Uganda: Understanding Consumer Protection in Microfinance

Tuesday, April 19, 2011

Lately, the Microfinance industry has come under the spot-light with critics arguing that microfinance institutions drifted away from their core and initial mission of working to uplift the poor out of poverty through micro loans. Critics argue that the entire microfinance business is now commercialized. This is what has probably resulted into draconian recovery methods; forexample in Mexico where loan officers take children after their parents are unable to make microfinance loans; to India were micro-borrowers are committing suicide for failure to raise installments for the micro loans obtained from microfinance institutions (MFIs).

For along time, client protection has not been taken seriously until recently when a campaign was launched to protect Microfinance clients and create a win-win situation between Microfinance Service Providers and it customers. The Smart Microfinance Campaign. The Campaign seeks to create sanity in the industry by advancing client rights and obligations through a set of principles which all MFIs must adopt.

The first Client Protection principle denotes to avoidance of over-indebtedness to borrowers. Many times multiple loans to one individual borrower has often resulted into default. The principle seeks to push MFIs to seriously consider client’s capacity and business strength as opposed to the strength of collateral security and guarantees prior to loan advancement. The second principle calls upon MFIs to Price their financial products responsibly and transparently. There has been a public out-cry on interest rates charged by MFIs. This principle suggests that MFIs should set prices that are fairly low but can enable them cover their operational costs. It also pushes MFIs to fully disclose their prices and charges to clients at the time of loan applications. Many MFIs hide charges from clients.

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