Principle #1 – Avoidance of Over-indebtedness

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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

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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.

Principle #1: Avoid Over-indebtedness

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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.

Principle #1: Avoid Over-indebtedness

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• 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.

What causes over-indebtedness?

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What does over-indebtedness mean for MFIs?

7Source: DAI

What does over-indebtedness mean for clients?

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NAME, TITLE• Bullet about experience• Bullet about experience

INSTITUTION:• Founding &

Organizational Status• # clients

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Institutional Logo

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Presenter Takeaways

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Questions or comments for the presenter?

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NAME, TITLE• Bullet about experience• Bullet about experience

INSTITUTION:• Founding &

Organizational Status• # clients

Photo of Presenter

Institutional Logo

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Presenter Takeaways

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Questions or comments for the presenter?

14Source: Apoyo Integral, El Salvador

What actions can MFIs take?

15Source: Apoyo Integral, El Salvador

What actions can MFIs take?

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Beyond Codes: Indicators of Good Practice

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Beyond Codes: Indicators of Good Practice

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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.

Good Practices from Beyond Codes

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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?

Discussion

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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?

Next time…

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Questions?Contact the Smart CampaignFor more information visit:

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