FULL TITLE: Transparency in Interest Rate Pricing and Other Efforts Toward Consumer Protection ROOM: Aberdare Hall Translated session: English & French PANEL: Chair: Mr. Chuck Waterfield, President & CEO, MFTransparency, USA Panelist: Ms. Robin Ratcliffe, Director, The Smart Campaign, Center for Financial Inclusion, ACCION International, USA Panelist: Mr. Fabian Kasi, CEO, FINCA Uganda Ltd, Uganda Panelist: Billha Maina, Financial Sector Deepening Kenya, Kenya

1. Transparency in Interest Rate Pricing and Other Efforts toward Consumer Protection Microcredit Summit 7th April 2010 Bilha Maina, Project Manager Financial Education & Consumer Protection

2. About FSD Kenya Financial Sector deepening works to support the development of inclusive financial markets in Kenya by improving competition and consumer choices support has been given to the Central Bank of Kenya to educate the public on the market bank charges and lending rates Investigated the different lending rate disclosure regimes with an aim to introduce standard measurement methods Consumer protection diagnostic study is underway and regular consultations with stakeholders are being undertaken

3. Survey on Bank Charges Cost comparisons for current accounts

4. What consumers say about Bank Accounts “The banks are doing very little to inform the public about the charges. They only talk about the advantages…Just like Bata would tell me a certain shoe is Ksh. 399, I would prefer if it was Ksh. 600 with all the charged involved in that.” “There are times you might check your balance only to realize that they have made some deductions. When you inquire about it, they tell you to come back the following week. They might return the money and sometimes they might say they have no idea what happened to the missing money.”

5. “I was not told this is a flat rate I was just told you will be paying the loan at 15% interest rate. I think banks take advantage of first timers” (Male, Older Loan, MFI & Bank, Nairobi Urban) “I took a loan in March in one of the banks around I was surprised to find that I was taking Ksh.50000 and they deducted Ksh.10000 I asked them why they were taking this and they told me it was for insurance and what have you and they did not explain that to me in the first place. I tend to think that SACCOs do not have any hidden charges”. (Males, Younger, Savings, MFI & SACCO, Eldoret Rural) “Therefore, when you realize or when you have a problem that is when they show you those terms and conditions. Sometimes you do not understand as they are normally written in very small letters. And sometimes they use the banking language that jargon and sometimes you do not understand.” (Female, Older, MFI & Banks, Nairobi Urban) Consumers are confused..

6. Room for improvement Current Ideal Hidden costs, unclear terminology Greater transparency Cannot be compared across loans Allow for informed ‘shopping around’ Standard Interest Rate Cannot be compared across institutions Encourage competitive rates Encourage honest competition A standard interest rate measure can level the playing field through transparency, consumer awareness and honest competition within the financial industry

7. The case for regulation Absence of an effective and appropriate regulatory credit environment Current Reality Financial Institutions Consumer Low consumer bargaining power High interest rates Hidden costs Over indebtedness Negative perceptions “Distress” Default In the absence of an appropriate regulatory framework there is an increased likelihood of exploitation, especially in the case of low-income, and vulnerable consumers.

8. Distressed consumers & providers “There was a person here in Nyamathi who was unable to pay for the loan so (the MFI) went to their place to get his things so they could auction them. On hearing that since the person also owed (another MFI) some money they also decided to go to the home. So both groups met and took everything.” Another... “She was buried on Wednesday…she died saying that you should not do like me.”

9. The case for regulation Absence of an effective and appropriate regulatory credit environment Current Reality Financial Institutions Consumer Low consumer bargaining power High interest rates Hidden costs Effective and appropriate regulatory credit environment Best case scenario Financial Institutions Consumer Transparent process Can transparency improve the perceptions of the industry and improve consumer welfare? “Truth in lending”

10. APR Regulatory Framework Legislated Disclosure Consumer Protection Include MFI/NBFIs USA Canada UK European Union Ghana Peru Malaysia South Africa Kenya Overview of disclosure regimes

12. Estimates monthly repayment

13. International evidence suggests most preferred measure

14. No indication of fees and charges

15. Simple

16. Estimates total cost to consumer

17. International evidence suggests a consumer preference

18. No indication of fees and charges

19. Complex concept

20. Establishes an ‘effective’ interest rate

21. Most widely used measure in developed countries

23. Repayment Schedules

24. Annual Percentage rate

25. Annual Percentage rate The APR formula is a representation of these inputs and calculates an ‘effective’ interest for credit. However, this measure is comparable only across similar sized loans and loan terms. Interest methodology APR Formula Specified fees and charges Loan term The actuarial method is deemed the most accurate and is widely used. The N ratio measure can be calculated easily on a calculator. Actuarial method APR Equation and Calculation Direct ratio Constant ratio N ratio The APR calculation can be standardised and simplified, however the main challenge is for consumers to understand it and use it effectively in comparing loans across institutions.

27. APR also felt to be useful, but complex and difficult to understand

28. Credit primarily taken in emergencies

29. Unbanked customers very vulnerable

30. Bank procedures complicated

31. Bank procedures complex and not transparent

32. Greater transparency among smaller credit providers

33. Consumers do not understand interest rates

34. More comfortable with TCC and RS, but feel it is most useful to provide all three measuresInternational research shows that consumers tend to get confused and overwhelmed and that it is important to run financial education programs and to keep the message simple.

35. Access to Finance Only 22.6% of the population(3.2 million people) are formally banked, 3.4% of the population are MFI’s clients (doubled) “The problem is most of us are very poor in maths ….they give you figures, figures, figures. I would prefer to be given the final figure for the whole year.” 38% of the population currently has, or ever had a credit product-service-facility “I was not told this is a flat rate I was just told you will be paying the loan at 15% interest rate. I think banks take advantage of first timers.” “…they show you those terms and conditions……normally written in very small letters…..they use the banking language that jargon and sometimes you do not understand.” 52% of the population has or ever had a savings product-service or facility Source: FinAccess2009 Source: Focus Groups 2008 & 2010 Low-income consumers in Kenya have low levels of financial usage and are suspicious of credit providers. This can be mitigated by a transparent disclosure regime that consumers understand and have confidence in.

36. Consumer protection diagnostic Activities Review of relevant laws and regulations, industry codes and standards Qualitative and quantitative data gathering Key stakeholders interviews regulatory agencies, service providers, industry associations, consumer representatives, others

37. Conceptual Framework Consumers receive quality services that are characterized by transparency, fair treatment and effective recourse mechanism. Pillars Regulation and supervision Industry standards and codes of conduct Consumer awareness

38. Quick Scan of CP in the sector

39. Envisaged Quick Win 1. Embed CP in various sector acts 2. Transparency and disclosure Mandatory disclosure of total cost of credit Repayment schedule for loan customers Plain language agreements (explained to customers) 3. Recourse Mechanism Information of consumers on recourse channels in all agreements & service points Telephone, email, SMS contacts for complaints Log of complaints, reviewed by regulator

40. Thank you for listening!Questions?