Consumer Protection and Microfinance - Microfinance Reports.pdf · Consumer Protection and Microfinance…

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<ul><li><p>Consumer Protection and Microfinance </p><p>Country Reports </p><p>Legal Empowerment Working Paper Series </p></li><li><p>2 </p></li><li><p>3 </p><p>Consumer Protection and Microfinance </p><p>Country Reports </p><p>Legal Empowerment </p><p>Working Paper Series </p></li><li><p>Consumer Protection and Microfinance: Country Reports </p><p>Copyright International Development Law Organization 2011 </p><p> International Development Law Organization (IDLO) </p><p> IDLO is an intergovernmental organization that promotes legal, regulatory and institutional reform to advance economic and social development in transitional and developing countries. Founded in 1983 and one of the leaders in rule of law assistance, IDLO's comprehensive approach achieves enduring results by mobilizing stakeholders at all levels of society to drive institutional change. Because IDLO wields no political agenda and has deep expertise in </p><p>different legal systems and emerging global issues, people and interest groups of diverse backgrounds trust IDLO. It has direct access to government leaders, institutions and multilateral organizations in developing countries, including lawyers, jurists, policymakers, advocates, academics and civil society representatives. </p><p> Among its activities, IDLO conducts timely, focused and comprehensive research in areas </p><p>related to sustainable development in the legal, regulatory, and justice sectors. Through such research, IDLO seeks to contribute to existing Practice and scholarship on priority legal issues, and to serve as a conduit for the global exchange of ideas, best practices and lessons learned. IDLO produces a variety of professional legal tools covering interdisciplinary thematic and regional issues; these include book series, country studies, research reports, policy papers, training handbooks, glossaries and benchbooks. Research for these publications is conducted </p><p>independently with the support of its country offices and in cooperation with international and national partner organizations. </p><p>DONOR SUPPORT </p><p>This research is part of the IDLOs "Legal Empowerment Program" and is being funded by the Bill &amp; </p><p>Melinda Gates Foundation (http://www.gatesfoundation.org). The findings and conclusions contained </p><p>within are those of the authors and do not necessarily reflect the positions or policies of the Bill &amp; Melinda Gates Foundation. </p><p>Disclaimer </p><p>IDLO is an intergovernmental organization and its publications are intended to expand legal knowledge, disseminate </p><p>diverse viewpoints and spark discussion on issues related to law and development. The views expressed in this </p><p>Publication are the views of the authors and do not necessarily reflect the views or policies of IDLO or its Member States. </p><p>IDLO does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any </p><p>consequence of its use. IDLO welcomes any feedback or comments regarding the information contained in the </p><p>Publication. </p><p>All rights reserved. This material is copyrighted but may be reproduced by any method without fee for any educational purposes, provided that the source is acknowledged. Formal permission is required for all such uses. For copying in other </p><p>circumstances or for reproduction in other publications, prior written permission must be granted from the copyright </p><p>owner and a fee may be charged. Requests for commercial reproduction should be directed to the International </p><p>Development Law Organization. </p><p> Cover picture Heres Kate </p><p>Published by: </p><p>International Development Law Organization Viale Vaticano, 106 </p><p>00165 Rome, Italy </p><p>Tel: +39 06 4040 3200 Fax: +39 06 4040 3232 </p><p>www.idlo.int idlo@idlo.int </p><p>http://www.gatesfoundation.org/</p></li><li><p>5 </p><p>Table of Contents </p><p>List of Acronyms .............................................................................................. 8 </p><p> Introduction ............................................................................................. 11 </p><p> India Country Report ................................................................................. 13 </p><p>1. Introduction ............................................................................................. 13 </p><p>1.1 Country Overview ......................................................................... 14 </p><p>1.2 Consumer Protection in Indias Financial Services Sector ................... 15 </p><p>1.3 Microfinance Institutions ................................................................ 16 </p><p>1.4 Microfinance in the News ............................................................... 18 </p><p>2. Protection of the Financial Consumer in Indian Legislation and Regulation ....... 20 </p><p>2.1 Transactional Regulation ................................................................ 20 </p><p>2.1.1 Regulatory Framework for Financial Contracts ..................... 20 </p><p>2.1.2 Key Contractual Terms ...................................................... 21 </p><p>2.2 Non-transactional Regulation ......................................................... 