Digital Financial Services into the Client Protection ... · How are microfinance providers using...

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Authors:

Sonia Arenaza, Director, Channels & Technology Carol Caruso, SVP Channels & Technology

April 2015

Collaboration between the Smart Campaign and Accion Channels & Technology

Recommendations to include Digital Financial Services into

the Client Protection Principles

Recommendations to include Digital Financial Services into the CPPs

April 2015 | Smart Campaign and C&T | Page

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Recommendations to include Digital Financial Services into the Client

Protection Principles

Recommendations to include Digital Financial Services into the Client Protection Principles ....... 3

1. Evolution of Client Protection Standards ........................................................................... 3

2. Analytical approach........................................................................................................... 3

3. Recommendations ............................................................................................................ 6

Annex 1 – Ecosystem ................................................................................................................ 15

a. Digital Financial Services ................................................................................................. 15

b. Overview of the Ecosystem ............................................................................................. 15

c. 3rd party providers of DFS ................................................................................................ 16

d. Business Models ............................................................................................................. 16

e. Agents ............................................................................................................................ 17

f. Agent Network Managers (ANM) .................................................................................... 19

Annex 2 – Existing Principles, Standards, Indicators and Guidelines ........................................... 20

a. Existing Principles and Standards ..................................................................................... 20

b. Existing Indicators and Guidelines ................................................................................... 22



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Recommendations to include Digital Financial Services into the Client Protection Principles

1. Evolution of Client Protection Standards The Client Protection Standards were created to serve as a guide for microfinance institutions to put in place the minimum service standards that clients should expect to receive when doing business with them. Building off of the seven Client Protection Principles (CPPs), the Client Protection Standards specify what ‘doing no harm’ must entail in practice. The client protection standards represent the output of several years of industry collaboration, managed by the Smart Campaign. For the standards, released in January 2013 as part of the Client Protection Certification Program, the Smart Campaign worked with a Task Force of over 30 experts representing various stakeholders to develop and vet the standards. The standards are truly a public good developed for and by the industry. Standards that reflect social norms and expectations of an evolving industry must be dynamic. In order to incorporate an ever-changing sector and its diversity of products, services and related client protection risks, the Smart Campaign has begun work to evolve and improve its standards. One of the areas flagged as requiring more attention and specificity was Digital Financial Services (DFS). The Smart Campaign and its Evolution of Standards Working Group has teamed up with Accion’s Channels and Technology (C&T) department to make an initial set of recommendations for improving the Client Protection Standards based on their application to DFS and the risks to clients that stem from these services. The purview of this initial set of recommendations is for microfinance institutions which are incorporating DFS into one or more areas of their operations. The recommendations included in this document will go through a period of open comment, beta-testing and expert review over the remainder of 2014 and first half of 2015. The method for providing the recommendations and modifications included a review of all areas; Principle, Standards, Indicators and Guidelines. After this period of review the Smart Campaign will determine which of the recommendations would be appropriate to include in its standards, which are currently scheduled to be re-released in 2015. After the release of the final recommendations, institutions interested in certification would not be held against these until the launch of Certification 2.0, planned for 2016, in order to make time for adjustment and alignment. We welcome your comments and thoughts on these recommendations and thank you for your participation. Annex 2 of this document contains the current standards and indicators as well as guidelines that specifically apply to DFS for your reference when reviewing the current recommendations.

2. Analytical approach The approach for including DFS sought to initially understand the intersection of two primary areas:

How are microfinance providers using DFS? To provide some concrete answers to this question,

we have created a research note: Digital Financial Services and Microfinance: State of Play1

What are the emerging risks to clients using DFS? How do these risks align with the seven Client

Protection Principles? What is the current evidence on those risks? What are the possible actions

1 See research at https://centerforfinancialinclusionblog.files.wordpress.com/2014/08/20140821_eos_dfs_mfis.pdf

https://centerforfinancialinclusionblog.files.wordpress.com/2014/08/20140821_eos_dfs_mfis.pdf



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to mitigate those risks? To provide answers to these questions, we have published a second

research report: Potential risks to clients when using Digital Financial Services2

It is from the intersection of these two key areas of research that the first set of recommendations in this paper has emerged. Our suggested changes were selected taking into account the following variables:

• Risks: We have identified a list of 36 key potential risks clients face in using DFS corresponding

to the Smart Campaign’s Client Protection Principles and classified them based on evidence

(how frequently the risk is seen; availability of examples, statistics, and scenarios in which risks

happen in DFS deployments) and potential impact of risk on clients (high, medium or low risk

that might harm clients and/or hinder adequate provision of services to them). In light of the depth

and breadth of these risks, we have suggested that the review of our recommendations primarily

consider the following 10 prioritized potential risks3:

List of key potential risks:

Key Potential Risks Description of risk

A Clients do not make informed decisions due to inadequate information from providers Insufficient transparency and disclosure of information

1 Clients are not adequately communicated with nor trained on: (i) Service understanding (e.g., how the service works-what is available and what restrictions may exist, how to use it, costs/fees, how to register, how to opt-out), (ii) the security of the service (iii) Client service (e.g., where to complain/call if the service does not work, if the transaction did not go through, if the agent does not provide adequate service, etc.) . Information on roles and responsibilities of the agent, product and service fees, prices, terms, conditions, mechanism to address client's complaints, and timeliness of updates/changes are not properly disclosed to client.

B Inadequate or lack of client care channel/recourse mechanism (e.g., client support, client helpdesk, dispute resolution, and complaint mechanisms)

2 Provider offers inadequate support, dispute resolution, and complaint mechanisms to clients. Thus, when issues occur: (i) clients do not know who to approach, (ii) these centers are not accessible, (iii) call centers/complaint line do not adequately deal with client queries and complaints, (iv) client's concerns are not addressed in a timely and fair manner.

C Data protection and security

3 Client identity is stolen and may be used to open an account or perform transactions, which could lead to identity theft. Could occur at field level or internally at the provider.

D Data privacy

4 Clients are not informed/ misinformed on how their data and history is being used or shared. Hence: (i) client information could

2 See research at

http://www.smartcampaign.org/storage/documents/Tools_and_Resources/EoS_Risk_identification_and_analysis_vSA_AR_LT.pdf 3 For an earlier version of risk mapping, please see Potential risks to clients when using Digital Financial Services: An

analysis report to inform the Evolution of the Client Protection Standards,Table 1 p.6, Sonia Arenaza, Smart Campaign, 2014.

http://www.smartcampaign.org/storage/documents/Tools_and_Resources/EoS_Risk_identification_and_analysis_vSA_AR_LT.pdf









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Key Potential Risks Description of risk be inappropriately sold or tracked without client consent, (ii) client could start receiving spam/unauthorized advertising.

E Clients are defrauded and/or lose their funds

5 When (i) Service presents faulty security that allows information to be stolen and misused, (ii) Clients share their PINs with another person, (iii) A non-client uses a friend or family member's account (more than one user of the service) to perform unauthorized transactions instead of the registered client.

6 When the mobile money/branchless banking service has system downtime or some processes are manual, transactions performed by clients can be delayed, lost, or clients can even be victims of stolen payments.

7 When an employee of the service provider commits fraud by manipulating data and transactions performed by clients.

F Clients cannot access their funds or float

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Agents often run out of either cash or float balance and cannot perform a transaction as requested by the client (float and liquidity management issues).

H Unauthorized fees, exploitative prices charged to clients

11 Agents charge unauthorized fees or agent does not clearly disclose fees/prices to the client.

12 Clients are charged exploitative prices due to market structure i.e., in non-competitive markets with a dominant player or a monopoly, the provider could abuse its position and charge abusive prices).

I Agent’s inability leads to lack of service

13 Clients cannot access the service because agent does not know how to perform the transaction.

J Agent’s misconduct against clients

14 Clients are treated unfairly due to inadequate incentive structure rewards to agent.

15 Agents persuade clients to avail of particular transactions and services not because those are in their best interest but because they provide higher fee/commissions for agents.

16 Female clients fear harassment from agents or are not served by agent.

17 Agents discriminate against clients to perform certain types of transactions due to security concerns (e.g., agent working in high-risk neighborhoods can be target of thefts and robbery and hence may want to limit cash in transactions. This situation is aggravated when agents do not have any insurance provided by a bank, MNO, or provider; or are not self-insured.

18 Agent performs/accepts transactions with counterfeit cash by himself or colluding with a third-person. Also, agent provides this money to clients.

Nonetheless, in providing recommendations we have also gone through the remaining 27

potential risks and evaluated their considerations in our recommendations. In the aforementioned

paper Potential risks to clients when using Digital Financial Services4, these risks have been

mapped to the Smart Campaign’s Client Protection Principles.

