Strategizing for the future of Cooperative Banking Institutions

“Strategizing for the future of Co-operative Banking Institutions’’ Pre - Indaba Workshop 15 th to 17 th March 2021 Dec-21 1

Session 1: Market Conduct Principles The International Client Protection Principles Dec-21 2

Session Objectives Attendees will learn about the international client protection principles for financial services, why they are important and how to implement them Dec-21 3

Self Introduction – Rose Mwaniki Financial Inclusion/Rural Finance Expert • • Fourteen years working within MF Sixteen years consulting in Africa Consumer Protection Expert Consultant – World Bank Group Contact: mwarose@gmail. com rmwaniki 1@worldbank. org

Session 1: Agenda Day 1 (March 15 th 2021) 10. 00 – 11. 30 AM Introduction – International Principles of client protection CPP 1: Appropriate Product Design & Delivery CPP 2: Prevention of Over-indebtedness 11. 30 – 1. 00 PM Dec-21 CPP 3: Transparency CPP 4: Responsible Pricing 5

Session 1: Agenda Day 2 (March 16 th 2021) 10. 00 – 11. 30 AM CPP 5: Fair and Respectful Treatment of Clients CPP 6: Privacy of Client Data CPP 7: Mechanisms for Complaints Resolution 11. 30 – 1. 00 PM Why are these international CPPs important to financial cooperatives and why implement them? Remember - Your clients have Rights Too! Dec-21 6

SUSTAINABLE FINANCE §Sustainable finance is composed of three pillars; Financial (Profit), Social (People) and Environmental (Planet).

SUSTAINABLE FINANCE WITHIN MF; WHY? FIs that embrace SF will provide financial services that protect and benefit their customers, employees, and the environment. They will: 1. Protect customers from risk 2. Create real value for their customers 3. Care for employees 4. Respect and conserve natural resources

FINANCIAL SUSTAINABILITY (PROFIT) 12/20/2021 9

SOCIAL PERFORMANCE (PEOPLE) 12/20/2021 10

ENVIRONMENTAL SUSTAINABILITY RESPECT AND CONSERVE NATURAL RESOURCES (PLANET) 1. Environmental policy 5. Environmental non-financial services 4. Green microcredit 12/20/2021 Microfinance Environmental Performance Index 2. Ecological footprint 3. Environmental risk assessment 11

SUSTAINABLE FINANCE FOCUS BALANCING FINANCIAL, SOCIAL AND ENVIRONMENTAL MISSION Financial Performance Environmental Performance Social Performance

SUSTAINABLE FINANCE WITHIN FINANCIAL INSTITUTIONS FIs must therefore integrate sustainable practices into their business model – that takes into account the interest of the CFI, the clients, the communities and environment in which they operate Session 1 of the Indaba Workshop will discuss the place of the client within sustainable finance and how your CFI can access clients products and services that do not cause them harm.

So, Why Client Protection? Client protection seeks to level the playing field between suppliers and consumers of financial services. Clients have less information about their financial transactions than do the financial institutions providing the services, which can result in excessively high interest rates paid, lack of understanding about financial options, and insufficient avenues for redress. Such an information imbalance is greatest when clients are less experienced and products are more sophisticated.

What is Client Protection? CP ensures that FI takes appropriate responsibility toward clients/members through appropriate products, transparency, data privacy, fair treatment, prevention of over-indebtedness, responsible pricing, and communication channels to handle complaints. In other CFIs Do No Harm to their Client/Members

Client Protection: 3 Pillars RESPONSIBLE FINANCE Regulation for client protection and supervision RESPONSIBLE FINANCE Standards and codes of conduct for the industry 16 Financial education and capability

Client Protection Principles 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 clients data 7. Mechanisms for complaint resolution

Client Protection Principle (CPP #1) Appropriate Product Design and Delivery

Session Objectives • Understand know relevance of appropriate product design and delivery. • Know the key standards related to CPP 1.

