Pakistan: Microfinance Sector's Consumer Protection Initiative

Feb 2009
Karachi, Pakistan, February, 15 2009 - Pakistan's microfinance sector is considered to be a late bloomer, especially from a regional standpoint. However recognising the need to increase the depth and outreach of financial markets in Pakistan, policy makers and regulators along with other stakeholders have worked hard for the development of the microfinance industry in the country.

The Government's Microfinance Sector Development Programme (MSDP), establishment of Pakistan Poverty Alleviation Fund (PPAF) and Khushhali Bank, promulgation of the Microfinance Institutions Ordinance 2001, SBP's Financial Inclusion Programme and the recent Microfinance Credit Guarantee Facility - all have helped catalyse the sector's growth.

With a growth rate of 45 percent over the past three years, Pakistan's microfinance industry has emerged as one of the fastest growing sectors globally today reaching 1.9 million clients in September 2008. Product diversification has taken root and savings and insurance uptake has surged.

Institutions are moving towards financial sustainability and accessing commercial sources of funding. Thus despite the late start, and consequent relative youth of the sector, microfinance providers in Pakistan have remained significantly proactive in terms of fostering innovation and channelling development of microfinance as a whole.

One of the key steps in this direction was the establishment of Pakistan Microfinance Network (PMN), which initially emerged informally in 1999 out of the effort of several microfinance practitioners who felt that a platform to share views and experience was needed. Today PMN's membership includes 20 members, including microfinance banks, specialised microfinance institutions, commercial financial institutions and multi-dimensional mf NGOs and rural support programmes.

Since its inception PMN has been consistently working towards its vision of expanding 'the frontiers of formal financial services reach out to all' and its mission of 'supporting the sector, especially retail MFPs, to enhance scale, quality, diversity and sustainability in order to achieve inclusive financial services'. In order to achieve these, the Network has three key objectives:

-- Promoting an enabling environment that benefits the work of all stakeholders

-- Building the capacity of stakeholders, especially retail microfinance institutions

Acting as an information gateway by disseminating industry relevant information, improving transparency, promoting benchmarks and serving as a point of contact for the retrieval of data/information.

The past few years have seen the microfinance industry grow to become more complex and more closely linked with the mainstream financial sector in Pakistan. The sector has grown exponentially and the range of financial services being offered has expanded. Competition in the sector has increased which will result in better services and competitive pricing for microfinance clients in the country.

But sometimes competition can also lead to the use of unethical and illegal practices by organisations in order to gain competitive advantage and such situations often lead to a loss of reputation and government intervention to impose stringent regulations in order to curb such practices as was seen in Andhra Pradesh and Bolivia.

However, in the case of microfinance, regulations of this nature often do more harm than good and invariably detract from the basic goal of microfinance by impeding the creativity and flexibility required for the provision of such services. This - added to the characteristic vulnerability of recipients of microfinance - highlights the increasing importance for microfinance institutions to act responsibly and ensure that best practices in terms of consumer protection and consumer rights become institutionalised.

Consumer protection as an issue, however, has largely been ignored in Pakistan at the policy level. Official legislation for the protection of consumer rights either did not exist, or was not enforced. There is little, if any, recourse for consumers to take in case a violation on their rights had been committed. In 2005, formal consumer protection legislation was drafted for Islamabad and at the provincial level.

While this legislation seems to be a long overdue step in the right direction, there are still areas which have been overlooked. One major area that falls into this category is financial services. The services sector in general has barely been addressed in the drafted legislation - which focuses heavily on manufacturing - and financial services in particular have been overlooked.

This can be particularly problematic for microfinance clients who are, for the most part, disenfranchised and unaware of the very existence of their rights. State Bank of Pakistan has recently begun some work on consumer protection for the banking sector but this still does not encompass microfinance institutions, especially non-bank service providers.

Realising the necessity of consumer protection measures for microfinance clients, PMN with the co-operation of its members, has begun a number of activities including the development of a code of conduct for consumer protection and setting up an external grievance redressal system for the sector. Pakistan Microfinance Network's 'Code of Conduct for Consumer Protection' lays out a set of generally accepted guidelines and principles for the treatment of microfinance clients.

These principles and guidelines are in line with ethical and operational norms in microfinance globally and are structured around six core values which are fundamental to the provision of microfinance services. The code includes a commitment statement explaining the purpose behind the code itself, and why PMN member organisations volunteer to commit to it.

The core values around which the code is structured are a) transparency b) fair practices c) dignified treatment d) privacy and fair disclosure e) governance, and f) client satisfaction. Each of these core values signifies a key area of concern for microfinance clients, and this code attempts to highlight in clear terms what the clients can expect from microfinance providers. The Code of Conduct has been unanimously approved by all twenty PMN members and was officially launched on 26th January 2009.

The code will be translated into all regional languages and distributed to all branches of the signatory organisations. The code itself mandates that copies of it be present in all offices of each respective microfinance provider, and be given to a client if they so require. Although microfinance clients will be the direct beneficiaries of the code, there will be positive spillovers for microfinance practitioners as well through increased customer loyalty and subsequent customer retention.

By helping clients understand that they have rights but also responsibilities and increasing their understanding of product pricing will help clients comprehend their true financial liabilities and assets. This could help clients avoid over-indebtedness and thus reduce default risk for the service provider. Additionally, microfinance providers operate in geographically diverse areas, which sometimes results in a communication gap between senior management and the field staff. Measures to gauge client satisfaction would also provide insight into the working of the field staff.

Developing and launching the Code of Conduct is the first part of the consumer protection process initiated by PMN. According to PMN, the next step in the process is developing a consumer feedback and grievance redressal system. This system will be put in place over the next few months and will provide clients with a forum through which they can file complaints, grievances or violations against the code of conduct.

The forum will also be a channel through which general client feedback can be heard and forwarded to the organisation in question. The third step in the consumer protection process will be monitoring compliance with the code of conduct. With awareness about issues of consumer rights increasing day by day, it is now considered essential for any industry to provide a secure and ethical environment for its clients.

Increase in consumer confidence leads to a healthier and more vibrant sector. It is easy to lose focus of the social objectives of microfinance in a competitive environment which is pushing for outreach growth and financial performance. Initiatives of consumer protection help renew the implicit commitment towards welfare of the microfinance clients and a deep desire to have a positive impact on the lives of the people of Pakistan.


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