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The Microfinance Loan Agreement Why “As is” fails to Protect Consumer Rights.
The Microfinance Loan Agreement Why “As is” fails
to Protect Consumer Rights.
A few words about Consumer Rights: To know what they are you must refer to the national
legislation (ex. From Kenya);
There may be a general CPL (and reg. authority),or contained in financial sector laws; competition laws; advertising laws; civil procedure laws; collaterals/pledges/mortgages laws.
It is lazy & risky to be ignorant of the law where you are doing business.
The bare minimum a socially responsible lender/investor should do is follow the law of the land.
What your contract says to the world re: your business
The contract is a mirror of the MFI’s mission.
Standard form contracts are not a business trade secret : copies should be given to clients BEFORE signature.
Not giving a copy is a red flag. Failure to convey accurate information
to clients is not socially responsible, and demonstrates bad business sense
Business case for transparent, easy to read contracts For clients: It is difficult to honor an agreement
you do not understand. Local language? From business risk perspective: you may be
violating the law of the land(ex. Unconscionability/fraud laws beginning to be enforced & for those operating in Kenya –there’s a new Const. And new competition law in force)
An educated client can protect against MFI corruption (ex. Pay late pay double scheme in Kenya).
Over indebtedness & default may be linked to not understanding full impact of repayment amounts due on the household budget.
What are some current anti consumer practices contained in MFI contracts? Blocking a percentage of loan while charging
interest on the whole the fake bailor-bailee relationship clause; abuse of
promissory notes and blank checks and even contracts as collateral)
not giving a copy of the contract (includes guarantor/spouse)
not allowing rescheduling for would be defaulters, relying instead on heavy handedness of group debt collection & seizure of collateral – signing away rights to auction by law
hyper collateralization at 3-4 times value of loan Is it insurance or isn’t it?
Example from Kenya: MFI group loan agreement Particular MFI has institutional investors,
grants and almost $3m USD loan from Kiva
Has a 5 Diamond rating on mix Offers loans and voluntary savings (does
not have deposit taking license) PAR in ‘09 was over 10% with ZERO
defaults
Contract terms of a Kenyan group loan w/ sample MFI: Requires personal guarantees and physical
collaterals which are 328.5% of the loan amount 30% of loan amount is blocked,though client
pays interest on 100% of loan. Stated interest rate is 19.5% (flat or declining?)
but considering all admin. Fees and unexplained insurance: EIR is 63%
Contract states that borrower is giving authority to group to seize collaterals w/o involving “public authorities.”
Fee for insurance and that’s all the language dedicated to coverage.
How many Kenyan laws does this contract violate? The Kenyan Constitution (Bill of Rights CP,
Chpt. 4 sec 46 & 22: anyone has rt. To sue)
The Competition Act of 2011 Chpt. 128 Chief Authority Act Chpt. 504 Restrictive Trade Practices Act Chpt. 28 Chattels Transfer Act Microfinance Act of 2008
Example of a bad MF loan agreement (fiction but a fusion of Ugandan contracts) The hand out is a loan agreement containing
multiple unfair terms which negatively impact consumer rights. (there are 13 or more imbedded in the agreement).
It also contains clauses which are illegal in certain jurisdictions
How many of these clauses does your MFI use?
How can we improve the loan agreement? Hire a local lawyer
Keep it simple & use local language (at least for key terms); give a copy of loan to client before they sign
Do a real household budget with the client
Guarantors should have their own contract: spouses should give consent when their rights are at issue
Separate the issues & explain them in the contract: ex. Insurance coverage should be in the agreement.
If you wouldn’t sign it yourself; it probably isn’t fair.
Being Socially responsible is about protecting the client; not preserving him in perpetual debt …
Thanks for your interest in consumer protection Jami Hubbard Solli
[email protected]@gmail.com
Enjoy the E-MFP Conference!
