The European code of Good conduct for Microcredit Provision. Prepared by Dr Karl Dayson and Dr Pål Vik of community finance Solutions, University of Salford (UK) under a contract signed with the European commission. Luxembourg: Publications office of the European Union, 2020. © European Union, 2020.
The European Code of Good Conduct for Microcredit Provision provides a set of standards in terms of management, governance, risk management, reporting, and consumer and investor relations that are common to the microcredit sector in the European Union for the benefit of customers, investors, funders, owners, regulators and partner organisations.
✱ how was the code developed?
The Code has been developed based on recognised best practice in the microfinance sector and in close consultation with the microcredit sector in the EU and its stakeholders. The development of the Code has been guided by the following principles: An emphasis on incorporating specific and measurable content on the basis of which microcredit provider managers and board can take action to enhance their organisations. An emphasis on developing a Code that is adjusted to the diversity of microcredit providers in the EU in terms of market conditions, institutional forms and legal frameworks. An emphasis on raising standards by balancing the need for introducing best practice with realistic operational expectations of the providers.
✱ why a code of good conduct for microcredit providers in the Eu?
The development of the Code was based on the recognition that in light of the disparate regulatory frameworks in which microcredit providers in the EU operate, there was a need for a unifying set of expectations and standards that was common to the sector. This is for the benefit of the sector itself as well as its funders, investors, customers, owners, regulators and partner organisations. The Code sets out good practice guidelines that will better enable the sector to face the challenges of accessing long-term finance, maintaining and raising the quality of services and moving towards sustainability. The purpose of the Code is not to introduce or replace existing regulation of microcredit providers. Rather it is intended to detail a set of common standards in terms of the operation and reporting by microcredit providers.
✱ which institutions are covered by the code?
The European Code of Good Conduct for Microcredit Provision is primarily designed to cover non-bank microcredit providers which provide loans of up to €25,000 to microentrepreneurs directly or in partnership with another financial institution (e.g. a bank). However, the microcredit sector in the EU is diverse in terms of size, institutional set-up and the markets in which they operate. Consequently, not all practices can be considered good practice or even possible for all microcredit providers. In some cases, regulation may already exist which covers certain domains and practices. The Code recognises this and, where applicable, it specifies the type of institutions not covered by the clause in question.
✱ who are the intended audience of the code?
This Code is intended for microcredit provider managers, directors, customers, investors, funders, owners, regulators and partner organisations. It is designed to be a tool for microcredit provider board members, stakeholders and managers in improving the operation of the sector. For customers, it is a tool to ensure that they are treated in a fair and ethical way. For investors and funders, it ensures that the sector operates with transparent and pan-EU reporting standards. For regulators, it gives some reassurance that the sector operates according to sound business practices and principles, and that it is well governed.
✱ how to use this document?
The Code is divided into five sections: Customer and investor relations: This section covers obligations of microcredit providers towards customers and investors, and rights of customers and investors Governance: This section covers standards for both management and the board of microcredit providers Common reporting standards: This part details which indicators microcredit providers must collect, report and disclose. Management Information Systems: This chapter details common standards for Management Information Systems Risk management: This part details common approaches and procedure for managing risk There is also a glossary which explains some of the terms used. The clauses are presented as illustrated below: Clause 1.3: For loans of duration of 12 months or longer, microcredit providers will provide clear and accurate information to their customers about their loan in an annual statement or make it available online. (★★★) The annual statement must include the amount paid (interest and principle), the balance left (interest and principle) and the structure of the remaining payments (timing, amounts, interest and principle). The annual statement may be transmitted electronically, on paper or made available online. The clauses are bolded and further guidance, where applicable, can be found below the clause. level of difficulty – ★/★★/★★★ The level of difficulty in implementing a clause is indicated by ★ (low difficulty), ★★ (medium difficulty) and ★★★ (high difficulty) priority clauses (p) Throughout the document there are a number of clauses that have been identified as priority clauses. These clauses are seen as of being of particular importance and are presented in red font as illustrated below. Clause 1.12: Microcredit providers will have a mechanism to deal with customer complaints with dedicated staff resources. (★) This clause has been identified as a priority clause because the right to complain and redress is an important and widely recognised customer right. This must be the responsibility of one or several staff members. This can be part of one or a group of staff member’s job description. large institutions only – ▲ Where a clause only applies to large institutions this is indicated by the symbol (▲), displayed after the clause. Large institutions are here defined as providers that have more than 7,000 active borrowers1 and more than 70 employees. In the further guidance to the clauses,
references are also made to small and medium providers. Small providers refer to organisations with fewer than 4,000 customers and 35 employees, while medium providers have 4,000-7,000 customers and 35-70 employees. All the clauses are summarised in a matrix in the following pages. The priority clauses are in bold red font. 1 customEr and invEstor rElations introduction Microcredit providers have clear obligations towards customers and investors. The well-being of customers is closely linked to the mission of microcredit providers in combating poverty and social and financial exclusion, while private and public investors are increasingly important in the funding of the sector. Hence, establishing principles guiding the treatment of customers and principles ensuring transparency and reliability in dealing with investors is of great importance. This section of the Code sets out a series of obligations by microcredit providers towards their customers and investors. This includes a fair and transparent lending process, right to redress, avoidance of customer over-indebtedness, protection of customer data and transparent conduct towards