Section 3: Treat Clients Responsibly Moderator: Cara Forster With Partner (Bosnia) and Oikocredit

Agenda Review of Section 3 of the Universal Standards Interview with Selma Jahic of Partner, Bosnia Input from Yolirruth Núñez of Oikocredit, South America Discussion with Participants

Section 3 of the Universal Standards Section Title: Treat Clients Responsibly Rationale: Client protection is the foundation of good social performance. Coordination: This section of the Standards was developed in conjunction with the work of the Smart Campaign.

Section 3: Five Standards 3.a. Conducts good capacity analysis and participates in market level risk management. 3.b. Communicates transparently with clients so that clients can understand and make informed decisions. 3.c. Treats clients fairly and respectfully without discrimination. 3.d. Respects the privacy of client data and only uses data as agreed to with the client. 3.e. Offers timely and responsive mechanisms for complaints that permits problem resolution for the clients and improvements to products and services.

Standard 3a: Four Essential Practices 3.a.1 Conducts good capacity analysis and does not rely solely on guarantees. 3.a.2 Has explicit guidelines on borrow debt thresholds and multiple borrowing. 3.a.3 Reviews borrower repayment history through a credit bureau, exchange of information with peers, or consultation with internal records. 3.a.4 Internal Audit verifies compliance with policies and systems used to prevent client over- indebtedness.

Agenda Review of Section 3 of the Universal Standards Interview with Selma Jahic of Partner, Bosnia Input from Yolirruth Núñez of Oikocredit Discussion with Participants

The Market in Bosnia and Herzegovina B&H has a very competitive environment (23 MCOs and 29 commercial banks for a population of 3.8 million) In 2005, AMFI (the national network) implemented a progressive Code of Business Ethics of Microfinance Institutions Laws regulating the banking, finance and microfinance do exist, but limited progress toward a general law on consumer protection. Over-indebtedness crisis in 2009; MFT Pricing data released. Partner is a market leader in client protection (MFC Excellence in Client Protection Award in 2010)

What does Partner’s philosophy of “a risk for the client means a risk for the institution” mean for the MFI? Financial (and business) education for clients and all staff members Partner is in the process of implementation of ISO 31000:2009, certification on standards of risk management. Advice and support for clients facing judicial proceedings Co-founder of a Personal Finance Counseling Association (U plusu) that helps mediate solutions for over-indebted clients Constant market surveys Sophisticated internal audit systems Client oriented management

What role does institutional culture play at Partner and how does it influence the MFI’s work on indebtedness? Management creates an organizational culture valuing ethical behavior and excellent service (e.g. mystery shopping) Code of Conduct adjucted according to the international standard ISO ISO the certification that standardizes information security management systems (ISMS) Partner’s soical rating assesed as AA- by Planet Rating (2011) Special Projects (Educational brochures with EFSE, 100,000 disbursed)

Introduction to Client Protection at Partner Serious and systematic approach to the problem of clients’ over- indebtedness Raising institutional awareness (creating buy-in among loan officers, and eventually all staff) Compliance with all 7 Client Protection Principles (2012): ▫Appropriate product design and delivery ▫Prevention of over-indebtedness ▫Transparency ▫Responsible pricing ▫Fair and respectful treatment of clients ▫Privacy of client data ▫Mechanisms for complaint resolution

Highlights of Client Protection Practices at Partner Explicit guidance regarding debt thresholds Prices, terms, and conditions are disclosed - prior and at point of sale (participated in MF Transparency project) Appropriate collection practices, formalized in the Foundation’s policies, prevent depriving borrower of basic survival capacity Possibility to negotiate with the delinquent borrowers and re-scheduling policies prevent automatic debt extensions Evaluation of loan staff behavior (managers + internal audit + marketing audits) Fraud prevention: internal controls & organizational culture Procedure for handling complaints in place

Essential Practice 3.a.1 is about borrower repayment capacity and the loan approval process. How does Partner handle these issues? The credit analysis is based on an evaluation of: Client’s character Repayment capacity Capital Environment Warranty Loan officers have a conversation with prospective clients that covers a list of 25 questions including household and business income, debts, and experience/obligations.

