FUNGAI CHIMWAMUROMBE/PLAXEDES TAVIRAI
The microfinance code of conduct is a welcome development to ensure that consumers know their rights so as to avoid arbitrary and draconian actions by microfinanciers which used to be a common feature before the enactment of the Microfinance Act [Chapter 24:30].
The Zimbabwe economy is hinged on small to medium enterprises.
There has been little left by the conventional banks to assist the players in this space and thumps up to microfinance companies (MFIs) who have occupied the space and now allow for the smooth movement of businesses through microfinancing.
It is imperative to have a look at how the government is keen to ensure sanity within the MFIs through the enforcement of the code of conduct that is enshrined in the Act.
The Microfinance code of conduct is a supervisory and regulatory tool which is at the disposal of the Reserve Bank of Zimbabwe to ensure discipline and order amongst MFIs.
The microfinance sector plays a vital role in enhancing financial inclusion levels through the provision of appropriate financial services and capacity building, particularly amongst the low income groups.
The sector continues to play a very important role in the provision of financial assistance to those sectors that do not find place under the conventional banking systems.
In order to fortify consumer protection and imbue the MFI sector with the public’s confidence, the Act seeks to achieve these goals through a code of conduct affixed in the first schedule of the Act. The code defines certain actions and conduct that is deemed undesirable in conducting microfinance business.
It stipulates that failure to comply with the ethical practices and rules of conduct contained therein is considered to be adopting undesirable methods of conducting business. The microfinance code of conduct is at the centre of the legislature’s intention to promote fair dealing between microfinances and the consumers of their products.
This article shall discuss some of the critical aspects contained in the Microfinance code of conduct.
Operating guidelines and treatment of clients
Every microfinance institution is mandated by the code of conduct to devise and keep to date operating guidelines and procedures to ensure that clients and/ or potential clients are treated with dignity, respect, and sensitivity. It is also their duty to ensure that their staff is trained and equipped to implement the guidelines and procedures.
Furthermore, microfinanciers must follow practices that are built on respect, fair treatment, persuasion, and courtesy towards clients. They are obliged not to disrespect clients or treat clients in an unfair manner.
Microfinance institutions have a duty to keep client’s personal information strictly confidential unless required to disclose it by a court order or for the purpose of legal proceedings.
It is important to note that the code places a mandate on microfinances to fully disclose to their potential clients all terms and conditions (including any changes) attaching to any of the financial services offered by the microfinance in plain and simple language understood by the client.
Vague and ambiguous language should be avoided at all costs. The code stipulates that every client documents, particularly loan agreements and other related documents should indicate the rate of interest, terms of repayment, collateral required from the client, and details of all charges other than interest.
This is because the client has to know the terms and conditions for the loan facility so that they don’t feel ambushed. In addition, the borrower has a right to request from the MFI at any time, written periodical statements setting out all the charges levied upon the facility, all the payments made by him or her and the outstanding balance owed by him or her under the loan agreement.
The microfinance has a corresponding obligation to provide these without undue delay.
The code gives the microfinances permission to hold the borrower’s property as security. Every person to borrow money from the institutions should pledge as security, property that is not more than twice the value of the amount borrowed from the MFI. Such property must be kept in safe custody and not be used by the institution.
It is important to note the risk of attaching to the pledged security in possession of the MFI lies with the institution such that in the event of destruction or theft of that security, liability lies with the institution.
The institution can only be absolved of liability if it can prove that the security was held in a safe place of custody and the loss or destruction of the pledged security was not attributable to any negligence on the part of the MFI.
However, in a situation where a borrower had initially pledged security whose value is more than twice the value of the amount borrowed for any reason, the borrower is allowed at any time to substitute new security that is more commensurate to the value borrowed.
Where a borrower has pledged security worth more than the value of the money borrowed, the MFI is mandated to ensure that if the borrower defaults and the property is sold in execution, the balance is remitted to the owner after the MFI has subtracted the amount due to them.
Avoiding over-indebtedness, interactions, and collection practices
The MFI have an obligation to take reasonable steps to ensure that the credit services offered by them are confined to the need and repayment capacity of each client.
This is an exercise in responsible lending hence MFIs services are obligated not to put the borrowing client at significant risk of over-indebtedness.
To ensure this, the institutions must diligently investigate and consider the client’s creditworthiness, debt history, sources of income and the nature of the collateral that may be reasonably expected from him or her.
In that regard, MFIs are enjoined to have at least one credit control advisor to give credit control advice to current or potential clients. It is a requirement under the Code that the credit control advisor should not be involved in any way with the offering of credit facilities to current or potential clients.
Every MFI is obliged to behave in a dignified manner towards clients, that is to say, to conduct in a way that does not humiliate or degrade the client.
MFIs should not visit a client’s house or place of abode or place of employment for the collection of money due from the client, unless such visits have been expressly authorised as part of the terms and conditions of the agreement for the loan or credit facility.
In light of the foregoing, interactions with clients should be done in a language that is understood by the clients, that is the use of English and any other indigenous language predominant in the area of operation.
Furthermore, every MFI shall have a clearly defined procedure in the case of defaulting clients, and shall notify clients of such procedure as part of the terms and conditions of any loan or credit facility.
Relations with clients should be kept professional. Visits during public holidays or on any day on which the client or any member of his or her family is celebrating a marriage, or on any occasion set aside by the family of the client for memorialising a bereavement is prohibited.
Further, there must be no stressful recovery methods like detaining ATM cards or demand post-dated cheques as security for any loan or credit facility should be avoided at all costs.
Instead, the microfinance institutions should promote a culture of social sensitivity towards their clients, and in particular, should endeavoUr to foster a long-term and individualised relationship with each of their clients.
Client education and financial literacy
Microfinance institutions must adequately inform clients and potential clients of any information that will enable them to make informed choices and decisions concerning the range of credit facilities or options available to them, whether or not such facilities or options are offered by the MFI concerned.
The Microfinance Act is one of the most progressive acts as it contains a code of conduct stating the rules, values, ethical principles, and vision for the institutions. It provides clear standards and expectations of how MFIs should relate with their clients. Zimbabwe’s microfinance regulatory and supervisory framework is still developing, regardless of the pre-existing parameters set within the Act.
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at email@example.com and WhatsApp 0772 997 889. Plaxedes Tavirai is a Legal Intern, email firstname.lastname@example.org