CPP 1 - Principle in Practice Providers take adequate care to design products, delivery channels and select partners in such a way that they do not cause clients harm. Products and delivery channels are designed, and partners selected with client characteristics taken into account. Consider this: Appropriate products and services not only provide access to clients, but they also create value for clients.

CPP 1 - Principle in Practice Suitable Design Multiple and/or flexible loan products address different business and family needs. If products offered through third-parties, thorough vetting occurs. Repayment schedules are flexible and match cash flows. Loan size matches financial need. Suitable Delivery Services are reliable, convenient, and function as advertised. Suitable Products

CPP #1: Standards of Adequate Care FI offers products and services that are suited to the client needs FI monitors suitability of products, services, delivery channels FI has policy and documented process to prevent aggressive sales techniques and forced signing of contracts.

Appropriate Products and Design – Key Take-aways q Conduct regular market studies and client surveys to collect information on client needs q Design products & services: loans/savings/insurance/payments based on clients' needs. q For all products, ensure that delivery is reliable and convenient for the client - keep transaction costs at a minimal for clients. In short products and services should not cause harm to the clients

Key Messages • Appropriate product design is relevant in CP because FIs often deal with inexperienced clients that do not necessarily have the knowledge/experience to determine if the product provides good value for the money. • Product suitability must be incorporated at all levels of an FI from board policies to staff training • MFIs that listens and learns from their client are more likely to succeed than who imitates others product/services in the market. • Moderate sales techniques should be used to deliver products/services. Aggressive sales must be defined. • Third parties must be vetted with client in mind

Client Protection Principle (CPP #2) Prevention of Over-indebtedness

Session Objectives • Identify the most common causes and effects of overindebtedness. • Understand the key standards of CPP 2.

What is over-indebtedness?

What is over-indebtedness? Default/delinquency approach A client is over-indebted if he/she can not repay the loan.

Prevention of Over-indebtedness q A client is over-indebted if he/she can not repay the loan. q In other words, over indebtedness is the inability for your client to handle loan repayments without sacrificing basic quality of life. q A client may still be able to make loan repayments by selling assets or making other sacrifices that reduces their quality of life or even make them more poorer.

Prevention of Over-indebtedness Question 1: What are the causes of over-indebtedness in your CFI? Question 2: What are some of effects of over-indebtedness to the client and your CFI?

Identifying the Causes of Over-indebtedness Multiple loans Poorly designed repayment schedules • 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 • Repayment schedule does not match the client’s business cycles (e. g. , agriculture) Inadequate capacity analysis • The institution relies on guarantees as a substitute for adequate capacity analysis Unpredictable events • Accidents, disease, or natural disasters

How over-indebted clients affect the Financial Institution 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

How over-indebtedness affects your clients 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.

Prevent Over-indebtedness CFI Borrowers • 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. Consider this: Research and practical experiences shows that borrowers consistently overestimate their own capacity to repay debt.

Principle in Practice Over indebtedness is avoided in product design through carefully defined and rigorously assessed eligibility criteria and defining debt threshold limits. There should be rationale for target setting, incentive schemes and senior management should monitor and respond to issues around portfolio quality.

CPP#2: Adequate Standards of Care Policy and well-documented process for loan approvals using appropriate information criteria Credit reporting information is used Senior management and board monitor and respond to heightened Over-indebtedness (OI) risk.

CPP#2: Adequate Standards of Care Sound Portfolio Quality maintained Staff incentivized to approve quality loans

Prevention of Over-indebtedness – Key Take-aways q Identify causes of indebtedness – multiple loans; inadequate capacity analysis or unpredictable events. q Establish the borrower’s ability to afford the loan and repay it. Train loan officers and provide incentives for thorough client screening. q Monitor over-indebtedness – use of client & finance education to create awareness. q Verify credit history – where credit bureau is available especially in competitive markets.