22 </p><p>2.2.1 Data Regulation .............................................................. 22 </p><p>2.2.2 Use of Agents ................................................................. 23 </p><p>2.2.3 Advertising ..................................................................... 23 </p><p>2.3 Supervision and Enforcement ........................................................ 24 </p><p>3. Field Research .......................................................................................... 25 </p><p>3.1 Methodology Research Design ..................................................... 25 </p><p>3.2 Microfinance Institutions ................................................................ 27 </p><p>3.2.1 Assessment of Customers Ability to Repay ......................... 28 </p><p>3.2.2 Use of Client Information .................................................. 28 </p><p>3.2.3 Information Provided to Consumers .................................... 28 </p><p>3.2.4 Debt Collection Practices ................................................... 28 </p><p>3.2.5 Redress Mechanisms for Consumer Complaints ................... 29 </p><p>3.3 Clients ........................................................................................ 30 </p><p>3.3.1 Client Selection of MFIs .................................................... 30 </p><p>3.3.2 Requirements for Receiving Credit ...................................... 32 </p><p>3.3.3 Information on Contract Terms and Conditions .................... 32 </p><p>3.3.4 Consequences of Late Payment .......................................... 33 </p><p>3.4 Ombudsmen ................................................................................ 34 </p><p>3.4.1 Disputes ......................................................................... 34 </p><p>3.4.2 Procedures ..................................................................... 35 </p><p>3.4.3 Awards and Enforcement................................................... 35 </p><p>3.4.4 Content and Clarity of Financial Contracts ........................... 36 </p><p>3.4.5 Other Recourse and Applicability to Microfinance ................. 36 </p><p>4. Recommendations ..................................................................................... 37 </p><p>Annex I Regulatory Framework for Relevant Subjects ...................................... 39 </p><p>Annex II Form of Complaint (to be lodged) with the Banking Ombudsman .......... 43 </p><p>References .................................................................................................... 45 </p><p> Colombia Country Report ........................................................................... 47 </p><p>1. Introduction ............................................................................................. 47 </p><p>2. Protection of the Financial Consumer in Colombian Legislation and Regulation .. 48 </p><p>2.1 Consumer Protection in Colombias Financial Services Sector ............. 48 </p><p>2.2 Financial Consumer Protection: A Legal and Regulatory Overview ....... 50 </p></li><li><p>6 </p><p>2.3 Consumer Protection in Transactional Regulation .............................. 51 </p><p>2.3.1 Financial Contracts ........................................................... 51 </p><p>2.3.2 Credit Conditions .............................................................. 52 </p><p>2.3.3 Guarantees ..................................................................... 53 </p><p>2.3.4 Savings Deposits .............................................................. 53 </p><p>2.4 Consumer Protection in Non-transactional Regulation ........................ 54 </p><p>2.4.1 Credit Risk Analysis .......................................................... 54 </p><p>2.4.2 Non-bank Correspondents ................................................. 55 </p><p>2.5 Supervision and Enforcement ........................................................ 55 </p><p>3. Field Research .......................................................................................... 56 </p><p>3.1 Methodology Research Design ..................................................... 56 </p><p>3.2 Microfinance Institutions (MFIs) ...................................................... 58 </p><p>3.2.1 Assessment of Clients Ability to Repay ............................... 59 </p><p>3.2.2 Information on Interest Rates and Payments ....................... 60 </p><p>3.2.3 Collection Practices ........................................................... 60 </p><p>3.2.4 Consumer Complaint Mechanism ........................................ 60 </p><p>3.2.5 Use of Client Information .................................................. 60 </p><p>3.3 Clients ........................................................................................ 60 </p><p>3.3.1 Choice of Microfinance Institution ....................................... 61 </p><p>3.3.2 Credit Application Requirements ......................................... 62 </p><p>3.3.3 Knowledge of Contract Terms and Conditions ...................... 62 </p><p>3.3.4 Consequences of Late Payment .......................................... 63 </p><p>3.4 Judiciary ..................................................................................... 65 </p><p>3.4.1 Recurring Controversies Between MFIs and Customers ......... 