Protecting Microfinance Borrowers

Understanding consumer protection in microfinance

This paper defines and discusses the elements that make up consumer protection. It assesses the two primary approaches to enforcement of such measures voluntary codes and state regulation in the context of developing countries.

The paper states that consumer protection encompasses all the means necessary to safeguard the interests of consumers (in the case of microcredit, usually poor borrowers in developing countries) and empower them to know their rights and make educated decisions.

The paper states that:

  • The main categories of consumer protection measures are:
    • Disclosure requirements;
    • Lender practice prohibitions and requirements;
    • Mechanisms for handling complaints and disputes;
    • Consumer education.
  • The approaches to enforcement of consumer protection are:
    • Industry self-regulation;
    • Government agency enforcement;
    • Self-regulation.

The paper concludes that:

  • There is no clear consensus about the scope of appropriate measures or the mechanisms to enforce them, especially in developing countries;
  • In countries where political pressure to implement new protection measures is strong, excessive protection could yield results that contradict the intentions;
  • Microfinance lenders should consider voluntary pledges that promote effective consumer protection and a consumer-oriented culture;
  • A truly consumer-friendly approach may indeed be the only long-term survival strategy for microfinance providers in competitive markets.

About this Publication

By Porteous, D. & Helms, B.