the total cost of the credit that they are considering getting. Clearly, this is critical in ensuring that consumers are able to enjoy their right to choice - an important consumer right - so that their decisions do not have an adverse impact on their financial health.
This, obviously, will go hand in hand with the cooling-off period of at least five days - giving the consumer the opportunity to reconsider if he or she feels that the deal may lead to a debt trap, for instance.
Information that the consumer must receive needs to include clear and transparent pricing - written in a clear, prescribed form that will explain the following aspects to the consumer:
· The principal value being borrowed
· The total of all interest
· All charges
· All fees
· Any VAT costs
· Any other costs that may be applicable
One very positive element in the proposed legislation is that in instances where credit agreements are found to be unlawful by the credit regulator, the law may provide that consumers be refunded their money with interest. This has to be applauded as it ensures that there is a balance in the market - unlike before, where consumer compensation was excluded and the focus was only on criminal convictions. This system never benefited many consumers, as it is not a simple matter for an ordinary person to make use of the courts of the land.
Privacy of personal information.
As we discuss protection for consumers who use micro finance products and services, we also need to think about the privacy issues. Many countries of the underdeveloped world still do not have personal data protection legislation. The industry cannot afford to wait for the promulgation of such acts if it is serious about consumer protection. The private information of clients needs to be protected from reaching others who are not authorized to access it. Consumers need to consent in writing before their personal information is made available to third parties.
To conclude, I would like to say a few words about consumer education. This education is extremely important to empower consumers to make the right decisions in the market place. As the saying goes, an informed consumer is the best weapon against an unfair business practice. And if we want all our clients to receive adequate protection, if we want consumers to enjoy their full rights under any law, we need to start soon to put in place very innovative consumer education programmes. The focus of these programmes will, of course, be on the poor and the disadvantaged. Only then will we be convinced that the industry means business when it talks about consumer protection for its clients.
Improving Micro Finance Client Protection in Africa
Presentation to the Micro Enterprise Alliance conference
10 March 2005
Birchwood Hotel, Boksburg, Gauteng, South Africa
Ladies and gentlemen
I speak here on behalf of Consumers International, an international federation of about 260 consumer organisations from 120 countries.
I also speak on behalf of the National Consumer Forum (NCF), a non-governmental organization that campaigns for the promotion and protection of the rights of South African consumers. The NCF represents the aspirations of tens of thousands of poor and disadvantaged consumers who have for many years been victims of unscrupulous business practices.
The consumer movement worldwide promotes the recognition of consumer rights, and their translation into effective policies and practices by governments, international agencies and the business community. At the same time, we seek to empower individual consumers - through education, information and advice - to exercise their rights. The movement's role is also to constantly brief consumers about political and economic issues that affect the nature, quality and accessibility of goods and services.
Borrowers abused in the rush for super-profits
The issue of client protection in the area of micro finance has been on the priority list of the NCF for many years. In fact, the first consumer bodies in African areas such as Soweto were established in the seventies as a result of the abuse of poor people and low- income earners by credit grantors.
Micro finance plays an important role in the economies of many African countries. Many consumers, especially the poor and the disadvantaged, can only improve the quality of their lives - by starting a micro/small enterprises or by buying furniture and household goods - by making use of micro finance. This is due, of course, to the fact that institutions such as banks are unwilling to provide access to credit to the majority of our people, forcing them to get loans at vastly higher interest rates from less regulated lenders.
This industry has grown in recent years into a multi-billion dollar sector across our continent. Seeing the huge customer base and excessive profits, many new players have joined the industry - including the very same banking institutions whose restrictive lending practices led to its emergence. There are many players who are exploiting the fact that, in many countries in Africa, this is essentially unregulated industry and capable of delivering super-profits.
In South Africa, we have experienced massive abuse of poor, low and middle-income earners by unscrupulous micro lenders, due to the fact that our legislation was outdated and clearly inadequate to deal with the challenges of such a huge industry. For many years now, the NCF and other NGO bodies in the country such as the Black Sash and others, have made representations to government and the industry about the prevalence of bad practice such as exploitative interest rates, illegal collection practices (even threats of violence) and the withholding of the identity documents and bank cards of lenders.
We therefore welcome and fully support the initiative of the Department of Trade and Industry to introduce legislation to regulate the credit industry, to enforce consumer protection and to promote competition.
What the law must do
The first challenge of the new legislation is to ensure that contracts for micro finance, in fact all contracts, should be written in simple language. We need to be conscious of the fact that we come from different cultural, educational and language backgrounds. A simply written contract or agreement will make it easier for consumers to understand and will benefit both the consumer and business.
Another big challenge for the new legislation is the matter of reckless lending which is responsible for the vicious debt trap that many consumers find themselves in today. Government needs to develop guidelines urgently that will ensure that consumers' debt commitment does not exceed 33% of gross salary.
We need to fight to indebtedness at all costs. We have to ensure that micro finance service providers do not lend clients more than 33% of their gross salary. If we lend more than that, we are creating a debt trap for consumers and this may have very serious social implications.
The other issue is that of the regulation of the credit bureaus. Many consumers are forced to resort to unscrupulous providers of micro finance due to the practices of the credit bureaus related to the collection, sale and distribution consumer's personal information. As we write in our first edition of Consumer Fair, which will be published monthly to raise consumer awareness and to lobby for pro-consumer policies, this industry cannot be allowed to continue being prosecutors and judges in their own cases. This practice severely undermines the objectives of consumer protection and fair business practices.
More information to allow the right to more choice.
The other issue that we are concerned about is lack of access to information that will empower consumers to shop around for the best deal and to have access to the total cost of the credit that they are considering getting. Clearly, this is critical in ensuring that consumers are able to enjoy their right to choice - an important consumer right - so that their decisions do not have an adverse impact on their financial health.
This, obviously, will go hand in hand with the cooling-off period of at least five days - giving the consumer the opportunity to reconsider if he or she feels that the deal may lead to a debt trap, for instance.
Information that the consumer must receive needs to include clear and transparent pricing - written in a clear, prescribed form that will explain the following aspects to the consumer:
· The principal value being borrowed
· The total of all interest
· All charges
· All fees
· Any VAT costs
· Any other costs that may be applicable
One very positive element in the proposed legislation is that in instances where credit agreements are found to be unlawful by the credit regulator, the law may provide that consumers be refunded their money with interest. This has to be applauded as it ensures that there is a balance in the market - unlike before, where consumer compensation was excluded and the focus was only on criminal convictions. This system never benefited many consumers, as it is not a simple matter for an ordinary person to make use of the courts of the land.
Privacy of personal information.
As we discuss protection for consumers who use micro finance products and services, we also need to think about the privacy issues. Many countries of the underdeveloped world still do not have personal data protection legislation. The industry cannot afford to wait for the promulgation of such acts if it is serious about consumer protection. The private information of clients needs to be protected from reaching others who are not authorized to access it. Consumers need to consent in writing before their personal information is made available to third parties.
To conclude, I would like to say a few words about consumer education. This education is extremely important to empower consumers to make the right decisions in the market place. As the saying goes, an informed consumer is the best weapon against an unfair business practice. And if we want all our clients to receive adequate protection, if we want consumers to enjoy their full rights under any law, we need to start soon to put in place very innovative consumer education programmes. The focus of these programmes will, of course, be on the poor and the disadvantaged. Only then will we be convinced that the industry means business when it talks about consumer protection for its clients.
