Consumer Protection? Ask the Consumer

The main objective of the diagnostic study undertaken in Senegal in early 2011 was to develop a better understanding of microfinance clients’ protection and suggest possible improvements. A CGAP-GIZ team met with microfinance stakeholders (regulators, consumers associations, microfinance association, donors) and reviewed legislation and regulations. However, this alone would have only given us a one-side story. We needed to hear the consumer’s voice without any interference. Microfinance clients took part in quantitative and qualitative field research undertaken by the Frankfurt School of Finance & Management and funded by KfW. The survey included a sample of 500 microfinance clients in rural and urban areas and 11 focus groups completed the research.

The field research focused on different areas:

• Demographics – sex, age, occupation, income level and literacy level of MFI clients.
• Knowledge – on financial products, awareness of rules, regulations and recourses.
• Perceptions – Do people feel safe depositing or transferring money? In case of problem, is there a belief that the client has a right to seek redress or a feeling of fatalism? Is there any MFI practice perceived as unethical?
• Decision process – Do clients actively gather information before choosing a new financial product? What are the sources of information?

In many ways, the research confirmed what we had heard from the microfinance providers and the Senegalese authorities: For example, clients did not like some of the methods used to pressure them into repayment (displaying pictures of late payers is seen as socially humiliating, for instance) but understood that other ways such as personal visits although not always comfortable were indispensable to the sustainability of the sector.

In other ways, the results challenged conventional views. If we take for instance one of the oldest rules in Senegalese legal framework, the Usury Law which limits interest rates charged by banks and MFIs. In microfinance the limit on the total cost of credit (TEG) is 27% p.a. There has been a recurring debate in the microfinance sector and in the media on the rate cap. On one hand, some journalists, politicians and academics have argued that that rate is too high for poor clients; on the other hand some MFIs providing financial services to the poorest, most isolated clients, might not survive a strict application of the Usury Law. In spite of that well publicized debate, 99% of surveyed clients were unaware of the limitation, let alone the complicated calculation to include commissions and other fees into the TEG.

Is this striking lack of awareness because Dakar is far from consumers? Responses from rural and urban clients were similar. Literacy was not a factor because even better educated clients did not know. Because access is more important that cost? This is true in remote areas but in other places, there is often more than one MFI and competition should play a role in fostering transparency and lowering the cost of credit. However, information on the cost of financial products is not always displayed or provided if clients asked. Clearly consumers are not encouraged to compare prices.

Financial education that would explain the legal restrictions on cost of credit is clearly needed but that would only have a limited effect if clients cannot compare products costs and other conditions. It is therefore important for microfinance stakeholders to develop practical ways to inform clients. Ideas of standardized display of cost in MFIs branches, comparative tables that would be published in the media and easy-to-understand contract clauses have been discussed and might soon be in effect.

Since 2010 a financial services mediator has been set by the Government within the Observatoire de la Qualité des Services Financier. Based on the use of ombudsman mechanisms in other countries (Philippines, Mexico, South Africa, Peru), the mediator should be an effective recourse for MFIs’ clients which have exhausted internal recourses. However, over 99% of surveyed MFIs clients did not know the mediator. In the months that followed the research, the mediator has taken steps to increase awareness through local media and road shows. The mediator has also been flexible by allowing consumers to file a complaint in a non-written way while the legal rule set the principle of a written process. The mediator has also put in place a hot-line to make the recourse more accessible.

In conclusion, Senegal has a set of adequate rules to protect consumers; however the application of these rules need to be fine-tuned to (1) make consumers aware of their rights, (2) enable them to access, understand and compare information, (2) allow easy access to effective redress mechanisms. Consumer research has already prompted some practical changes and other may soon follow. Only close interaction with consumers will determine whether new mechanisms and awareness campaigns will succeed in achieving these objectives. Then again, research techniques will be useful to assess and improve consumer protection.