• Control of FI: The provision of DFS involves the participation of a variety of players along the

value chain such as financial institutions (FI), mobile network operators (MNOs), financial

4 See research at

http://www.smartcampaign.org/storage/documents/EoS_Risk_identification_and_analysis_vSA_AR_LT.pdf

http://www.smartcampaign.org/storage/documents/EoS_Risk_identification_and_analysis_vSA_AR_LT.pdf



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technology providers, regulators, agents, agent network managers, chains of retailers, and

donors (this is explained in detail in Annex 1: Ecosystem). Hence, the level of control a FI has

over risks to client at each step of the value chain varies but plays a key role in the provision of

services to clients.

• Actions to mitigate risks: A thorough analysis of the risks clients face in using DFS, including

evidence of the potential risk and impact on clients has allowed us to suggest actions/practices to

mitigate those risks.

3. Recommendations This section presents recommendations for inclusion into certification 2.0. The recommendations are organized into sections that represent different levels of recommendations, such as new/modified standards for existing principles (Table A), new/modified indicators for existing standards (Table B) and new/modified guidance for existing indicators (Table C). New material from the DFS recommendations is in blue for clarity, deletions are crossed out.


April 2015 | Smart Campaign and C&T | Page 7

Recommended new / modified standards, indicators, guidelines organized by principle

Existing Principle Propose new / modified Standard

Proposed Indicator Proposed Guidelines

Principle 1: Appropriate Product Design and Delivery Channels

The FI designs products and channels that are appropriate to client needs and do no harm

1.1. The FI designs products and channels that are appropriate to client needs and do no harm. It does not offer products or channels that produce negative value for the clients.

[DFS] * FI and its agent providers continuously work on improving liquidity management such as repeating training, improving procedures, monitoring liquidity of agents, or providing credit to agents. This will allow access to funds or float (i.e., agents often have either cash or float when clients are asking for other so they cannot get their money). * Agent is accessible or close-by and service required by client is available at agent. In doing so, the FI and its agent provider continuously work on building an adequate agent network, growing the network especially in areas where person-to-person transactions happen. A successful agent network depends on the availability of agents. * FI has in place procedures to monitor transaction flows and pays attention to money laundering and terrorism financing threats that may arise from the use of digital channels and in some cases from non-face-to-face relationships and transactions (e.g., some options are to implement transaction limits to limit the number of accounts a client can hold, frequency of transactions, volume of transactions, amount that can be transferred in a certain period of time).

1.2 The FI seeks client feedback for product & channel design and delivery

1.2.2 The FI uses client feedback to inform product & channel development and improve existing products & channels (client feedback can be informal).

[DFS] FI should be able to show that it or its third party provider of DFS has made changes to products or services when feedback from clients or agents is relevant.

*DFS+ The FI researches/analyzes clients’ feedback before, during, and after designing and delivering a product. FI analyzes the data on an on-going basis

[DFS] * FI analyzes clients' needs/wants/behavior before designing products. * FI and its 3

rd party providers of DFS understand clients

and create/test/improve products/services based on that understanding.

1.3 The FI does not use [DFS] FI's agent does not persuade clients to avail of [DFS]





aggressive sales techniques

particular transactions and services not because those are in their best interest but because they provide higher fee/commissions for the agent.

* FI monitors agent performance and defines process for reinforcing training, warning of misconduct, and/or removing agents.

Principle 3: Transparency

3.1 The FI fully discloses cost and non-cost information

[payments] [DFS] Marketing literature, published fee structure and verbal communication is consistent, transparent and outlines all fees and costs applicable to conduct the service.

[DFS] *Visible and accessible digital financial services (payments, money transfer, mobile & internet banking) information/documentation lists the amount to be paid by the sender in the sender’s currency and the amount to be received in the recipient’s currency; all fees; taxes; estimated exchange rate; possible changes; terms, conditions for collecting money; cancellation conditions; location of agents; linked products (i.e., having option to open a savings account); and mechanisms to address client's complaints. * Documentation is accessible for clients of any payment service provided at the FI's agent such as bill payments, top-up, cash-in, cash-out, utility payments, lists all fees, terms, taxes, and cancellation conditions.

[DFS] FI's agents do not charge unauthorized fees to clients.

[DFS] * FI requires agents to disclose fees. * FI should have procedures in place (e.g., field monitoring, data analysis, client surveys) to ensure that agents do not charge unauthorized fees and clearly disclose fees and prices to the client. * FI monitors agent performance and defines process for reinforcing training, warning of misconduct, and/or removing agents.

3.2 The FI communicates proactively with clients in a way that clients can easily understand

3.2.1 The FI has effective communication. Staff and agents communicate in such a manner that clients can understand the terms of the contract, their rights and obligations. Staff and agents communicate with techniques that address literacy limitations (e.g., materials available in local languages).

* Product information is in the local language; verbal communication is in the local language. * Front line staff and agents are is trained to communicate with clients with literacy limitations. For example, new front line staff they receives initial dedicated training on client communication during induction training. Staff and agents receive yearly refresher trainings on client





communication. Generally, it is not enough to address client communication techniques in internal staff manuals. * Staff and agents are trained to verify client understanding of the terms of the contract. [DFS] *Client communication covers (i) Service understanding (e.g., how the service works, how to use it, how to register, how to opt-out); (ii) Trust in the service (e.g., reinforce client confidence in the service, security of data); (iii) Client service (e.g., where to complain/call if the service does not work, if the transaction did not go through, if the agent does not provide adequate service, mechanism to address client's complaints, etc.)

3.2.2 The FI contracts contain simple language and no fine print (figuratively or literally). A clear facts summary page is given if the legally necessary contract is deemed too technical for the clients.

[DFS] FI extends agency-banking services to existing clients; clients do not have to sign a specific contract with the FI to access services provided through an agent. However, to access digital services such as mobile and internet banking clients are requested to register for the service with the FI or another 3

rd party provider.

3.3 The FI uses a variety of disclosure mechanisms

3.3.1 The FI uses at least two different communication channels for disclosing clear and accurate information about the product & channel: written and verbal (to address literacy limitations).

Product & channel information is displayed and visible in branches and agents (e.g., posters, brochures, pamphlets), read aloud to clients or verbally communicated to clients.

3.4 The FI leaves adequate time for client review and discloses information multiple times

3.4.3 The FI staff and 3rd

party representatives are available to answer questions.

- Field staff are trained to resolve frequently asked questions on the new channel offering and time taken to resolve disputes and problems is accounted for when evaluating their performance (i.e. there are no disincentives because the agent has taken additional time to resolve client problems negative impact on efficiency and TAT.

3.5 The FI provides accurate and timely account information

3.5.3 The FI regularly gives clients clear and accurate information regarding their accounts (e.g., account statements, receipts, balance inquiries, proof of payment for loans).

[DFS] *Client receives a text message (sms) ,email or paper receipt (especially for OTC) once a transaction is performed through an alternative delivery channel (i.e., agent, internet, mobile)

[DFS] Clients are informed on roles and [DFS] * FI establishes minimum disclosure and





responsibilities of the agent, timing of changes in terms of services, and cancellation or disruption of the service.

transparency requirements for the DFS (e.g., visual information of roles and responsibilities of agent, communication line in cases of disruption of the service, complaint lines)

Principle 5: Fair and Respectful Treatment of Clients

3rd

party providers providing DFS are expected to follow the same practices as the FI

[DFS] There are clear agent recruitment, selection, training, and monitoring processes at third party providers. Provider complies with any existing Central Bank regulation on consumer protection.

[DFS] FI can use 3

rd party providers for DFS; these providers

should follow any standard, or policy by which the FI is accountable. FI are responsible for monitoring agents being used through providers in the fulfillment of their responsibilities to the FI. In working with 3

rd party providers that interact with

clients (i.e., agents): *Agent contracts should comply with FI's standards and standards of professional conduct; * There are clear procedures to reinforce training of agents and capacity building of agents. *The agent network 3

rd party provider complies with

Central Bank regulation on client protection.

[DFS] FI has proper Service Level Agreements (SLAs) by which the 3

rd party provider of the service will

abide by fair and responsible treatment of clients.

[DFS] The following agent behaviors are prohibited: * client information is inappropriately sold or tracked without client consent; Data security policy in place to mitigate client data and identity theft risks; to protect against security breaches, fraudulent access, and misuse of client's information; and to provide notice of security breaches, and other protection; * agent corruption leads to lost funds; * agent discriminates against clients or refuses to serve without grounds; * agent harass clients; * agent requests bribes

Principle 4: Responsible Pricing

4.3 The FI does not charge excessive fees

[DFS] Fees from the use of services of digital channels (e.g., money transfers, cash-in, cash-out, loan disbursement, loan repayment, top-up) are not

[DFS] Fees are based on an evaluation of fair market pricing and actual costs incurred on the provision of DFS.





excessive

Principle 5: Fair and Respectful Treatment of Clients

5.4 The FI implements policies to promote ethics and prevent fraud

5.4.1 The FI managers and supervisors review ethical behavior, professional conduct and the quality of interaction with customers as part of staff and agent performance evaluations.

