The global financial crisis has dramatically illustrated the damage that can be caused by irresponsible provision of financial services. Whether the client does business in a Wall Street office tower or in a makeshift room in a rural town, over-indebtedness or unprotected savings carry enormous risks for business of all sizes and the families and communities that depend on them.
In developing countries, these risks are almost always greater and the consequences on individuals and communities more severe.
In the Indian state of Andhra Pradesh, a hot microfinance market became overheated, and in some cases the poor suffered. It is not easy to serve the poor and low income population, a market segment that often lacks collateral, business records or even a fixed address. Yet some financial services providers did not take the necessary care to ensure their products were appropriate for their clients, or were too aggressive in their efforts to sell into a competitive market. The hope in India, as elsewhere, is that a balanced approach can support expanded access to much needed and demanded financial services, but with protections in place so that borrowers can increase their income and assets, not their risk and vulnerability.
What is UNCDF doing about this?
UNCDF is focusing on client protection above all else. The ability of microfinance to “do good” – that is, to help reduce poverty and accelerate progress towards achieving the Millennium Development Goals – is dependent on first “doing no harm.” UNCDF recognizes the six principles of client protection adopted by the global Smart Campaign:
1. Avoidance of over-indebtedness and appropriate product design;
2. Transparent and responsible pricing;
3. Appropriate collections practices;
4. Ethical staff behavior;
5. Effective mechanisms for managing complaints;
6. Privacy of client data.
These principles inform UNCDF’s work at the policy, industry, and retail levels. UNCDF supports evidenced-based and proportionate regulation that balances access and protection, and does so by working with government and development partners to build consensus about sound policies and practices. In working with financial services providers and industry associations on client protection, UNCDF raises awareness, supports certification of providers, and builds provider capacity to operationalize the principles.
On the other side of the transaction is the client – and a more informed client is a better protected client. UNCDF is promoting financial literacy to build client capacity to make informed decisions and use financial products wisely.
More than 2.7 billion people around the world do not have access to financial services. Expanding their access is imperative, but the quality of that service is paramount: inclusive finance must be responsible finance.