Findings from the World Bank’s study on Partner’s clients stated that the development of practical business skills can influence all these areas. 445 clients 2/3 business training + financial literacy 1/3 control group 36% new businesses shut down Improved business practices (17%) Encourages new business investments (11%) More capital growth (15% but 54% in some subgroups) Separation of business from personal accounts Refinance the loans under more favorable terms Improvements in business performance and sales What is Partner’s motivation for its Financial Literacy program for both staff and clients?

Tell us about the role of the credit bureaus in Partner’s risk management strategy? The Central Loan Registry (CLR) was introduced at the end of By decision from the Central Bank of B&H, all financial institutions are obliged to submit their clients’ information. Each financial institution must interpret the given information. In Partner, we are taking into consideration all information from the CLR. Partner has developed a list of criteria with clearly stated indicators for assessing individual clients’ risks.

How did Partner’s internal audit system develop and how does it help prevent over- indebtedness? It is in the Audit’s scope of work to check the criteria for each individual loan selected (e.g. number of loans, the amount of installments, income per household) The Audit Team checks the client’s capacity at the moment when the loan was approved, i.e. if the client was over- indebted when he received the loan from Partner. The Audit Team also occasionally conducts the analyses of slow loans, based on data from the CLR.

How is customer satisfaction important to avoiding client over-indebtedness? The preventing over-indebtedness does not always coincide with customer satisfaction – may have negative effects in the short-term, but positive long-term effects. Partner believes that satisfied clients are more loyal and won’t seek loans from other institutions, allowing the Foundation to maintain better control of clients’ levels of indebtedness. Market research represents an important pillar in strategic planning and is carried out through a system of customer satisfaction surveys, product testing, client exit monitoring, and mystery shopping.

Does Partner have guidelines on the maximum number of loans outstanding? Partner has developed a list of eliminatory criteria, setting up explicit thresholds for clients by: ▫Repayment capacity ▫Target population ▫Loan use ▫Debt exposure Every loan is placed into a certain risk category. (A loan can be exceptionally approved by a special loan committee, but it will be thoroughly monitored until it is repaid.)

Does Partner have guidelines on maximum debt thresholds? If a household member already has an active loan with Partner, the Branch Manager must visit the client and take part in the business analysis, if the remaining balance is over USD 4,710. Or if a potential client has taken a loan during the last 9 months. All household members cannot have more than 3 active loans (unless the total debt is lower than USD 5,383) All household members cannot have a total outstanding balance over USD 27,000. The total amount of all monthly installments for all household members cannot exceed USD 404.

Recommendations The mentioned phenomenon must be dealt with, if possible, on the state level. This includes all the stakeholders in the field: -Legislative bodies -Legal framework -Financial supervisory authorities (banking agencies) -Sectoral approach through trade associations (for both banks and MCOs) If a MFI works in a unregulated environment (i.e. no legislation or Credit Bureau) it is important for an organization to find its own way and to, if possible, become self-determined and persistent in its efforts to keep the client in the focus.

Agenda Review of Section 3 of the Universal Standards Interview with Selma Jahic of Partner, Bosnia Input from Yolirruth Núñez of Oikocredit Discussion with Participants

Over-indebtedness Risk Management at Oikocredit SANR Yolirruth Núñez Social Performance Management & Capacity Building Coordinator Oikocredit - SANR

Agenda 1.What is Over-indebtedness (OID)? 2.OID Risk Management within Oikocredit’s Processes 3.Oikocredit’s Core Principles of OID Risk Management

What is overindebtedness? Oikocredit definition: “Poor entrepreneurs taking on debt beyond their repayment capacity, sometimes from multiple microfinance institutions” But... The borrower can be anyone from a poor microentrepreneur, to a subsistence farmer, to a middle-class worker The reason for becoming over-indebted can be internal with the lender/borrower (active OID) or external, e.g. a natural catastrophe (passive OID), or a combination of both The repayment capacity of the borrower needs to be well assessed and goes beyond checking whether the client falls into arrears