* Annual evaluations and/ or incentive scheme for staff and agents, and especially of those in direct contact with clients, penalizes unethical behavior and unprofessional conduct and rewards the quality of interaction with customers clients. The FI avoids putting staff in a situation where its interests conflict with those of clients (moral hazard) (i.e., incentives schemes are not based on short delays for PAR recovery). * Performance evaluations assess adherence to the Code and quality of customer services. * FI gets feedback from clients on interactions with staff and agents. * Incentive system specifically rewards ethical behavior.

5.4.2 The FI's procedures describe the sanctions that will be taken in case of violation of the Code of Conduct or collections policies (harassment, discrimination, theft, corruption, kickbacks, etc.) that can result in termination of employment or agreement with 3

rd party providers.

The FI communicates these policies to agents to ensure that this serves as a deterrent and agents are aware of the repercussions of misconduct.

[DFS] FI and/or agent provider performs sufficient monitoring of agent performance and has a defined process for reinforcing training, issuing warnings in the case of misconduct, and removing agents.

[DFS] * FI and/or agent provider monitor agent activity and performance and leverage the use of technology to detect possible misconduct and training needs.

5.7 The FI informs clients of their rights

[DFS] The FI informs clients that when performing a money transfer transaction:

Client materials & customer support center explain resolutions, for instance: - In cases where receiver cannot cash out money after a period of time then funds should return to sender and sender should receive a notification; - If money is sent to the wrong number, a cash reversal needs to be provided by either the agent or the provider (i.e., via client care channel or customer support)

Principle 6: Privacy of 6.1 The FI has a data privacy and security policy and

6.1.1 The FI has a written data privacy and security policy that governs the gathering, processing, use,

[DFS] * FI should have a data security policy in place to mitigate





Client Data

appropriate technology systems

distribution and storage of client information to maintain its confidentiality, safety and integrity. The policy covers current staff, third party providers that interact with the FI's IT systems and those who leave the organization and information leakage.

client data and identity theft risks; to protect against security breaches, fraudulent access, and misuse of client's information; and to provide notice of security breaches, and other protection; * FI clearly identifies who is financially liable to refund funds to the client if those are stolen due to data security breaches

6.1.5 The FI has process, people, and systems in place (including secure ICT systems) to protect the confidentiality, security, accuracy and integrity of customers’ clients' personal, transactional and financial information.

* FI restricts taking client files or documents to employees' or agents’ homes. * Infrastructure ensures secure access to client data (ex. VPN, different server for database and software data environments as for example a production, testing, and training environments with different levels of access). * Employees cannot download any parts of the database. * Client files are kept in a secure place, with limited and controlled access. * FI backs up data regularly, according to a clear policy. FI has or is working on having a disaster recovery plan in place. * FI verifies accuracy of client data in MIS and any information systems that interfaces with the MIS. * Staff are trained to enter data into the MIS. * Internal audit checks compliance with privacy policy. * FI may do external ICT audits, as well. [DFS] * FI has a process in place and staff and agents are trained to report security breaches and fraudulent access; * Agents are trained to enter data into any device used to deliver DFS; * FI has automated reconciliation processes; * Users receive an electronic confirmation once their transactions are completed; * If there is service downtime or unreliable service, then information and transactions are properly stored and transmitted once the service is restored;





* FI has systems in place to perform account monitoring and other controls to identify and discourage fraud.

6.1 The FI has a data privacy and security policy and appropriate technology systems

6.1.6 The FI's ICT systems in place a security management system (e.g., have different secure and encrypted password protection systems that are changed periodically with different access levels controls according to the position and roles of the staff member accessing the data.)

6.2 The FI informs clients about when and how their data is shared and gets their consent

6.2.1 The FI has a policy (included in the training manual) to describe how to talk to clients about this topic. Requires that the FI clearly present to clients how it will use and share their client data.

[DFS] * FI informs clients if/when data has inappropriately been sold or tracked

6.2.2 The FI communicates well the privacy policy to staff and 3

rd party providers

[DFS] * Third party providers and especially those that directly interact with clients (e.g., agents) sign an agreement recognizing the confidentiality policy

6.2.3 The FI trains its staff to protect the confidentially, security, accuracy and integrity of customers’ personal and financial information.

[DFS] * Training should cover privacy and security policies to staff and agents working on the provision of DFS.

[DFS] FI & its 3rd

party providers has a policy in place to identify/register beneficiaries from account holders upon account holder's death and to offer clients the opportunity to change the beneficiaries on a needed basis. Also, FI provides clients clear and adequate information and asks them about opt-in/opt-out options to identify beneficiaries.

Principle 7: Mechanisms for Complaints Resolution

7.1 The FI's clients are aware of how to submit complaints

7.1.1 The FI informs clients about: • their right to complain; and • how to submit a complaint to the appropriate person and/or channel (or where they could find that information if they don’t know it first-hand).

[DFS] * FI makes emphasis in communicating/training clients that they should be able to contact the call center or any client care channel or go to the nearest FI's branch and report the case for investigation if: - client suspects the agent of fraud; - client cannot access the service because agent does not know how to perform the transaction client requires; - client suspects agent is discriminating against him/her; - client cannot access service due to malfunctioning





equipment at the agent; - agents are too slow and unable to process registration swiftly.

7.2 The FI's staff and third party providers are is trained to handle complaints

7.2.1 The FI's dedicated staff induction training and FI’s 3

rd party providers (that handle complaints)

training includes a session on how the complaints mechanism works, the loan officer’s role and/or agent's role in the process and how to appropriately manage complaints until they are completely resolved (how to handle complaints and refer them to the appropriate person and/or channel for investigation and resolution).

[DFS] If FI uses a third party providers for complaint resolution/client support then it clearly defines in the SLA who is responsible and the tiering of response for resolving client’s issues and the time those issues should be resolved.

7.3 The FI's complaints resolution system is active and effective

7.3.3 The FI has assigned someone to handle complaints and refer them to the appropriate person for resolution and proper escalation, at least on a part-time basis.

-

7.3.4 The FI has a clear reporting system in place to ensure that complaints from branches/POS and any branchless banking channel (e.g., agents, mobile phone) reach complaints-handling staff.

-

7.3.6 The FI's clients receive a timely response to their issues, within a reasonable time (e.g., a week, a month) of complaint submission. Also, clients receive notification that their complaint was received.

-



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Annex 1 – Ecosystem

a. Digital Financial Services DFS combine Mobile Financial Services and Branchless Banking.

b. Overview of the Ecosystem The provision of digital finance involves the participation of different players such as banks/financial institutions, mobile network operators (MNOs), financial technology (FinTech) providers, regulators, agents (e.g., mom and pop shops, retailers, chain of retailers, pharmacies, etc.), clients, and donors. Hence, the interaction of these actors and the conditions of the regulatory environment and market archetype in which they participate pose complexities both to them and to the clients they serve.



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c. 3rd party providers of DFS For providing DFS a FI can enter into partnerships with MNOs, FinTech providers, and agents. MNOs can also provide DFS and enter into partnerships with Banks/FI, FinTech providers, and agents. Since FI can use third party providers for DFS; these providers should follow any standard, procedure, policy by which the FI is accountable. Also, FI are responsible for monitoring its providers in the fulfillment of their responsibilities.

d. Business Models Banks Agent banking has become a viable strategy for FIs for extending formal financial services into poor/rural/further areas and shifting low value transactions away from more expensive branches. Agent banking is known by different names such as: bank agents, banking agents, agent banking, non-bank agents, non-bank correspondents, banking correspondents, or correspondent banks.



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Agent banking gives FI the opportunity to provide low-income banking aiming to: - Decongest branches, migrate transactions to lower-cost channels, and to increase outreach and coverage at lower costs; - Reach out to new clients and expand payment services; - Provide low cost products such as loans, savings, and other inclusive products like micro-insurance by levering on coverage at lower costs; - Improve presence and visibility; - Encourage customer loyalty. MNOs The provision of DFS allows MNOs to have direct and indirect benefits such as: - Increase revenue per user; - Reduce prepay churn; - Reduce airtime distribution cost; - Increase customer retention; - Attain new sources of revenue (e.g., provision of insurance in partnership with insurance companies).

e. Agents An agent performs (1) cash services or CICO (cash in and cash-out transactions); (2) verifies identify of the client; (3) interacts with the clients of behalf of DFS providers (e.g., FI, MNOs); and (4) provides other related services such as utility payments, balance enquiry. While mobile money and branchless banking are services provided by different actors, agents play a key role in client protection and are key drives of DFS. Agents are sometimes the solely interaction with clients. There is need for a better design of the incentives, training, and monitoring of agents to ensure clients are well served and there are no harms against them. Agents can benefit from one or many of the following:

An agent is typically a retailer (e.g., mom-and-pop shop, pharmacy, convenience store, etc.), a chain of retailers, or an aggregator of agents called agent network manager (ANM). An ANM is explained in detail in section c, below. A FI could work with an agent under the following structures:



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AGENT(S)

The FI owns and manages it agents (e.g., Banco

de Credito in Peru)

Bradesco in Brazil. GKN an ANM in Peru provides services to FI in Peru such as Scotia Bank, BBVA.

