2. 2 1. Client protection principles 2. Principle #2 in practice 3. Participant feedback 4. Tools for improving practice 5. Conclusion and call to action Agenda

3. 3 1. Appropriate product design and delivery 2. Prevention of over-indebtedness 3. Transparency 4. Responsible pricing 5. Fair and respectful treatment of clients 6. Privacy of client data 7. Mechanisms for complaint resolution Client Protection Principles

4. 4 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

5. 5 Identifying the Causes of Over-indebtedness Multiple loans Poorly designed repayment schedules Inadequate capacity analysis Unpredictable events Accidents, disease, or natural disasters The institution relies on guarantees as a substitute for adequate capacity analysis Repayment schedule does not match the client’s business cycles (e.g., agriculture) Multiple loans are issued to client, by one or more institutions, due to: −Lack of information on the client’s liabilities −Incentives for loan staff to oversell credit products

6. 6 How over-indebted clients affect the MFI Increase in client delinquency Portfolio provisioning prevents institution from making other loans Slow and costly legal proceedings for collections Damage to the institution’s image and portfolio

7. 7 Source: DAI How over-indebtedness affects the client Clients may … Work longer hours Reduce consumption Use savings for loan repayment Take new loans to pay off current debt Sell assets, including productive assets Invest less in productive assets and human capital Search for help from family, depleting relatives’ assets

8. 8 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

9. 9 Prevent Over-indebtedness: The principle in practice MFI Carefully establishes the borrower’s ability to afford the loan and repay it. Are able to handle debt service requirements without sacrificing their basic quality of life. Borrowers Consider this: Research and practical experience show that borrowers consistently overestimate their own capacity to repay debt.

10. 10 Monitor over- indebtedness Evaluate client capacity Establish debt thresholds Management and Board are aware of and regularly monitor client over- indebtedness. Loan approval requires evaluation of client repayment capacity and loan affordability—approval is not based only on guarantee/collateral. Credit policies give guidance on debt thresholds and acceptable amount of debt from other sources. The Principle in Practice

11. 11 Verify credit history Audit credit procedures Incentivize quality loans If available, check the credit bureau. If unavailable, maintain and check internal records and consult competitors. Use internal audit to verify staff compliance with the procedures that prevent over-indebtedness. Set targets and incentives that value portfolio quality as least as highly as portfolio size and growth. The Principle in Practice (Continued)

12. 12 Example of Good Practices from Bosnia-Herzegovina Practice Outcome Good Practice: Interview delinquent clients. Internal audit department conducts regular interviews of a sample of clients who have fallen behind on their payments. Two main areas of investigation: Did loan officers follow proper procedures to avoid over- indebtedness when issuing credit? What are the causes of the client’s repayment challenges? Two main areas of investigation: Did loan officers follow proper procedures to avoid over- indebtedness when issuing credit? What are the causes of the client’s repayment challenges? The MFI uses the information to improve its credit procedures and to monitor risk.

13. 13 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

14. 14 Feedback from Participants What kinds of practices have you seen at your own (or other) MFIs that have contributed to over- indebtedness? How has over-indebtedness affected clients’ ability to use credit effectively? What consequences have over- indebted clients had on your institution?

15. 15 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

16. 16 Technical Tools Getting Started Questionnaire: Self Assessment for MFIs Avoiding Over-indebtedness: Guidelines for Financial and Non-Financial Evaluation Smart Lending Smart Savings Technical Guide for Investors Samples and Case Studies Client Business Evaluation Toolkit from Microfund for Women Loan Calculator from Opportunity Bank Serbia Smart Note: Facing Over-indebtedness at Partner Loan Officer Training Manual from Banco Solidario Debt Management Guide from NCR South Africa Tools available from the Smart Campaign

17. 17 1. Client protection principles 2. Understanding over-indebtedness 3. Principle #2 in practice 4. Participant feedback 5. Tools for improving practice 6. Conclusion and call to action Agenda

18. 18 The Smart Campaign has developed seven principles of client protection, one is prevention of over-indebtedness. Client over-indebtedness negatively affects both clients and MFIs in serious ways. Good practices have been developed to prevent and correct over-indebtedness. The Smart Campaign has tools to help practitioners improve their practices to prevent over-indebtedness. Conclusion Call to Action: What do you see as the industry’s next steps for facing this problem? What are the next steps for your institution?

19. 19 Thank you! Endorse the Smart Campaign. Visit www.smartcampaign.org Sign up to receive news and information. Download the Getting Started Questionnaire and conduct a client protection self-assessment.Getting Started Questionnaire What’s next? Email us! comments@smartcampaign.org