OID Risk Management within Oikocredit Processes: Pre-Selection Phase: Social Scorecard - Client Protection Principles Due Diligence Phase: Social Scorecard OID Risk Management Guidelines Approval Phase: Set of more stringent conditions (covenants) concerning credit policies and some organizational issues Monitoring Phase: Offer of technical assistance related to management of OID risk

Core Principles of OID Risk Management 10. Adequate Resources 11. Internal Control 7. Follow up 8. Portfolio Monitoring 9. Rescheduling and Restructuring 3. Access to Credit History 4. Set of Credit Policies for all Branches 5. Credit Policies Implemented 6. Credit Assessment 1.Proactive Definition of Over Indebtedness 2.Understanding of the Concept among Staff The 11 Core Principles Integrated into 4 Processes:

Core Principle 1: Proactive Definition of OID OID is clearly defined by the MFI with a proactive view and introduced as a specific risk to be managed within the MFIs credit processes. Core Principle 2: Understanding of OID by Staff Top management has a clear understanding of OID and its causes and is fully aware of OID risk. I. THE CONCEPT AND INTEGRATION IN THE MFI

Core Principle 4: Set of Credit Policies The MFI has credit policies decided at the highest level and not based on a pre-determined level of loan losses seen as acceptable; its incentives for staff are not mainly based on credit growth targets. Core Principle 5: Credit Policies Implemented The MFI has clear and conservative criteria in its credit policies, and those are really implemented in the evaluation, in order to efficiently avoid lending to over-indebted customers or over-indebting new borrowers. Core Principle 6: Credit Assessment The MFI conducts a thorough evaluation of the clients’ cash flows and debts (including those of the family), and uses conservative assumptions and calculations in order to determine repayment capacity and loan amounts. Core Principle 3: Access to Credit History The MFI uses the credit bureaus, and other credit information gathering techniques, for purposes of management of OID risk. II. CREDIT POLICIES AND EVALUATION PROCESS

Core Principle 7: Follow-up The MFI conducts a close follow-up of its customers, using clear early warning criteria and on-site work, in order to proactively identify OID situations. Core Principle 8: Portfolio Monitoring The MFI conducts a close monitoring of its credit portfolios in order to actively identify growing OID risks. Core Principle 9: Rescheduling and Restructuring The MFI always offers reasonable rescheduling and restructuring solutions to over-indebted customers. III. MONITORING

Core Principle 10: Internal Resources The MFI makes sure that its resources are not over-stretched in such a way that OID risk could be increased due to the general weakness in the quality of the whole credit process and of the internal controls. Core Principle 11: Internal Control The MFI has good internal controls, both permanent and ex-post, which aim at addressing the OID risk efficiently, and also an independent internal audit function. IV. INTERNAL CONTROLS

Agenda Review of Section 3 of the Universal Standards Interview with Selma Jahic of Partner, Bosnia Input from Yolirruth Núñez of Oikocredit Discussion with Participants

Where to Find More Resources A summary of the Universal Standards (new and improved format!): anual%2010%2015%2012.pdf anual%2010%2015%2012.pdf The presentation and recording of this session: standards-implementation standards-implementation Resource Library for the Universal Standards of SPM: resource-library resource-library 31

Examples from SPTF’s Resource Library Mechanism for complaint resolution, Svasti Microfinance Pvt. Ltd. (India) This document details Svasti's "Customer Grievance Redressal" (CGR) process using a flow chart that shows each step in the process, from who initially receives the complaint to how different types of complaints are directed to different departments. It also explains how Svasti makes sure that clients know how to use the system.Mechanism for complaint resolution Transparent collections practices, Svasti Microfinance Pvt. Ltd. (India) This is a guide that Svasti uses to train employees on how to inform clients about Svasti's loan collection practices. It lists all the information that employees must give to clients regarding the steps in the collections process, as well as about their rights.Transparent collections practices 32

Thank you for your participation! We invite you to join us in January for the next session in the series, which will be about Section 4 of the Standards: Client Driven Products and Services.