Does microfinance market need the basic standard?
Since the beginning of July the microfinance market introduced the first basic standard, which is aimed at protecting the rights of MFOs’ service recipients. The standard was developed by the self-regulating organizations, approved by the Bank of Russia and protects the rights of clients. The microfinance organizations will inevitably require additional injection of force, time and money for implementing the standard. Will these costs pay its way?
Discussing the provisions of the basic standard, journalists and public men, for obvious reasons, focused on the question of whether the standard would be useful foe the consumers of financial services. Will it be able to protect MFOs’ borrowers from excessive credit burden? Will it allow investors to obtain all the necessary information in order to make the balanced decision before investing funds? Will it provide real support to the debtor who has found himself in a whole mess of trouble? Experts have already made their speculations, but only practice can give exact answers to these questions.
However, for me, the co-owner of one of the largest microfinance organizations in the country, it is more interesting to find out how the implementation of the basic standard will affect the business of our company.
Compliance with the standard means for us – additional expenses: we made changes to our IT system, installed additional equipment, improved internal documents and work manuals and organize continuing training for line staff. Obviously, these costs will not pay its way in the near future – following the requirements of the basic standard will not bring us new customers and will not force existing borrowers to be more accurate repaying their loans.
And yet we are sure that money are not spent for nothing, and the standard will bring us significant benefits in the long term – it will cut back on spending and ultimately reduce reputational risks.
My confidence is based first of all on core ideology of the basic standards themselves. The basic standard is not exactly the Law. Of course, they both have much in common: they set norms and restrictions, are binding for execution and for their violation MFOs shall be penalized. But there are differences, and significant. Politicians and officials who often do not know the business from inside are creating these Laws. Market specialists develop standards, they are well aware of the day-to-day realities of the microfinance sector and are familiar with all the operating peculiarities of work in the companies.
The implementation of the standard shall become the touchstone for the company.
The standard has gathered in itself real-life norms and restrictions, which are providing conditions for fair business. In fact, the implementation of the standard becomes a milestone for the company: if you just need a slight change in the business processes and procedures – it is normal. This means that the company even before was moving in the same direction as the market leaders. If, however, the implementation of the standard is tough and the restrictions that were extended by the standard do not fly under the rules of operating the economy of your company, it is quite possible that there is something wrong about it…
For example, the standard contains the restriction on the number of short-term loans – during one year one borrower can get not more than ten loans. Such restriction helps to avoid the borrowers’ debt overburden. It also allows the company to organize portfolio of solvent customers and to cut off those borrowers who sit tightly on the “credit hype”.
Despite the fact that attracting so called “super loyal” borrowers, who come twice a month to borrow money, may look profitable in the short term, in the future such portfolio is a non-starter. The pyramids of loans and credits that such customers build up will begin to crumble, and the company will face massive arrears of payments.
Secondly, the basic standard will make it possible to increase the satisfaction of consumers with MFOs’ services. Of course, not by the very fact of its existence. The Russian consumer always hopes that he will be protected, but he never believes in it. Only the best practices of their own shall convince the borrowers that cooperation with MFOs can be comfortable and safe.
The introduction of the standard envisages the establishment of the system for qualitative and prompt responses to the complaints of borrowers. In fact, the microfinance market is oriented along the guidelines that many other industries have already voluntarily passed through.
You all know that in case you phone account was debited for extra charges, you can resolve the misunderstanding by contacting the telecommunications operator. And if the online shop is not delivering the goods you have ordered in time, you, highly likely, can even count on the bonus or discount for the next order as compensation. However, the client of the microfinance organization does not expect the MFO to be fair and would rather apply to the Bank of Russia or to the President of the country than filing the complaint to the company.
Both cellular operators and retailers eventually realized that a dialogue with the client and joint efforts in resolving his problems should be a major asset to the company. This allows you to save face in the eyes of the regulator and increase customers’ loyalty. The basic standard of the MFOs gives guidelines to the market participants directing them to this road before all companies through their own bitter experience realize that they need to go along it.
In the third place, the basic standard can help the market to attract investments. Today, investors are not in a hurry to invest in microfinance business, despite a high-grade profitability. The major challenge here is non-transparency of business and high reputation risks.
Even if the company manages to demonstrate an excellent reputation, sustainability of business and the balanced risk management policy, the investor cannot be sure that tomorrow the company will not change its methods of operation. The basic standard turns the common decencies into mandatory norms. And it provides guarantees to the investor that the MFO will not back away from the rules of the adopted policy.
I believe that the standardization of the market is beneficial to the MFOs. However, not for all of them, of course. Hypothetically, after the basic standard starts working, the companies that came for fast and easy money would be forced to leave the market. The companies that have come into business seriously and for long perspective, aimed at implementing ambitious plans will definitely benefit following the guidelines of the basic standard. The standard suggests the way for them to achieve their endeavors and build the company with a worthy credibility record in the market.
The consumer rights protection standard is the first, but not the only one basic standard in the microfinance market. In the near future, the Bank of Russia is going to approve the basic standard for risk management, in autumn the market will receive a third basic standard – on operations in the microfinance market. Their impact on the microfinance industry is also worth discussing.
Chairman of the Board of Directors of Vyruchai-Dengi