VisaNet with Banco do Brazil.

Banco do Brazil with Pao do Acucar chain of retailers

This is a MNO based service model. The FI acts as an agent of the mobile service (e.g., mPESA in Kenya, where the MNO works in partnerships with FI and other ANM)

FI

Retailer 1 Retailer 2 Retailer ..

FI

Retailer 1 Retailer 2 Retailer ..

ANM

FI

ANM 1

Retailer 1

Retailer ...

ANM..

Retailer 1

Retailer ...

FI

Chain of retailers

Retailer 1

Retailer ...

ANM 1

Retailer 1

Retailer ...

ANM..

Retailer 1

Retailer ...

FI

Chain of retailers

Retailer 1

Retailer...

MNO

FI

Branch

Branch

ANM

Retailer

Retailer



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f. Agent Network Managers (ANM) An agent network is comprised of several agents. The management of those agents is covered under the agent network management functions. The scope and responsibility of this function by a FI implies taking decisions with regards to the structure and management of the agent network – from performing it in-house to outsourcing it to an Agent Network Manager (ANM) - when launching branchless banking initiatives. There are three models of an agent network to follow in working with agent networks:

Worth noting is that:

A FI can sign a contract with each agent or with an agent network manager (ANM) that owns/subcontracts agents to provide products and services on behalf of the FI;

The FI pays a fee to the agent or ANM for extending the FI’s services to its clients, though the agent or agent network manager does not belong to the FI’s staff but signs an agreement with the FI

Direct

The FI defines the strategy and creates its

own network

The staff of the FI manages the network

The FI is the sole owner of the channel and of its

development

Mixed

The FI contracts an ANM

The FI hires the agents supported by

third party staff

The FI bears the risks and owns the channel

Outsourced

The ANM already owns an existing network

Delegation of the hiring process

Agents and ANM share the risks

The ANM has its own staff

Level of delegation



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Annex 2 – Existing Principles, Standards, Indicators and Guidelines

a. Existing Principles and Standards

1 - Client Protection Principle 1: Appropriate Product Design and Delivery Channels

1 1 The FI designs products that are appropriate to client needs and do no harm

1 2 The FI seeks client feedback for product design and delivery

1 3 The FI does not use aggressive sales techniques

2 - Client Protection Principle 2: Prevention of Over-indebtedness

2 1 The FI conducts appropriate client repayment capacity analysis before disbursing a loan

2 2 The FI incentivizes quality loans

2 3 The FI uses credit bureau and competitor data, as feasible in local context

2 4 The FI Management and Board is aware of and concerned about the risk of over-indebtedness

2 5 The FI's internal audit department monitors that policies to prevent over-indebtedness are applied

2 6 The FI avoids dangerous commercial practices (i.e., avoids combining loan products to meet the same need, or restricting the loan use; sets prudent limits to allow for the renewal of a loan in case of early repayment; sets guidelines for appropriate rescheduling policies)

3 - Client Protection Principle 3: Transparency

3 1 The FI fully discloses cost and non-cost information

3 2 The FI communicates proactively with clients in a way that clients can easily understand

3 3 The FI uses a variety of disclosure mechanisms

3 4 The FI leaves adequate time for client review and discloses at multiple times

3 5 The FI provides accurate and timely account information

4 - Client Protection Principle 4: Responsible Pricing

4 1 The FI offers market-based, non-discriminatory pricing

4 2 The FI’s efficiency is in line with its peers

4 3 The FI does not charge excessive fees

5 - Client Protection Principle 5: Fair and Respectful Treatment of Clients

5 1 The FI culture raises awareness and concern about fair and responsible treatment of clients

5 2 The FI has defined in specific detail what it considers to be appropriate debt collection practices

5 3 The FI's HR policies (recruitment, training) are aligned around fair and responsible treatment of clients



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5 4 The FI implements policies to promote ethics and prevent fraud

5 5 In selection and treatment of clients, the FI does not discriminate inappropriately against certain categories of clients

5 6 In-house and 3rd party collections staff are expected to follow the same practices as the FI staff

5 7 The FI informs clients of their rights

6 - Client Protection Principle 6: Privacy of Client Data

6 1 The FI has a privacy policy and appropriate technology systems

6 2 The FI informs clients about when and how their data is shared and gets their consent

7 - Client Protection Principle 7: Mechanisms for Complaints Resolution

7 1 The FI's clients are aware of how to submit complaints

7 2 The FI's staff is trained to handle complaints

7 3 The FI's complaints resolution system is active and effective

7 4 The FI uses client feedback to improve practices and products



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b. Existing Indicators and Guidelines

Certification Guidelines (Sept 19th 2013)

1 - - Client Protection Principle 1: Appropriate Product Design and Delivery Channels

1 1 - The FI designs products that are appropriate to client needs and do no harm

1 1 1 The FI designs products that are appropriate to client needs and do no harm. It does not offer products that produce negative value for the clients.

[credit] * Installments are designed in such a way that clients always reimburse a portion of capital with each installment in order to gradually reduce their debt (even for rescheduled loans), with the exception of loans where the cash flow is adapted to the client income flows (bullet payment at the sale of the harvest, bullet payment upon receipt of revenues from a contract, etc.). [savings] * Does not have high fees that deplete the savings. [insurance] * Insurance coverage is not excessive (i.e., "not useful for the client", especially in cases of compulsory products).

1 1 2 The FI has a policy describing acceptable pledges of collateral; Has clear guidelines for how collateral is registered and valued.

* Policy defines registration procedures, acceptable and non-acceptable assets, how collateral is valued (ex., based on market prices, resale value). Policy also defines a list of assets that cannot be accepted as collateral, or that cannot be seized in case of default, because they would deprive borrowers of their basic survival capacity, including business assets. * Valuation process is done by people with good market knowledge. * Fees related to the collateral sales are clearly explained to the client before the sale, are at levels that do not deprive clients of basic survival capacity, and the difference between the value of the asset and the outstanding balance is reasonable. * Fees related to collateral sales are commensurate with cost incurred when seizing and selling assets.

1 2 - The FI seeks client feedback for product design and delivery

1 2 1 The FI investigates reasons for clients drop out. * FI records reasons for drop outs and analyzes the data on an on-going basis.

1 2 2 The FI uses client feedback to inform product development and improve existing products (client feedback can be informal).

* FI must be able to demonstrate that feedback is communicated to management. FI should be able to show that it has made changes to products or services when the feedback is relevant (i.e. some feedback cannot be addressed, for example when clients complain about being denied a loan when the reasons can be justified by the LO). * Client feedback is collected at least quarterly. The FI can demonstrate that it has addressed the feedback In some way in the last two years.



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1 3 - The FI does not use aggressive sales techniques

1 3 1 The FI does not use high pressure/ aggressive sales techniques. Does not force clients to sign contracts (for credit, no forced signing of any individual borrower or group member, or any guarantor).

* Excessively high sales targets may encourage aggressive selling. Frontline staff should consider sales targets reasonable in their context. Sales targets take into account the level of competition, potential saturation and are revised on a regular basis. * Sales targets should be aligned with typical productivity levels, e.g., there are not significant, unjustifiable increases in productivity targets from one year to the next. * Staff are regularly reminded of clients' rights to refuse a loan/insurance/savings product.

2 - - Client Protection Principle 2: Prevention of Over-indebtedness

2 1 - The FI conducts appropriate client repayment capacity analysis before disbursing a loan

2 1 1

The FI policies support good repayment capacity analysis. The loan approval does not rely solely on guarantees (whether peer guarantees, co-signers or collateral) as a substitute for good capacity analysis. [individual lending] Repayment capacity analysis is done for every loan. [group lending] The group formation and loan approval process ensure the prudent self-selection of members, with emphasis on the concept of solidarity payment.

[individual lending] * FI has appropriate methodologies to collect information and assess client repayment capacity. * Cash flow analysis formats and the analysis in practice consider business and family expenses as well as liabilities from other sources. * Loan approval process requires evaluation of borrower repayment capacity through the analysis of household surplus. The client indebtedness level includes all the household members as well as the clients' direct and indirect loans (as guarantor). * Conservative criteria are applied to volatile income sources (e.g., remittances) and higher risk loans (e.g., start-up, consumption, higher loan amounts to a more vulnerable segment). [group lending] * The credit agreement depends on the group’s knowledge, analysis and decision regarding the moral solvency of the client. Groups and village bank members select members based on credit-worthiness, such as knowledge of the other member’s businesses, knowledge of the household, trust-worthiness, honesty and reputation to fulfill commitments. * Informal evaluation of group members' repayment capacity is further incentivized when groups and village bank members understand that they need to cover for co-borrowers in case of late payment. * Initial loan amounts for each individual in the group remain small.