Key Messages • CFI senior management review results related to over-indebtedness in the market at least quarterly. • CFI verifies that third parties train staffs on loan analysis and the credit approval process. • CFI defines PAR levels that trigger additional internal monitoring and response. • CFI has rigorous internal control process for credit underwriting process. • In last 3 years, if the Credit Risk > 10% then FI/Sacco demonstrates corrective actions. • For overheated markets, CFI adopts risk mitigating policies, i. e. slower growth, conservative loan approval.

Client Protection Principle (CPP #3) Transparency

Session Objectives § Understand why transparency is important. § Outline the key standards for CPP 3.

Transparency The Principle in Practice: Providers will communicate clear, sufficient, and timely information in a manner and language that client can understand, so that clients can make informed decisions. Consider this: Transparency is a pre-condition to many of the other principles— foremost, responsible pricing.

CPP #3: Adequate Standards of Care Policy and documented process are in place to require transparency on product terms, conditions and pricing. The FI communicates with clients at an appropriate time and through appropriate channels. The FI takes adequate steps to ensure client understanding and support client decision making

Lack of transparency affects the client and the FI Effects the… Lack of transparency Client… 1 FI… Client does not understand the maintenance fees for her savings account. …sees that her savings have decreased and thinks the bank has robbed her. …loses business when client tells others about her experience. Client is not aware that she receives only three free ATM withdrawals before incurring fees. …is demoralized and does not trust ATM transactions. …loses benefit of investment in new technologies. Client believes that if she does not file an insurance claim, the premium will be returned to her. …concludes that insurance is a scam when she does not have the premium returned. …finds that products intended to add value and attract clients actually have the opposite effect. 2 3

Lack of transparency affects the client and the FI Lack of transparency Client… Effects the… FI… 4 Client is not aware of the penalty charges on late payment of loans …thinks the loans are expensive and the FI hides costs …reputation is at risk. …feels cheated and overcharged. …repeat business is at stake. …concludes that FI can take their assets willingly …finds that collateral based loans result in low loan uptake 5 Client is told of loan processing/application fee at disbursement stage. 6 Client signs loan agreement without the FI explaining collateral in simple language

Client Voices Regardless of education levels, understanding of loan terms is low. When you took out the loan, did you understand the terms and conditions? (all current and former clients) 100% 90% 79% 80% 70% 60% 58% 50% 48% 41% 35% 40% 30% 18% 20% 15% 10% 11% 2% 0% Yes Somewhat Benin Georgia Pakistan No Peru 13%

Good practice: Make communication meaningful to the client. • Don’t use fine print. Can you read the bottom of this slide? • Use plain language. Which statement is more meaningful? • A. Non-repayment will result in action on the part of the institution at the immediate outset of the delinquency. • B. The institution will begin the loan collection procedures on the first day the client is late. • Fit the communication method to the client. Are your documents written in the local language? How would a blind person access your important contractual information? Fine print is often overlooked by clients. Minimize the use of fine print.

I can easily understand the interest rate and compare it to other institutions. I know my installment amounts and when payments are due. I’ve never had unexpected: late fees, early payment fees, or account activity fees, changes to my interest rate or loan terms. The institution has explained my responsibilities for delinquent group members. I can easily find out the amount of my outstanding debt and the balance in my savings account. I am always given the opportunity to ask questions during my interactions with the institution.

Good practice: Confirm client understanding. Use: • Call backs • Check lists • “Key facts” or FAQ document • Glossaries for key terms • Analysis of common complaints/questions to improve communication

Transparency – Key Take-aways q Disclose the prices, terms, and conditions of all products, including fees and information on the recovery process to enable clients make informed decisions. q Train staff to communicate effectively with clients, including clients with literacy limitations. q Provide total cost - transparency is a pre-condition to many of the other principles—foremost, responsible pricing. o Use multiple channels/client friendly language o Allow time for questions o Provide regular account information

Client Protection Principle (CPP #4) Responsible in Pricing

Session Objectives • Understand principle on Responsible Pricing. • Understanding some of the key standards for Responsible Pricing.

Responsible Pricing The Principle in Practice: Pricing, terms, and conditions are set in a way that is affordable to clients and sustainable for the financial institution. Consider this: Financial sustainability is required to continue serving clients, but is not an end in itself.

