Worldwide, the microfinance community is paying more attention to consumer protection. Controversial topics, such as high interest rates and the over-indebtedness of borrowers, have raised public concern for poor consumers in countries far and wide. Yet, relatively little is known about how consumer protection might apply to financial services for the poor. Moral arguments for consumer protection in microfinance focus on the imbalance of power between lenders and borrowers. The note analyzes the issue of consumer protection in microfinance, as a challenge that is here to stay. Few would disagree with the principles supporting consumer protection. However, there is no clear consensus about the scope and intensity of appropriate measures, or the mechanisms for enforcement, especially in developing countries. As a result, developing countries may inappropriately apply mechanisms and approaches from developed countries, without a proper evaluation of their costs and benefits, and often with unintended consequences. In countries where political pressure to implement new protection measures is strong, regulators and policy makers should carefully consider the full impact such measures may have, both immediately and over time. Excessive protection could well lead to results that directly contradict what is intended. Rather than promoting the formalization and integration of microfinance into the mainstream of the financial sector, Microfinance institutions (MFIs) could be forced outside of any legal framework. Such cases would likely result in no protection at all for borrowers.
Details
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Author
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Document Date
2005/05/01
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Document Type
Brief
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Report Number
33457
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2010/07/01
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Disclosure Status
Disclosed
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Doc Name
Protecting microfinance borrowers
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Keywords
microfinance;consumer protection;Consultative Group to Assist the Poor;interest rate ceiling;access to financial service;associations in south africa;consumer protection measure;consumer education;microfinance institution;code of conduct;consumer protection law;Superintendency of Banks;interests of consumer;approach to enforcement;pattern of abuse;channels of communication;conflicts of interest;lower interest rate;cost of compliance;lender practice;
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Citation
Helms,Brigit S. Porteous,David
Protecting microfinance borrowers (Chinese). CGAP focus note ; no. 27 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/725801468330352333/Protecting-microfinance-borrowers