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2 1 2 The FI's repayment capacity policy is adequately disseminated among staff, considering the staff growth and turn-over.

* A policy is adequately disseminated if all new staff are trained on the repayment capacity policy; junior loan officers receive field mentoring and/on-the-job training from senior staff. * Loan officer training materials should address how to analyze repayment capacity. Training should offer a mix of theoretical and practical examples on financial analysis, how to interview clients to get necessary information, how to conduct repayment capacity analysis. * If the FI is growing rapidly or has high turn-over, training is more frequent.

2 1 3 The FI's repayment capacity policy is uniformly used in the practice.

* Elements to verify whether the policy is uniformly used: the credit committee verifies/challenges loan officer’s analyses; loan files contain the documentation to support repayment capacity analysis. * Repayment capacity policy should be applied throughout the FI’s branch/bank/credit union network, unless context or some other factor justifies that the policy be customized. For example, if the policy requires an analysis of debt ratios, thresholds may change depending on the economic activities. * A sample verification of loan files should reveal that all the files contain the same forms required by the repayment capacity policy, (ex., table for cash flow analysis, client profile form, Profit and Loss statement, etc.), completely filled in. Any missing information should be justified with a note in the file.

2 1 4 The FI performs a repayment capacity analysis at each loan cycle, even if simplified for secondary aspects at loan renewal.

* Some FIs may have a more simplified analysis for very small loans, short cycle loans (2-3 months), or different loan products like emergency loans; this is fine as long as essential analysis is done (business and household income/expenses; liabilities from all sources), to take into account any changes to the clients situation.

2 1 5

For clients with informal revenues and/or non consumption loans (most cases), the repayment capacity analysis is based on a client visit (performed by the loan officer or delegated to the group/village members). The FI verifies the information consistency through cross-checks. For clients with a salary asking for a consumption loan, a client visit is not required.

* Debt capacity analysis should include a requirement for confirming information provided by a potential client, such as reference checks and site visits. This information helps assess not only the client’s ability to repay but also his or her willingness to repay. * New clients are visited either at their place of business or home. * If the FI's credit policy does not systematically require visits for clients with informal revenues, the exceptions are specified in the policy. * Exceptions to the client visit are ok for marginal portion of the portfolio if FI is mitigating the risk that clients are over-indebted (by monitoring, for example, repeat clients with same loan officer, repeat loan of same or lower amount, and small loans). * [group lending] FI must be able to demonstrate how it verifies or cross-checks analysis delegated to group members.



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2 2 - The FI incentivizes quality loans

2 2 1 Regular reports on PAR and write-offs are produced and reviewed by the FI's management.

* Management reviews PAR and write off reports at least monthly.

2 2 2 Reasonable portfolio quality is maintained over time. If there is poor long term quality of loan portfolio, and linked to over-indebtedness, corrective measures have been put in place.

* Reasonable portfolio quality is defined as PAR30 + write-off>360 <10% (including restructured portfolio) for the past 24 months (on average, monthly) (with downward PAR trends). * The FI shall not be penalized on this indicator If credit risk (PAR30+write off)>10% over the last 24 months and it was due to an exceptional situation (fraud, natural disaster).

2 2 3 The FI's productivity targets and incentive systems value portfolio quality at least as highly as other factors, such as disbursement or client growth.

* Using a very stringent PAR target like PAR1, or a zero tolerance policy for delinquency, can increase the risk of aggressive recovery tactics and discourage loan officers or recovery agents from taking the time to assess reasons for default. (indicator 5.2.2) Targets should be reasonable within current market conditions. * Some FIs do not use quantitative incentive targets but prefer to reward staff based on how well they comply with institutional processes, as determined by internal audit checks. Quantitative measures include PAR. * FI reviews incentives scheme at least yearly to adjust targets to context.

2 2 4 The FI's productivity targets and incentive schemes are reasonable as compared to the industry benchmark (parameters and proportion of fixed/variable remuneration).

2 2 5 If PAR is over 10% at the level of the MFI, bonuses are offered to loan officers able to decrease PAR below 10%.

2 3 - The FI uses credit bureau and competitor data, as feasible in local context

2 3 1 [credit bureau] The FI policies include clear consultation and sharing of client data (for all loan cycles).

2 3 2

[credit bureau] The FI systematically reviews client data from the credit bureau (for borrower current debt levels and repayment history) to assess the client repayment capacity prior to disbursement at each loan cycle. The FI also systematically reports client data to the credit bureau.

2 3 3 [credit bureau] [group lending] Groups access to up-to-date data from the credit bureau regarding borrower credit history: group members are provided with the credit bureau credit checks done on other members.

* With regard to potential invasion of privacy issues, members’ credit history information may be conveyed orally by the group leader or loan officer; it is not necessary that group members receive documentation on the credit bureau checks. * Group members do not necessarily need to receive/take home detailed credit history data on fellow members; a high level check of whether they pass or fail a credit bureau check is sufficient.



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2 3 4 [no credit bureau] Policies include clear consultation and sharing of client data (for all loan cycles), with competitors, as feasible in local context.

When there is no credit bureau or when MFI/coops are prohibited from accessing it, MFIs should strive to share data with competitors, as feasible in local context.

2 3 5 [no credit bureau] The FI regularly consults with and reports client data to competitors (informal data exchanges consistent with legal limitations), as feasible in local context.

When there is no credit bureau or when MFI/coops are prohibited from accessing it, MFIs should strive to share data with competitors, as feasible in local context.

2 3 6 The FI has a supervisory system in place to ensure that the credit bureau or competitor data is effectively used to inform credit analysis and decisions.

* Any kind of control process that verifies compliance with policies; may be internal audit or control, or a specific control system conducted before or after loan disbursement. * Internal audit or internal controls verify use of credit bureau or competitor data at the branch level at least on a yearly basis

2 4 - The FI Management and Board is aware of and concerned about the risk of over-indebtedness

2 4 1 The FI's management and Board of Directors show awareness and concern about the risk of client over-indebtedness, and monitor it.

* The Board receives reports to monitor potential over-indebtedness at least quarterly. * Regular review and analysis of portfolio quality is essential, but not sufficient. The FI should also be able to review products and practices if the context shows risks of over-indebtedness.

2 4 2

In high risk markets, stronger efforts are required. Management and Board of Directors define what is high-risk. They review relevant market level information (relevant to the current or planned operational area of the financial institution).

* In very competitive markets, credit approval policy explicitly addresses borrower debt thresholds and acceptable levels of debt from other sources. * FI has cross-indebtedness policy that defines either the number or volume of loans one individual can have at once, whether within the same FI or from different FIs. * A FI should be able to define over-indebtedness according to its own operations and context. * FI reviews penetration rates in high risk areas. * Incentives and productivity targets have been adjusted to account for market conditions. * Policy is adequately disseminated among staff, considering the staff growth and turn-over, and uniformly used in practice.



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2 5 - The FI's internal audit department monitors that policies to prevent over-indebtedness are applied

2 5 1 The FI's internal audit and/or internal controls department verifies the compliance with the policies and systems to prevent the risk of client over-indebtedness.

* Internal audit verifies the compliance with the policies and procedures to prevent the risk of client over-indebtedness: client repayment capacity and debt exposure (including the existence of multiple borrowings), use of credit bureau and competitor data, rescheduling/refinancing agreements, productivity targets and incentives, and other practices that could increase client indebtedness. * Internal audit gives an opinion on the quality of procedures to prevent the risk of client over-indebtedness. * The FI takes action on IA's recommendations.

2 5 2 The FI's internal audit and/or other departments (except for credit and/or collections departments) visit a representative sample of clients each year.

* Client visits are used to verify the compliance with the policies and mitigate the risk of client over-indebtedness. * Internal audit procedures identify guidelines for sampling based on pre-defined early warning indicators. * Internal audit intensifies visits in branches with high PAR. * Sampling should be based on areas of risk, such as a new branch, a loan officer’s delinquent portfolio, loans over a certain amount, or simply areas of concern. The greater the sample size, the more reliable the findings and conclusions, but the greater the cost. If there are specific problems to follow up, or a Branch has previously identified weaknesses, or the Branch has not been audited for a long period of time, sample sizes should be increased.

2 5 3 The FI's MIS regularly provides information on rescheduled loans.

* The MIS has a specific field or process that allows differentiating rescheduled loans from other loans; it should be distinct from the loan cycle field, and should allow filtering the whole portfolio by only rescheduled loans. * Management reviews reports of rescheduled loans at least monthly.

2 6 -

The FI avoids dangerous commercial practices (i.e., avoids combining loan products to meet the same need, or restricting the loan use; sets prudent limits to allow for the renewal of a loan in case of early repayment; sets guidelines for appropriate rescheduling policies)

2 6 1 [group lending] The FI has a policy that avoids parallel loans within the MFI (i.e., combining loan products to meet the same need, or restricting the loan use).