In determining whether an institution is pricing responsibility, the price itself is important but not the only component

What influences pricing?

Responsible Pricing Analysis Includes Expenses Income Profit Financial Expenses Credit Losses Portfolio Yield Operating Expenses

CPP #4: Adequate standards of Care FI is managed sustainably to provide services in the long term. The FI’s pricing policy is aligned with the interest of clients. The FI's financial ratios do not signal pricing issues. (If outside the ranges, FI must be asked to explain and justify. )

Responsible Pricing – Key Take-aways q Pricing, terms, and conditions are set in a way that is both affordable to clients and sustainable for the financial institution. q Financial sustainability is required to continue serving clients: q Price competitively – fees & interest q Earn reasonable return q Use profits to benefit clients q Do not pass inefficiencies to the client

Session 1: Agenda Day 2 (March 16 th 2021) 10. 45 – 12. 45 PM CPP 5: Fair and Respectful Treatment of Clients CPP 6: Privacy of Client Data CPP 7: Mechanisms for Complaints Resolution 12. 45 – 1. 00 PM Why are these international CPPs important to financial cooperatives and why implement them? Remember - Your clients have Rights Too! Dec-21 59

RECAP - SUSTAINABLE FINANCE WITHIN MF; WHY? FIs that embrace SF will provide financial services that protect and benefit their customers, employees, and the environment. They will: 1. Protect customers from risk 2. Create real value for their customers 3. Care for employees 4. Respect and conserve natural resources

RECAP - Client Protection Principles 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 clients data 7. Mechanisms for complaint resolution

Client Protection Principle (CPP #5) Fair and Respectful Treatment of clients

FAIR AND RESPECTFUL TREATMENT OF CLIENTS How well or fairly or respectfully do you treat your members and clients even when they are not repaying their loans as scheduled?

Session Objectives § Understand the importance of fair and respectful treatment of clients § Understand how a FI can create and maintain high standards of ethical behavior towards clients

Principle in Practice Providers and their agents treat clients fairly and respectfully, as defined in the institution’s code of conduct. They do not discriminate in both client selection and treatment and will ensure safeguards are in place to detect and correct corruption and aggressive/abusive treatment from staff and agents. Consider this: Most abuses and discrimination happen during the loan sales and debt collection processes—these need special attention by providers. Codes of conduct should define sanctions.

The code at the center Management Code of Ethics Human Resource Internal Audit

Role of Management § Create a Code of Ethics for the institution. § Communicate the importance of ethics to staff on a regular basis. § Train staff to respond to ethical dilemmas tailored for their position. § Empower managers to follow up on ethical complaints. § Establish an Ethics Committee that rewards ethics and sanctions violations.

Adequate Standards of Care Promotes and enforces respectful treatment of clients through a Code of Conduct. Policy to avoid discrimination against protected categories in client selection Defined apt debt collection practices by staff and 3 rd party Effective systems to prevent and detect fraud Insurance claims are processed in a fair/timely manner Management and oversight support for fair and respectful treatment of clients.

Examples of inappropriate practices Offensive language and threats Unethical seizure of property Subcontracting to unethical businesses Careless debt extension • Credit staff uses offensive or abusive language. • Collections agents threaten clients or harass them at work, home, or their places of worship. • Collections agents enter a client’s home and/or seize property without a judicial order. • The institution accepts collateral that may deprive borrowers of their basic survival capacity. • The institution subcontracts collections to businesses that are not subject to the same ethical standards as the institution. • The institution issues automatic debt extensions.

Examples of correct practices q Policy that clearly defines examples of inappropriate debt collection practices is enforced q Management reviews key results related to fair and respectful treatment of clients such as customer surveys and conducting their own client visits q When an insurance claim is denied, claimants are provided reason for rejection and receive within 1 month of claim

Examples of correct practices q Independent internal audit team checks for fraud related to client savings. q Collateral seizing is respectful of clients' rights: does anyone have an example from their Institution?

