On Friday, September 18th, I attended a conference held by MicroJustice4All, an organization that provides legal aid assistance to low income populations throughout the developing world. At the conference, the FairKampaign in Kenya was launched to establish collaborative relationships with microfinance institutions to create fair contracts for clients.
Different stake holders from the Kenyan microfinance industry, including microfinance investors, microfinance institutions, wholesale microfinance companies, local and international lawyers, and researchers were invited to discuss the possibility of contract reform along with the issue of over indebtedness of microfinance clients.
At the conference, the FairKampaign in collaboration with the Clifford Chance law firm offered to review contracts of microfinance institutions on a pro-bono basis. As discussed during the conference, most microfinance institutions started as non-governmental organizations or trusts, but some have not reviewed or redrafted their contracts even though their internal structures, operations and clientele have changed over time. This includes commercial banks that still provide microfinance services, including Equity Bank that was once a building society, K-Rep that was once an NGO, and Co-Operative Bank that was once a co-operative society.
The microfinance institutions present at the conference discussed their views of the suggested contract changes.
First, microfinance institutions argued that training is provided in which clients learn about the loan fees, contract conditions, group requirements and default mechanisms to ensure that all clients are well prepared to take on a loan.
Of the five microfinance programs that have I researched, all provide training. Within each program, the material taught and time required varies. Rafiki DTM Limited requires 4 hours of training, Opportunity Kenya requires 6 hours of training, K-Rep Bank requires 6-10 hours of training, Jamii Bora Bank requires training with non-specified time requirement and Faulu Kenya DTM Limited requires a few hours a day for 3 days of training. It is assumed through this training that clients will have full knowledge and understanding of the requirements, the risks and the investment involved.
Second, even though the majority of microfinance contracts are in English, many microfinance institutions claimed that verbal translation from English to Swahili is provided to every client. Unfortunately, contracts or a summary of loan requirements, guidelines and fees are never provided to clients. The institutions also failed to address the suggestion of redrafting their contracts into “plain language” and omitting technical microfinance jargon.
Third, in regard to over indebtedness of microfinance clients, microfinance institutions claimed that institutions face a higher risk when lending compared to microcredit borrowers. Their argument was based on the fact that collateral of microcredit loans are rarely sufficient to cover the loan total when default occurs as many microfinance clients borrow from one than one institution using the same collateral to cover multiple loans and over value their collateral items.
The argument was also made that managing microcredit loans is costly and stressful for most staff members who are required to attend group meetings, manage group behavior and loan payments, conduct training, process loans, and evaluate individual borrowers and applications. Often, staff members cannot manage all of the responsibilities described above to the best of his or her ability.
Despite the limited participation of Kenyan microfinance institutions at the conference, I hope that microfinance institutions take advantage of the FairKampaign and come forward voluntarily to have their contracts reviewed. After all, suggestions made by the FairKampaign are voluntary. Such participation has the potential to increase the credibility among microfinance borrowers many of whom have lost faith in the industry.
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