2 6 2 [group lending] The FI has prudent limits to allow for the renewal of a loan in case of early repayment.

Prudent limits refers to qualitative procedures for automatic loan renewals or increases. The FI should have procedures in place to ensure that clients are not repaying loans early (with money borrowed from a moneylender, for example), in order to take a larger loan. This practice of "bicycling" or "juggling" loans, i.e. using



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one loan to pay off another, increases the risk of over-indebtedness. It also blurs the credit history, giving the impression of a good repayment, when in fact the client may be borrowing elsewhere to pay off loans.

2 6 3

The FI has specific procedures to actively work out solutions (i.e., through workout plan) for rescheduling loans/ refinancing/ writing off on an exceptional basis for late clients who have the “willingness” to repay but not capacity to repay, prior to seizing assets.

* Procedures list cases of specific distress under which clients can be granted rescheduling or refinancing (death of relative; natural disaster leading to destruction of asset or production tool; sickness; etc.). * Rescheduling or refinancing can also be considered if clients have demonstrated good history of repayment and request a rescheduling due to business or personal problems. * Rescheduling is authorized by a supervisor (i.e., higher ranked individual than the one proposing the rescheduling). * LO should receive guidance on how to determine willingness and capacity to repay in case of default.

3 - - Client Protection Principle 3: Transparency

3 1 - The FI fully discloses cost and non-cost information

3 1 1

The FI fully discloses to the clients all prices, installments, terms and conditions of all financial products, including all charges and fees, associated prices, penalties, linked products, 3rd party fees, and whether those can change over time.

[credit]

[credit] Prior to sale the clients should receive: * a full breakdown of all costs (principal, interest and fees) * an amortization schedule that defines the amount, number and due dates of installment payments and * the fees and conditions for early repayment, late payments and default * information and conditions on linked products (i.e. credit life insurance premium, forced savings) if applicable. It is OK is the amortization schedule itself does not have full breakdown, but clients need to have the breakdown at least in the aggregate level, prior to sale. * loan document should specify any possible changes to product terms, and if/how clients can accept or refuse them.



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[savings]

[savings] * Savings documentation lists eligibility criteria, interest rates, withdrawal limits, minimum and maximum balances and use of savings in case of credit default (if applicable). * All fees should be disclosed, including for account opening and closing, account maintenance, balance inquiries, withdrawals, payments, transfers, use of ATMs and use of mobile phones for payment transactions. If fees vary depending on account balances and/or usage (for example, if certain services are free if balances are above a certain minimum), this should also be made clear. * Any minimum balance requirements and consequences (higher fees, ability to earn interest, account closure, etc.) if balances fall below the minimum. * Interest rate information must include the percentage interest rate; how it is calculated (on the basis of the original deposit or compounded for interest accruals) and how often; the annual percentage yield; whether the interest rate can be changed and, if so, how often. * The account closing procedure, including any additional fees and the time required to liquidate final account balances, should be made clear. * Savings documentation shows total annual cost for maintaining each type of savings account

[insurance]

[insurance] * Insurance product documentation lists eligibility criteria; cost and how premiums are collected; specific events covered by product and amount of loss covered; length and term of coverage, and premium due dates; all exclusions; any expiry conditions; waiting periods, if used; how to file a claim; contact information for making a claim; reimbursement conditions; whether and how insurance is regulated by a third party. * In the absence of regulations, the minimum is that clients are presented with the total cost of the loan in written form prior to sale.

[payments]

[payments] * Payment documentation lists the amount to be paid by the sender in the sender’s currency and the amount to be received in the recipient’s currency; all fees; taxes; estimated exchange rate; possible changes; conditions for collecting money; cancellation conditions; linked products (i.e., having to open a savings account). * Means of payment documentation show total annual cost to access the service.



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3 1 2 The FI clearly presents to clients the total amount that the client pays for the product, regardless of local regulations (including in the absence of industry-wide requirements).

[credit] * At the minimum, FIs should present the total cost of the product for the product term, so that it is possible to compare product amounts. Total cost of credit includes total interest charges for the loan period; total payments associated with fees, commissions, penalties, and mandatory credit life insurance if applicable; total payments of compulsory savings/cash deposit/loan guarantee fund and any interest earned thereon. Total cost is expressed as an absolute value, not expressed as an annualized percentage.

3 1 3 The FI participates in the MFTransparency project (or similar industry project, if applicable).

Microfinance industry participants should also work to create an environment where comparative transparency is possible using standardized, annualized calculations such as APR or EIR. In countries for which MFTransparency (www.mftransparency.org) is conducting pricing analysis, MFIs should participate by disclosing the requested information and sharing it with clients.

3 2 - The FI communicates proactively with clients in a way that clients can easily understand

3 2 1

The FI has effective communication. Staff communicates in such a manner that clients can understand the terms of the contract, their rights and obligations. Staff communicates with techniques that address literacy limitations (e.g., materials available in local languages).

* Product information is in the local language; oral communication is in the local language. * Front line staff are trained to communicate with clients with literacy limitations. For example, new front line staff receives dedicated training on client communication during induction training. Staff receives yearly refresher trainings on client communication. Generally, it is not enough to address client communication techniques in internal staff manuals. * Staff are trained to verify client understanding of the terms of the contract.

3 2 2 The FI contracts contain simple language and no fine print (figuratively or literally). A clear facts summary page is given if the legally necessary contract is deemed too technical for the clients.

* Facts summary page for credit products: summarizes the pricing information, terms and conditions of the product. For loans, it should include: principle, interest rate, fees, loan purpose, loan period, number and frequency of installments, grace period, penalties for late and pre-payment, disbursement date, compulsory savings, guarantee, and total cost of loan. * Savings products: product term, start date, interest rates, fees, withdrawal limits, minimum and maximum balances, penalties. * Insurance products: premium amount and due dates, events covered, amount covered, term of coverage, contact information for making a claim, exclusions, expiry conditions, waiting periods.



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3 2 3 The FI avoids using pricing mechanisms that create confusion on the total costs.

Mechanisms that create confusion include: * Calculating interest using a flat method, and not disclosing APR/EIR, which makes it difficult for clients to compare loan products of varying terms; * Requiring more than 10% in cash collateral to access the loan (10% of cash collateral corresponds to a Transparency Index of 80%--i.e., clients can clearly see where 80% of the total interest goes, while the other 20% is buried in undisclosed costs). Cash collateral refers to savings required to deposit upfront in order to access a loan. Usually expressed as a percentage of the loan. May be associated with compulsory savings, i.e., deposits throughout the loan cycle. Other terms used: financial guarantee, security deposit. * Up-front fees representing more than 2.5% of the principle (which corresponds to a Transparency Index of 80%). * Deducting the first payment from the principle, without clearly communicating this to clients (i.e. there is a difference between the loan amount as per the contract and the amount of money given to the client). * Variable rate loans, such as indexed loans, the FI must demonstrate that they clearly explain pricing and cost scenarios to the clients, including a pessimistic scenario (e.g., in the case of indexed loans). They must also demonstrate that product was developed after careful study of client needs.

3 3 - The FI uses a variety of disclosure mechanisms

3 3 1 The FI uses at least two different communication channels for disclosing clear and accurate information about the product: written and verbal (to address literacy limitations).

Product information is displayed and visible in branches (e.g., posters, brochures, pamphlets), read aloud to clients or verbally communicated to clients.

3 3 2 The FI discloses pricing information in public domain.

3 4 - The FI leaves adequate time for client review and discloses at multiple times

3 4 1 The FI communicates all information related to the product (terms, conditions, etc.) to clients before signing.

[credit] * FI communicates conditions of loan to clients at least two occasions before signing. * FI informs clients of debt collections practices and consequences of delayed payments and defaults before signing. * FI informs clients of collateral seizing procedures and fees before signing. [group lending] * FI communicates the concept of paying for other group members in case of late payment or default prior to sale.

3 4 2 The FI gives clients adequate time to review the terms and conditions of the product, ask questions and receive additional information prior to signing contracts.

* Gives clients product documentation to take home and review, prior to sale, including an amortization table (for both individual and group loan clients). * Guarantors must know their responsibilities prior to signing.

3 4 3 The FI staff is available to answer questions.



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3 5 - The FI provides accurate and timely account information

3 5 1

The FI gives clients a hard copy of all documents signed by clients (including, but not limited to the contract) with all terms and conditions. The FI ensures that there are no blank terms in all documents signed by clients (including, but not limited to, contracts) – they must be completely filled out.

* Clients and guarantors receive an original copy of all documents they signed unless regulatory requirements stipulate otherwise. * Internal audit or control verifies documents are duly filled out.

3 5 2 [group lending] Each client receives a contract, and/or an individual pass/book or payment book with contact terms and signature (even if the contract is between the group and the financial institution).