FAIR AND RESPECTFUL TREATMENT OF CLIENTS – Key Take-aways q. Set ethical standards – behaviors that are acceptable or not – offensive language and threats; unethical seizure of collaterals; careless debt extension. q. Set appropriate debt collection practices – clear steps should be well detailed q. Train staff on ethics – for example on appropriate and inappropriate practices on loan recovery. Offensive language and threats

Key Messages §Providers and their agents should treat clients fairly and respectfully in every situation especially during disbursement and delinquency management. §Institutions should have strong policies, enforcement mechanism and appropriate sanctions in cases of policy violations. §Senior Management plays a crucial role in creating a ethical organization §To understand “appropriate practices, ” it is useful to define inappropriate practices and related sanctions §Inappropriate collections practices have negative consequences for both clients and institution.

Client Protection Principle (CPP #6) Privacy of Client Data

PRIVACY OF CLIENT DATA – CPP#6 q Do you know that client data belongs to the client not you as the institution? q Are you also aware that misuse of the data has the potential to harm your own clients? q So What is required of you as a financial provider?

Session Objectives § Outline the positive effects of data privacy for a FI and the client § Learn good practices practiced by the FI around data privacy and security

The Principle in Practice: The provider complies with all local data privacy laws. Client information is only used in the ways agreed upon at the time of data collection. Consider this: Clients trust financial service providers with very sensitive personal and financial information.

The Principle in Practice: Explain the importance of privacy and safeguarding confidentiality of client’s information. §Confidentiality prevents losses due to theft and fraud; §helps clients build assets by protecting them from pressure of friends/family. §Refer to current context e. g. ATM and branchless banking and the need to preserve privacy of data.

Digital Financial Services and Privacy • Rapid growth in mobile usage increases client “digital footprints” • Partnerships between financial institutions, telecos, agent networks, technology platforms etc, complicate the question of responsibility for client.

CPP #6: Adequate Standards of Care Client data is kept secure and confidential. Clients are informed about data privacy and consent to the use of their data.

Good practices for privacy and security Ask employees to sign a confidentiality agreement at the same time as their employment contract. Hold periodic campaigns for clients to update their data and incentivize them to participate. Establish a clearly defined “user access hierarchy” for staff accessing sensitive data. Don’t allow information available on the ‘intranet’ to be printed or downloaded for use outside the office.

Good practices for privacy and security Spot check the security of physical files in branches (e. g. using internal auditors). Describe the sanctions for the misuse of client data in the staff book of rules. Train clients on how to keep group information private.

PRIVACY OF CLIENT DATA – Key Take-aways q Use a privacy policy - Use a written privacy policy that governs the gathering, processing, use, and distribution of client data. q Use appropriate systems - Use technology that keeps client data secure. Train staff to keep data confidential, secure, and accurate. q Inform clients - Inform clients how their information will be used internally and externally—including data shared with 3 rd parties and the use of photos. q Train clients on how to safeguard information, access codes/ PIN numbers, and group information

Key Messages § Client information is only used in the ways agreed upon at the time of data collection. § The FI should have a privacy policy and appropriate technology systems to protect client data. § FI must receive written approval from clients before sharing or using their photo or personal and financial information. § With limited awareness about the pitfalls of inadequately protecting client information, FI should proactively educate staff and clients on data privacy.

Client Protection Principle (CPP #7) Mechanisms For Complaints Resolution

MECHANISMS FOR COMPLAINT RESOLUTION – CPP# 7 q Clients Protection also means that your institution has put in place a mechanism for handling client complaints. q Clients should be free to air their concerns; express specific problems; and provide any complement. q A complaints resolution mechanism is much more than a suggestion box!

Session Objectives • Recognize the importance of resolution of client complaints • Understand different types of complaints mechanisms and how they can be used effectively.

No Complaints ≠ Completely Satisfied Customers If your institution does not receive concerns or complaints, be careful: • Clients could be happy with your products and customer service, or • Clients might not feel empowered to share their concerns and complaints or • They might not know how to do so, or • Clients might not feel like they can complain without this affecting their business relationship with the institution.

