Principle #1 – Avoidance of Over-indebtedness A special presentation for YOUR INSTITUTION made possible by the Smart Cam

1. Principle #1 – Avoidance of Over-indebtedness A special presentation for YOUR INSTITUTION made possible by the Smart Campaign www.smartcampaign.org

2. 1. Avoidance of over-indebtedness 2. Transparent pricing 3. Appropriate collections practices 4. Ethical staff behavior 5. Mechanisms for redress of grievances 6. Privacy of client data Client Protection Principles

3. Principle #1: Avoid Over-indebtedness Providers take reasonable steps to ensure that credit will be extended only if borrowers have demonstrated an adequate ability to repay and loans will not put the borrowers at significant risk of over-indebtedness. Similarly, providers will take adequate care that non-credit, financial products (such as insurance) extended to low-income clients are appropriate to their needs and means.

4. Principle #1: Avoid Over-indebtedness What it means for the clients: • Clients should make prudent decisions and assume responsibility for their actions. • Clients should be capable of making payments on their debt without sacrificing their basic quality of life. What it means for the institution: • A financial institution measures its compliance with this principle by carefully assessing the client’s capacity to successfully repay the loan.

5. What causes over-indebtedness? • Loans for amounts surpassing client’s debt capacity - multiple loans at one or several institutions. • Lack of information on existing liabilities (e.g. non-existent credit bureaus or lack or reporting to credit bureaus by other lending institutions). • Incentives for loan officers to oversell credit products. • Products that do not match client’s business cycles (e.g. agriculture). • Institutions relying on guarantees as a substitute for capacity analysis. • Accidents, disease or natural disasters.

6. What does over-indebtedness mean for MFIs?

7. What does over-indebtedness mean for clients? Source: DAI

8. INSTITUTION: • Founding & Organizational Status • # clients Photo of Presenter • NAME, • TITLE • Bullet about experience • Bulletaboutexperience Institutional Logo

9. Presenter Takeaways

10. Questions or comments for the presenter?

11. INSTITUTION: • Founding & Organizational Status • # clients Photo of Presenter • NAME, • TITLE • Bullet about experience • Bulletaboutexperience Institutional Logo

12. Presenter Takeaways

13. Questions or comments for the presenter?

14. What actions can MFIs take? Source: Apoyo Integral, El Salvador

15. What actions can MFIs take? Source: Apoyo Integral, El Salvador

16. Beyond Codes: Indicators of Good Practice

17. Beyond Codes: Indicators of Good Practice

18. Good Practices from Beyond Codes • In addition to implementing a rigorous credit methodology to ensure that clients are capable of repaying their loans, • one MFI in Bosnia-Herzegovina: • Tasks its internal audit department with following up on a sample of clients who have fallen behind on their payments. • Has the internal audit team conduct client interviews. • Focuses interviews on ensuring that loan officers followed proper procedures to avoid over-indebtedness. • Includes in the interview a focus on diagnosing the causes of the client’s repayment challenges.

19. Discussion We have talked about multiple examples of good practices that are currently in use, but over-indebtedness continues as one of the key problems MFIs face in many countries. What do you see as the next steps to address this?

20. Next time… We will discuss Principle #2: Transparent & Responsible Pricing We will examine concrete examples: • What is transparency? • How can you tell if clients understand the information shared with them? • What role does financial literacy play?

21. Questions?Contact the Smart CampaignFor more information visit:www.smartcampaign.org

22. Join the Campaign & Endorse the Principles of Client Protection • www.smartcampaign.org • Thank you!