3 5 3 The FI regularly gives clients clear and accurate information regarding their accounts (e.g., account statements, receipts, balance inquiries, proof of payment for loans).

* Clients receive a receipt/proof for all transactions.

3 5 4 The FI provides clients with updated balances on request.

4 - - Client Protection Principle 4: Responsible Pricing

4 1 - The FI offers market-based, non-discriminatory pricing

4 1 1 The FI offers market-based, non-discriminatory pricing.

*Rates do not differ based on ethnicity, gender, disability, political affiliation, sexual orientation, and religion, among others. [credit] * Prices are market oriented and competitive within the country context. * Prices allow to cover costs, take into account inflation, and are comparable to peers. * Product prices are defined on the basis of an evaluation of what it costs to deliver that service. * FI shows signs of sustainability (OSS approaching 100%) * Board defines profitability targets for ROA, ROE, Yield or OSS * Loan prices do not deviate significantly from peers. * Peer groups created on the basis of the following variables: target market and country; if market distorted, look at regional comparisons. * If there is some room for negotiation in the pricing of products, only relevant elements are taken into account when setting prices (risk level of the activity being financed, client loyalty, staff loans which may be priced lower, etc.), and no irrelevant elements such as gender, sexual orientation, ethnicity, etc. are being used. * [existence of initiative to promote transparent pricing at the country level (i.e., MFTransparency)] Do an analysis of APR at the product level (any product contributing >25% of portfolio needs to be evaluated). Every product that



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corresponds to more than 25% portfolio needs to 'pass' for the MFI to pass this indicator. * [no initiative to promote transparent pricing at the country level] If no initiative, take portfolio yield for peer analysis. [savings] * Savings rates are comparable with peers. Peer groups defined as: country, scale, and level of financial intermediation (low and high, per MIX). * FI pays interest on all deposit/savings accounts, but not necessarily compulsory deposits; interest rates are in line or above peers. * Interest rates are calculated on a daily balance [insurance] The difference between premiums collected and paid to insurance company does not exceed an estimate of reasonable costs to administer the product. House insurance, if applicable, is not more expensive than that offered by the formal sector to the same client segment. The premium paid by the client should not exceed the premium paid to the insurance company by more than 50%. [payments] Competitive information. Cost of means of payment comparable to other providers. As was noted, payment providers cannot always control the cost of payment products, because they often rely on at least one other party to effect the payment. However, providers can compare their pricing with the market by using the World Bank database on remittance costs: http://remittanceprices.worldbank.org.

4 2 - The FI’s efficiency is in line with its peers

4 2 1 The FI has efficiency ratios aligned with peers.

4 3 - The FI does not charge excessive fees

4 3 1 The FI's pre-payment penalties, account closure fees, transaction fees or other penalties are not excessive.

* In case of pre-payment FI collects Interest accrued to date + a reasonable fee to cover the administrative costs related to the early repayment and the lost opportunity for the MFI; the fee is based on an evaluation of actual costs incurred.



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5 - - Client Protection Principle 5: Fair and Respectful Treatment of Clients

5 1 - The FI culture raises awareness and concern about fair and responsible treatment of clients

5 1 1 The FI clearly spells out in a Code of Conduct (i.e., in Code of Conduct, Code of Ethics, Book of Staff Rules) the organizational values and standards of professional conduct that are expected of all staff.

The following behaviors are always prohibited (at a minimum): * use abusive language; * use physical force; * limit physical freedom; * shout at the client, enter in the client’s home uninvited; * publicly humiliate the client; * violate the client’s right to privacy; * discriminate based on ethnicity, gender, sexual orientation, religious belief, political opinions, disability; * participate in corruption, kickbacks, theft; * participate in sexual or moral harassment.

5 1 2 The FI's Code of Conduct has been reviewed and approved by the Board.

5 1 3 The FI's staff signs a document by which they acknowledge that they will abide to the standards of professional conduct and not engage in the prohibited behaviors mentioned in the Code of Conduct.

* Staff signs a document by which they acknowledge that they will abide to the standards of professional conduct and not engage in the prohibited behaviors mentioned in the Code of Conduct. * Personnel files contain a copy of the signed document. * Staff have a shared understanding of the professional conduct expected of them, and what is prohibited.

5 2 - The FI has defined in specific detail what it considers to be appropriate debt collection practices

5 2 1

The FI clearly spells out in a Code of Conduct (i.e., in Code of Conduct, Code of Ethics, Book of Staff Rules) the specific standards of professional conduct that are expected of all staff involved in collection (including third party staff).

* Specific standards refers to detailed description of debt collections practices: what is acceptable (e.g. visiting the client’s business during the client’s working hours) and what is unacceptable (e.g., calling the client after 8pm), the steps to follow in the case of default. The actions that should not be taken or the behaviors that are considered to violate the borrower's rights. * Policy defines steps to follow in case of default: after how many days the FI will take action and what those actions are. [group lending] * The procedures also describe actions that group members are expected to take and are prohibited from taking.



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5 2 2 The FI does not endorse a policy of zero tolerance for PAR.

* A zero tolerance policy is a red flag that calls for a careful look at collections practices. The expectation and incentive to maintain a PAR1 of 0% can create pressure on loan officers or collections staff and thus increase the risk of unethical behavior in collections. * A FI can avoid this by having clear policies on what is acceptable or unacceptable, strong training, internal control and audit procedures to make sure staff behave ethically. * The impact of PAR levels on bonus level is gradual.

5 2 3

The FI's policy guarantees that clients receive a fair price for any confiscated assets; Has procedures to ensure that collateral seizing is respectful of clients' rights; Offers an explanation of the role of guarantors. In case collateral is kept in the financial institution premises, procedures are in place to ensure its security.

* Unless authorized by a legal court order, seizing collateral only occurs after receiving the client's consent. * Collateral cannot be sold to staff of the financial institution or to their relatives, or third parties involved in the seizing process. * If the value of the collateral exceeds the debt, the remaining amount is given back to the client. * Collateral is kept in a locked room or secure premises.

5 3 - The FI's HR policies (recruitment, training) are aligned around fair and responsible treatment of clients

5 3 1 The FI staff is recruited and trained in line with the Code of Ethics.

* Recruitment procedures include a background check on staff that focuses on identifying potential previous instances of misconduct. * Recruitment occurs without prejudice based on ethnicity, gender, disability, political affiliation, sexual orientation, or religion, among others. * Initial training includes a review of the Code of Conduct and a discussion with new staff on the situations where the compliance with the Code might be a challenge. * Interview questions for recruitment address ethical behavior.

5 3 2

The FI staff is trained in line with the Code of Ethics: initial training includes a review of the Code of Conduct and a discussion with new staff on the situations where the compliance with the Code might be a challenge.

* FI has a dedicated module to train new staff in the Code or institutional values. * Training includes job-specific dilemmas or role play of situations that might pose an ethical challenge. * Staff receive refresher trainings on the Code, institutional values, or ethical guidelines for behavior at least yearly.

5 3 3

The FI's collection practices are covered during the initial training of all staff involved in collections (loan officers, collections staff, and branch managers). In particular, collections staff receives training in acceptable debt collections practices and loan recovery procedures.



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5 4 - The FI implements policies to promote ethics and prevent fraud

5 4 1 The FI managers and supervisors review ethical behavior, professional conduct and the quality of interaction with customers as part of staff performance evaluations.

* Annual evaluations and/ or incentive scheme for staff, and especially of those in direct contact with clients, penalizes unethical behavior and unprofessional conduct and rewards the quality of interaction with customers. The FI avoids putting staff in a situation where its interests conflict with those of clients (moral hazard) (i.e., incentives schemes are not based on short delays for PAR recovery). * Performance evaluations assess adherence to the Code and quality of customer services. * FI gets feedback from clients on interactions with staff. * Incentive system specifically rewards ethical behavior.

5 4 2

The FI's procedures describe the sanctions that will be taken in case of violation of the Code of Conduct or collections policies (harassment, discrimination, theft, corruption, kickbacks, etc.), that can result in termination of employment.

* FI policy specifies different levels of sanctions depending on the severity of violations of ethical standards or business conduct. * There are sanctions in the case of violation of collections policies. * Cases of sanctions can be verified based on a list of dismissals and review of staff files.

5 4 3 The FI staff is informed of penalties for non-compliance with Code of Conduct or collections policies.

* If asked, staff can list penalties in case of violation of ethical behavior or business conduct. * Staff are made aware of sanctions that have been applied in cases of non-compliance. * Depending on size, may require different levels of formalized information channels.

5 4 4 There is sufficient monitoring of the practices (by operations department, internal audits), to provide education or sanctions as necessary.

* Branch managers conduct occasional client visits. * Internal audit asks questions about staff behavior during client visits. * FI tracks staff-related complaints.

5 4 5 The FI sanctions cases of violations of the Code of Conduct or collections policies (identified by management, internal audit or thanks to an efficient complaint mechanism) according to the set rules.