Philosophy to consider Complaints and suggestions are GIFTs to the institution. They help an institution understand client needs and innovate for improvement.

Examples v Email the Macro Dreams Customer Response Department: customers@md. info v Call the 3 rd party/Agent Customer Response Line: 555 -555 v Call the Macro Dreams Customer Response Line: 555 -555 v Send an SMS to the Macro Dreams Customer Response Line: 555555 -555 v Leave a comment card in the Suggestion Box at your branch v Visit a Customer Service Desk. Call for locations: 555 -555

Surveys indicate clients don’t know how to complain Smart Campaign research indicates that clients are not aware of communications channels for complaints, grievances, and queries, or lack such options all together

It’s not that clients don’t have complaints Of clients who have had reason to complain, many do not do so “It is so expensive to complain, then sometimes it has no use. ” – Woman, Telavi, Georgia “If you go to complain to [the MFP] office, or elsewhere, you won’t get another loan. ” – Man, Parakou, Benin

Mechanism for Complaints Resolution The Principle in Practice: Providers have a mechanism for collecting, categorizing, analyzing, and responding to customer complaints in a timely manner. The mechanism is incorporated into staff performance reviews and rewards and it is used to improve product and service quality. Consider this: Suggestions boxes and/or client satisfaction surveys are not substitutes for a complaint mechanism.

Mechanism for Complaints Resolution §Dissatisfied clients and their complaints are inevitable – providers should address these problems quickly and effectively. §Clients should be made aware of their right to complain, how to complain and the process itself should be easy to use. §Providers should track complaints in order to improve their products and services. The processes for monitoring and analyzing complaints.

CPP 7: Standards of care The FI has effective system to receive and resolve complaints. The FI informs clients about their rights to complain and how to submit a complaint. The FI uses information from complaints to manage operations and improve product and service quality.

MECHANISMS FOR COMPLAINT RESOLUTION – Key Take-aways q. Set a complaints policy – for customer complaints to be fully investigated and resolved in a timely manner without bias. q. Actively use a mechanism - to handle customer complaints, dedicate staff resources to it, and ensure that it is actively used. q. Train staff - Train staff to handle complaints and refer them to the appropriate person for investigation and resolution. q. Monitor the system – to check how complaints are handled. q. Use the information – to improve products, processes, etc. 20 -Dec-21 CP 96

Key Messages • At least two channels for complaint resolution. • Collect, analyze, notify, and respond on time! • Management does regular review, incentives, and analysis to improve product/service quality. • Internal control - verify policies and procedures for complaints handling. Field checks on sample basis. • Staff and third parties are trained and clients are informed.

FINDINGS OF CLIENTS & CP Study (Microsave) – APRIL 2012 INDIA, BANGLADESH & PHILIPHINES – 357 responds said that: All the 7 CPPs are important But; When asked to rank the CPPs in their relative importance the clients gave the ranks as follows; 20 -Dec-21 CP 98

FINDINGS OF CLIENTS & CP Study (microsave) – APRIL 2012 1. Fair and respective treatment to clients 2. Transparency 3. Prevention of over indebtedness 4. Responsible pricing 5. Appropriate product design and delivery 6. Mechanism for client complaints 7. Privacy of client data 20 -Dec-21 CP 99

WHAT does all this mean for you as the CFIs? q In the past, FIs may have taken client protection for granted but with the growing highly competitive markets, there is need for more explicit attention to clients. q. All serious financial providers must put the client at the center of their business if they want to grow! 20 -Dec-21 CP 100

TREAT YOUR MEMBERS/CLIENTS RESPONSIBLY - THEY WILL GROW YOUR BUSINESS Product Design & Delivery Mechanism of client complaint Resolution Privacy of client data 20 -Dec-21 Prevent overindebtedness Client Protection Fair Treatment of clients CP Transparency Responsible Pricing 101

Dec-21 DQM 102