Consumer protection diagnostic study - FSD Kenya

26 • CONSUMER PROTECTION DIAGNOSTIC STUDY: KENYA
Chapter 10
FORMaL, UnSUPeRVISeD FInanCIaL SeRVICe
PROVIDeRS
10.1 SECTOR OVERVIEW
The [non deposit-taking or “credit-only”] MFIs and those SACCOs unlikely to
be regulated under the SACCO Societies Act are the two main groups of formal
organisations that provide financial services but are not subject to prudential
regulation and supervision. This category, while not prudentially regulated,
are either at least registered already as credit providers with some statutory
authority (e.g., non deposit-taking SACCOs - see chapter 6 - or hire-purchase
companies, which were not included in the study) or potentially so (non
deposit-taking MFIs). The number of such organisations providing some kind
of unregulated financial services to low-income populations is unknown in
Kenya. Almost all of them are small and their total consumer base does not
appear to be significant. The ten Kenyan credit-only MFIs that report to The
MIX Market (www.themix.org) had a combined clientele of around 210,000 at
the end of 2009. SACCOs outside the regulation and supervision of SASRA are
treated in the chapter on the SACCOs because they are subject to their own law
and answer to the Ministry of Cooperatives.
Unregulated consumer credit companies have also entered the market and
appear to be growing rapidly.
10.2 LEGAL, REGULATORY AND SUPERVISION FRAMEWORK
The Microfinance Act assigns responsibility for regulation of the non deposittaking
MFIs to the Ministry of Finance. The MoF has not developed or issued
regulations for credit only MFIs as provided for under section 3(2) of the Act.
10.3 GAP ANALYSIS
The absence of regulation and a supervision agency for this sector reduces the
opportunities for enforcing consumer protections related to transparency, fair
practice, and recourse. As noted above, the MoF does have the authority to
issue regulations, but without supervision capacity to monitor compliance the
effect of any such regulation will be difficult to judge.
As mentioned previously, the consumer surveys reveal that MFI customers (no
distinction between deposit and non deposit-taking MFIs) suffer frustrations
with hidden fees and understanding the terms and conditions of their loan
with a frequency that is only marginally lower than with banks and SACCOs.
The previously referenced MFT APR calculation exercise revealed a widespread
use of flat interest rates, fees, obligatory insurance policies, and obligatory
cash deposit requirements that elevate the effective interest rate well above
the rates that are quoted to clients. Moreover, the level of understanding
about the cost impact of these practices on the consumer varied significantly
among the providers. In general, the MFIs appear to be especially challenged
in understanding the effect of their fees and charges on the total cost of credit
to the borrower.
10.4 RECOMMENDATIONS
The MoF is encouraged to consider the potential benefits of using the
regulatory and supervisory authority granted in the Microfinance Act to
issue regulations for the MFIs that harmonize eventual disclosure and dispute
resolution guidelines with those recommended for the supervised institutions.
This action could be beneficial, even if the MoF does not dedicate resources to
enforcing compliance with the regulations or delegates supervision to sector
regulators or other public agencies. From a policy standpoint, the action would
establish a level regulatory playing field across all formal providers. And in the
MFI sector, there are market forces that may well provide significant incentive
for compliance, even in the absence of supervision. The best of the creditonly
MFIs (who also serve the majority of the sub-sector’s clients) are likely to
comply with the regulations as they prepare to apply for a DTM license. To the
extent they have investors, these funders are also likely to expect adherence to
better practices in client protection.
In addition, the Association of Microfinance Institutions of Kenya (AMFI)
encourages its members to align their consumer protection procedures
with industry-wide practice, through upholding the AMFI voluntary code
of conduct. 49 The code sets standards for good banking and microfinance
business practices while allowing competition and market forces to work,
encouraging higher standards and better service provision. By signing the
code, service providers commit to transparency and disclosure, fair practices,
plain language contracts, financial educate, non-discriminatory behavior and
the establishment of formal and informal dispute resolution channels and
client feedback mechanism. This provides valuable protections for the MFI
clients who are mainly the poor, low-income households and small and micro
scale enterprises.
49 The AMFI Code of Conduct – Setting the standards for Microfinance best practices in Kenya, August
2010.