A Risk for the Client Is a Risk for the Institution: Client Protection at Partner MFI in Bosnia

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Date Published: 
Jan 2013
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Highlighting Section 3 of the Universal Standards for Social Performance Management

The recent over-indebtedness crisis in Bosnia shed light on the need for greater attention to client protection. Partner Microcredit Foundation is looking to the future as it addresses those gaps, ensuring that clients understand such basics as, What is interest and how is it calculated? What is a credit history? What responsibilities go with being a loan guarantor?

Financial education is just one of the program components put into place to ensure that client protection ranks equally with institutional protection.Selma Jahic, Partner’s executive director of credit operations, explains Partner’s simple but powerful in-house mantra: A risk for the client means a risk for the institution.

“Observers always say that ‘the client is at fault with the payment,” Jahic said. “But it’s not the client’s fault; it’s always the institution’s fault. That’s why we talk to the clients constantly, [to learn] what is happening in their lives, in the environment, in the market, that affects their business, their life.”

Jahic spoke during a December webinar focused on how real MFIs are implementing the essential practices for each of the standards in the third section - Treat Clients Responsibly - of the Social Performance Task Force’s Universal Standards for Social Performance Management (“the Standards”).The standards in this section pertain to good capacity analyses, participation in market-level risk management, transparency in client communications, fair and respectful treatment of clients and their personal data, and mechanisms for receiving and resolving customer complaints.

Partner is considered a role model for treating clients responsibly. Founded in 1997, Partner holds a portfolio worth $55.1 million and serves 34,728 active borrowers. Yet, like other MFIs worldwide, Partner has had its hard times.

Specifically, it is one of just 23 MFIs (and 29 commercial banks) in Bosnia that survived not only the world financial crisis of 2008 but also a regional crisis of over-indebtedness in 2009. “Many of the MFIs could not cope,” Jahic remembered of that turbulent time. “We actually had a situation where clients were multiple borrowers to different MFIs at the same time.” Discovering that fact about individual borrowers wasn’t easy: “We were relying on information we were given by the client,” plus often dubious data informally shared among the MFIs themselves, Jahic said.

The lack of a national credit bureau is a problem that is not unique to Bosnia. The Standards therefore help institutions think concretely about what the institutions themselves can do to help manage clients’ debt levels. “Where there’s already been an over-indebtedness crisis, one of the things we’ve seen as an outcome is institutions establishing guidelines for what is an acceptable level of debt within the household or at the individual client level, and also the acceptable number of loans from other sources,” said Cara Forster, the webinar moderator and SPTF’s Associate for Outreach to Latin America, with expertise in client protection.

In the wake of Bosnia’s over-indebtedness crisis, Partner adopted several principles to improve client protection:

• a systematic approach to managing client indebtedness;
• an emphasis on staff “buy-in” to the seriousness of over-indebtedness;
• a code of ethics for all staff plus a client protection code;
• a commitment to negotiate with delinquent borrowers; and
• measures to ensure that clients understand the intricacies of their loans before they sign.

Capacity analysis is, of course, also central to client protection, Jahic said. At Partner this includes an examination of the client’s character and capital environment. Loan officers pose 25 questions as part of a process that “allows the capacity assessment process to double as a form of financial counseling.” If the officer does not perform this task to standards, he or she may face sanctions.

Evaluation of loan officer behavior and internal controls for fraud are also on Partner’s list of principles. During the over-indebtedness crisis, “We had one or two fraud cases, and out of these fraud cases we actually picked up some lessons learned, which we incorporated in our practices,” Jahic acknowledged. An internal audit team randomly samples loans and collections to verify policies are being followed, such as the maximum income criteria ($200 a month, since Partner does not serve citizens with access to banks), Partner’s cap on the number of active loans per household (three, unless the total debt is less than $5,383), and its loan thresholds: a branch manager participates if the balance is over $4,710; a household’s monthly installments may not exceed $404; and the total outstanding balance may not exceed $27,000.

Yet another component of client protection at Partner is the seriousness with which it regards consumer complaints, via a formal complaint board. This body reviews customer feedback, treating it as a valuable source of information, “because from every single complaint you learn.”

Institutional culture, too, plays a role in client protection. “Everything really relates to preventing [over-]indebtedness,” Jahic said. Posters are on the walls in every department, explaining how to anonymously report any irregularities seen at work. Loan officers observe strict rules of behavior (a sample: no calls to clients after 8 p.m.). And “mystery shoppers” hired from outside the organization play the part of potential clients, to monitor services and disclosures by loan officers.

Less tangible measures also can be an important means to prevent over-indebtedness. “We believe that increasing satisfaction of the clients can be viewed as an additional means to prevent over-indebtedness,” Jahic said. In short, educated, satisfied customers remain loyal and don’t go elsewhere for loans.“Education is a very powerful tool in everyday activities.”

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