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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);

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The Microfinance Loan Agreement Why “ As is ” fails to Protect Consumer Rights.

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  1. The Microfinance Loan Agreement Why“As is”fails to Protect Consumer Rights.

  2. A fewwordsabout Consumer Rights: • To knowwhatthey are you must refer to the nationallegislation (ex. From Kenya); • Theremay be a general CPL (and reg. authority),or contained in financialsectorlaws; competitionlaws; advertising laws; civil procedure laws; collaterals/pledges/mortgageslaws. • Itislazy & risky to be ignorant of the law whereyou are doing business. • The bare minimum a sociallyresponsiblelender/investorshould do isfollow the law of the land.

  3. 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

  4. Business case for transparent, easy to readcontracts • 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.

  5. What are some current anti consumer practicescontained 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?

  6. Example from Kenya: MFI grouploanagreement • 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

  7. Contractterms of a Kenyangrouploanw/ 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.

  8. How manyKenyanlawsdoesthiscontract 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

  9. Example of a bad MF loanagreement (fiction but a fusion of Ugandancontracts) • The hand out is a loanagreementcontaining multiple unfairtermswhichnegatively impact consumer rights. (there are 13 or more imbedded in the agreement). • Italsocontainsclauseswhich are illegal in certainjurisdictions • How many of theseclausesdoesyour MFI use?

  10. How can weimprove the loanagreement? • 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.

  11. Being Socially responsible is about protecting the client; not preserving him in perpetual debt …

  12. Thanks for yourinterest in consumer protection • JamiHubbard Solli Jsolli@Consint.org Jamisolli@gmail.com Enjoy the E-MFP Conference!

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