65 </p><p>3.4.2 Probable Causes of Process Delay....................................... 66 </p><p>3.4.3 Defence Capability of Financial Consumers .......................... 66 </p><p>3.4.4 Content and Clarity of Financial Contracts ........................... 67 </p><p>4. Conclusions and Recommendations ............................................................. 67 </p><p>4.1 Conclusions ................................................................................. 67 </p><p>4.1.1 Regulatory Framework ...................................................... 67 </p><p>4.1.2 Regulatory Gaps .............................................................. 68 </p><p>4.1.3 Effective Application of the Regulatory Framework ............... 68 </p><p>4.1.4 Gaps Between Law and Practice ......................................... 69 </p><p>4.2 Recommendations ....................................................................... 69 </p><p>References .................................................................................................... 72 </p><p> Kenya Country Report ................................................................................ 73 </p><p>1. Introduction ............................................................................................. 73 </p><p>1.1 Country Overview ......................................................................... 73 </p><p>2. Protection of the Financial Consumer in Kenyan Legislation and Regulation ..... 75 </p><p>2.1 Financial Consumer Protection: A Legal and Regulatory Overview ....... 75 </p><p>2.2 The Institutional Framework........................................................... 76 </p><p>3. Field Research .......................................................................................... 76 </p><p>3.1 Contracting and Disclosure Practices ............................................... 77 </p><p>3.1.1 Commercial Practices of MFIs and Informational Asymmetries 77 </p><p>3.1.2 Advertising and Price Display ............................................. 78 </p><p>3.1.3 Contracts ........................................................................ 79 </p><p>3.1.4 Interest Rate Disclosure .................................................... 81 </p><p>3.2 Collateral in Kenyan Microfinance.................................................... 81 </p><p>3.2.1 Typology of Microfinance Collateral ..................................... 81 </p><p>3.2.2 The Issue of Blocked Deposits ............................................ 83 </p><p>3.2.3 Collateral Regulation 1: The Protection of the Borrower ......... 83 </p></li><li><p>7 </p><p>3.2.4 Collateral Regulation 2: Inefficiencies ................................. 84 </p><p>3.3 Debt Collection and Judicial Procedures .......................................... 85 </p><p>3.3.1 The Role of Chiefs ............................................................ 86 </p><p>3.3.2 Auctioneers ..................................................................... 86 </p><p>4. Conclusions and Recommendations ............................................................. 87 </p><p>References .................................................................................................... 89 </p><p> Cameroon Country Report .......................................................................... 90 </p><p>1. Introduction ............................................................................................. 90 </p><p>1.1 Country Overview ......................................................................... 90 </p><p>2. Protection of the Financial Consumer in Cameroonian Legislation and Regulation ..</p><p>............................................................................................................... 90 </p><p>2.1 Civil Law in Cameroon ................................................................... 92 </p><p>2.2 Common Law and Customary Law .................................................. 92 </p><p>2.3 International Law 1: OHADA Law .................................................... 92 </p><p>2.4 International Law 2: CEMAC/UMAC/COBAC Law ................................ 93 </p><p>2.5 The Directorate of Consumer Protection ........................................... 94 </p><p>2.6 Bank of Central African States (BEAC) ............................................ 95 </p><p>3. Field Research .......................................................................................... 95 </p><p>3.1 Informational Asymmetries ............................................................ 96 </p><p>3.2 Advertising, Price Display and Sales Practices ................................... 97 </p><p>3.3 The Formal Requirements of Financial Contracts ............................. 100 </p><p>3.4 The Notion of Public Order ........................................................... 103 </p><p>3.5 Interest Rate and Usury .............................................................. 104 </p><p>3.5.1 Observed Interest Rates ................................................. 104 </p><p>3.5.2 A Market Interest Rate? ................................................. 104 </p><p>3.6 Array of Security Interests in Cameroonian Microfinance .................. 105 </p><p>3.6.1 Security Interests: Authentic Pledges and False Mortgages .. 105 </p><p>3.6.2 Personal Securit...</p></li></ul>

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