* FI can point to cases of staff that have been sanctioned due to violation of the Code or collections.

5 4 6 The loan officer base pay is at least a living wage.

* To evaluate whether the salary meets basic needs, several elements may need to be taken into account, including the poverty line, the minimum wage, the cost of a basket of consumer goods, as well as perceptions of staff on whether their base salary is sufficient to meet their basic needs.

5 5 - In selection and treatment of clients, the FI does not discriminate inappropriately against certain categories of clients

5 5 1 The FI has a non-discrimination policy. * Procedures prohibit client discrimination by ethnicity, gender, sexual orientation, religious belief, political opinions, and disability.

5 5 2 The FI's rescheduling policies are applied in a consistent and fair way across the financial institution.

* Internal audit verifies rescheduling/refinancing agreements.



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5 6 - In-house and 3rd party collections staff are expected to follow the same practices as the FI staff

5 6 1 The same training is provided to third party collections staff in case collection is subcontracted and they are held to the same standards as the FI staff.

* Contract with third party collections staff requires compliance with FI's ethical standards and standards of professional conduct. * Third party collections receive training in acceptable and unacceptable collections practices. * Internal audit verifies a sample of clients delegated to third party collectors.

5 7 - The FI informs clients of their rights

5 7 1 The FI informs clients of the main aspects of the Code of Conduct. Information includes clients’ right to complain and how to submit a complaint.

5 7 2 [group lending] The FI informs clients about procedures about collateral seizing.

* Clients are informed of collateral seizing procedures and fees prior to signing the contract.

5 7 3 The FI documents and communicates to clients loan policies and procedures for rescheduling credit.

* FI should have language in the loan contract or on some other form of communication with the client that indicates that clients who are facing severe repayment problems may approach the branch manager to discuss possible adjustments in loan schedule.

6 - - Client Protection Principle 6: Privacy of Client Data

6 1 - The FI has a privacy policy and appropriate technology systems

6 1 1

The FI has a written privacy policy that governs the gathering, processing, use, distribution and storage of client information. The policy covers current staff and those who leave the organization and information leakage.

* Policies address confidentiality of client information and a clear list of actions to take when staff are terminated to safeguard client privacy. * All staff who are involved in the processing of data are covered by the privacy policy. * Privacy is addressed at all stages of the product delivery process.

6 1 2 The FI's privacy clause is in plain language and not hidden in legalese or contract. The privacy clause stands out and is not in small print.

6 1 3 The FI's Staff Book of Rules and/or Code of Conduct penalize misuse or misappropriation of client data.

6 1 4 The FI has penalties for exposing or revealing client data to third parties without prior client consent.



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6 1 5 The FI's has systems in place (including secure IT systems) to protect the confidentiality, security, accuracy and integrity of customers’ personal and financial information.

* FI restricts taking client files or documents to employees' homes. * Infrastructure ensures secure access to client data (ex. VPN, different server for database and software). * Employees cannot download any parts of the database on their computers. * Client files are kept in a secure place, with limited access. * FI backs up systems daily. * FI verifies accuracy of client data in MIS. * Staff are trained to enter data into the MIS. * Internal audit checks compliance with privacy policy. * FI may do external IT audits, as well.

6 1 6 The FI's IT systems in place have different password protection systems that are changed periodically with different access levels according to the position of the staff member accessing the data.

* Access profiles and passwords are reviewed/changed regularly (a yearly basis is not sufficient).

6 1 7

If files are stored in physical format, the FI stores the client files in a secure location, within the branch or headquarters that has 1) restricted access only to selected persons; 2) is kept in a facility secure from arson or theft.

* Files are stored in locked cabinets. * Access to keys is restricted. * FI records who requests access to client files.

6 2 - The FI informs clients about when and how their data is shared and gets their consent

6 2 1 The FI has a policy (included in the training manual) to describe how to talk to clients about this topic. Requires that the FI present clearly to clients how it will use and share their client data.

* Policy includes information about how privacy information (how client data is secured, if/when it is distributed/reported to the credit bureaus) is communicated to client, during any data collection/financial service application process, OR during any orientation or educational sessions done with clients. * Staff communicate on how client data is kept safe at some point during the product application process. * Staff communicate on how data is distributed, reported or shared to credit bureaus, competitors, donors, etc.

6 2 2 The FI communicates well the privacy policy to staff.

* Staff sign a document recognizing the confidentiality policy upon employment. * If asked, front line staff can describe the privacy policy. * FI communicates on privacy policy to staff using several channels of communications (pamphlets, posters, reminders/memos).

6 2 3 The FI trains its staff to protect the confidentially, security, accuracy and integrity of customers’ personal and financial information.

* Employee training covers privacy policy.

6 2 4 The FI informs customers how their information will be used internally and, when applicable, when it will be shared externally.

* Staff inform clients of their right to privacy at the beginning of the product delivery process. * If asked, clients understand how their information is used and protected. * If asked, clients understand how their data is shared with the credit bureau and/or



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competitors.

6 2 5 Prior to loan disbursement, the FI's staff reads the privacy portion of the contract to the client.

If applicable, inform clients that their information will be reported to the credit bureau. If reporting to credit bureau mandated by law, inform clients that they cannot access a loan without approving that clause.

6 2 6 The FI's contracts include a data privacy clause, describing how and when data can be shared (in addition to credit bureau information).

* Product contracts include a clear explanation of how client data may be used, shared or protected and with whom (FI avoids the use of generic terms like "third parties").

6 2 7 The FI requires written client consent to share personal information with any external audience, including credit bureaus, insurance agents, collections companies, and others.

6 2 8 The FI requires written client consent to use of information or photos in promotions, marketing material and other public information.

6 2 9 [group lending] The FI trains group leaders to safeguard group member information, particularly saving account balances, dates of loan disbursement, and information on repayment problems.

7 - - Client Protection Principle 7: Mechanisms for Complaints Resolution

7 1 - The FI's clients are aware of how to submit complaints

7 1 1

The FI informs clients about: • their right to complain; and • how to submit a complaint to the appropriate person (or where they could find that information if they don’t know it first-hand).

* Information on how to submit a complaint is displayed and visible in branch offices and/or included in product documentation. * Front line staff inform clients on how to submit a complaint during the product application process (application interview, orientation sessions, disbursement speech, etc.). * If asked, clients know how to submit a complaint and to whom. * There is a distinction between submitting a complaint and receiving suggestions, via a suggestion box for instance. A complaint expresses dissatisfaction, and may or may not come with a suggestion. Clients should know their complaints will be heard and when possible resolved. A suggestion box generally does not convey this message.

7 2 - The FI's staff is trained to handle complaints

7 2 1

The FI's dedicated staff induction training includes a session on how the complaints mechanism works, the loan officer’s role in the process and how to appropriately manage complaints until they are completely resolved (how to handle complaints and refer them to the appropriate person for investigation and resolution).

* FI has and informs LOs of potential consequences of not reporting a complaint.

7 3 - The FI's complaints resolution system is active and effective

7 3 1 The FI's policies include how to handle complaints. They include how to



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inform client about the complaint mechanism.

7 3 2 The FI has an effective, appropriate system in place to resolve complaints in a timely way.

* The complaints mechanism defines that complaints must be resolved within one month, with a differentiated response depending on the severity of the complaint. * Complaints are taken into account in bonuses or performance evaluations.

7 3 3 The FI has assigned someone to handle complaints and refer them to the appropriate person for resolution, at least on a part-time basis.

* The person responsible for handling complaints is independent from operations staff or at least independent from the staff who is the cause of the complaint.

7 3 4 The FI has a clear reporting system in place to ensure that complaints from branches/POS reach complaints handling staff.

* The reporting system ensures that branches report all complaints to complaints handling staff and cannot be erased from the records (numbered register, database with audit trail). * All branches produce at least bi-monthly reports describing registered complaints and their resolution.

7 3 5 The complaints mechanism is actively used by clients.

* FI monitors number of clients who have used the mechanism over a given period, at least on a monthly basis. * Internal audit asks clients if they know how to submit a complaint. * In general, suggestion boxes are not adequate.

7 3 6 The FI's clients receive a timely response to their issues, within a month of complaint submission.

* FI informs clients of receiving the complaint within a week of reception.

7 3 7 The FI's internal audit or other monitoring systems check that complaints are resolved satisfactorily.

* Internal audit or another monitoring system verifies a sample of clients (at least 10%) who have submitted a complaint to see if complaints have been resolved. * Internal audit verifies the complaint reporting system to increase likelihood that no complaint goes unrecorded.

7 4 - The FI uses client feedback to improve practices and products

7 4 1 The FI uses information to correct mistakes, omissions and activities that may be harmful to the client.

* FI has made corrections, applied sanctions or penalties based on complaints in the last year.

7 4 2 The FI uses complaints information to improve the organization's operations/products/ communications.

* FI has made adjustments to operations, products, communication materials in the last year based on complaints or suggestions.

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