investors. customer relations ✱ sufficient information provided to customer Clause 1.1: Microcredit providers will disclose lending costs in their advertising(★) Costs disclosed as the Total Cost of Credit or Annual Percentage Rate in all advertising promoting the provider is based on price Clause 1.2: The following information is included in the credit agreement: Clause 1.2.1: the identity and geographical address of the lender (★) Clause 1.2.2: the amount (★) Clause 1.2.3: the duration of the credit agreement (★) Clause 1.2.4: the interest rate (★) Clause 1.2.5: costs as total cost of borrowing (★) Clause 1.2.6: charges for late repayments (★) Clause 1.2.7: right of early repayment (★) Clause 1.2.8: repayment schedule (★) This clause has been identified as a priority clause because providing clear contractual information is important in helping customers make informed borrowing decisions Clause 1.3: For loans of duration of 12 months or longer, microcredit providers will provide clear and ✱ avoiding over-indebtedness of customers Clause 1.7: Microcredit providers will assess repayment capacity and loan affordability on the basis of sufficient information from the applicant, database and/or from competitor. (★★) This clause has been identified as a priority clause because it reduces the risk of customers over- indebtedness. At a minimum, this must involve calculating the customer’s working capital, business and household surplus, and assets and liabilities. It should include an investigation of the capacity to carry forward the project. In that sense, referring to internal business development services or external partners to assist in the assessment is considered good practice. Clause 1.8: Microcredit providers will have credit policies which give explicit guidance on borrowerdebt thresholds and acceptable levels of debt from other sources. (★★) The credit policy may indicate debt thresholds as a percentage of or a range of percentages of disposable income that a borrower can reasonably be expected to manage. This should be based on a realistic assessment of disposable income, allowing for fluctuations and including an allowance for other debts. Clause 1.9: If there is significant non- or under- payment exceeding one month’s credit, the microcredit provider should inform the borrower without delay of non- or under-payment through the appropriate medium. (★) System and procedures ensure that borrowers with non- or under-payment exceeding one month’s credit are informed without delay through appropriate medium. ✱ customer care Clause 1.10: Microcredit providers will regularly assess customer satisfaction. (★★★) For large microcredit providers this must entail more formalised and regular assessments involving the use of recognised market research methods, such as focus groups, surveys, questionnaires or customer panels. For small providers, the assessment may be more informal, involving customer conversations or group discussions. Clause 1.11: Microcredit providers will have an explicit policy known by all staff members requiring customer complaints to be fully investigated and resolved in timely manner. (▲) (★★) Providers have customer complaint policies, including how to handle complaints and how to inform customers about their right to complain and the complaint mechanism. Clause 1.12: Microcredit providers will have a mechanism to deal with customer complaints with dedicated staff resources. (★) This clause has been identified as a priority clause because the right to complain and redress is an important and widely recognised customer right. This must be the responsibility of one or several staff members. This can be part of one or a group of staff member’s job description. Clause 1.13: Microcredit providers will, in the course of the loan application process, ensure that customers are informed about their right to complain and how to make a complaint to the appropriate person. (★) The right to complain and who to contact to make a complaint should be included in information material handed to loan applicants and should be raised with the applicant. ✱ Ethical staff and institutional behaviour Clause 1.14: Microcredit providers will not discriminate on the basis of race, ethnicity, gender, political affiliation, disability, religion or sexual orientation in the selection and treatment of customers. (★) Non-discriminatory treatment is important for providing access to financial services to all clients who can use them and builds their confidence in the fairness of the provider. The provider has non-discrimination policy (e.g. in credit manual, code of conduct or similar documents) which specify that loan applications are not assessed using race, ethnicity, gender, political affiliation, disability, religion or sexual orientation as determinants of creditworthiness, and staff is trained about it. Providers using algorithms in the underwriting process should: document and review the rationale for doing so; and exclude potentially discriminatory variables (race, ethnicity, gender, age, disability, political affiliation, sexual orientation and religion) in algorithm even if it correlates with repayment likelihood. Clause 1.15 Microcredit providers will have a policy in force clearly defining appropriate and inappropriate collection practices by staff and third party. (★★) The provider has a written procedure for debt collection which lists acceptable and unacceptable practices. The procedure should apply to provider staff and external debt collectors (third party). Clause 1.16: Microcredit provider will conduct staff appraisals regularly to assess performance, ethical behaviour, professional conduct and quality of interaction with customers. (★) Staff appraisals are conducted at least once a year. It should address issues such as performance, ethical behaviour and professional conduct including relations with customers. ✱ customer data protection Clause 1.17: Microcredit providers will have a written privacy policy governing the gathering, processing, use and distribution of customer data. (★★) Provider should have written privacy policies and procedures that govern the gathering, processing, use, distribution and storage of customer information. Clause 1.18 Microcredit providers will ensure they have systems (including IT) in place to protect the confidentiality, security, accuracy and integrity of customers’ personal and financial information. (★★) This may include password protection or encryption of customer databases. Clause 1.19: Customers will be informed about how their information will be used and about their right to withdraw their permission from this use. (★) This should include explaining how the data will be used and presented, and that the customer can withdraw their permission for the particular use. This should be explained to a customer before the customer is requested to submit the information in question. Clause 1.20: Written customer consent is required for use of any customer information in promotions, marketing material and other publicly disclosed information. (★) This means that such use of customer information requires the signature of the customer. The customer may provide the signature electronically via email. investor relations Clause 1.21: Microcredit providers have a responsibility not to mislead investors. (★) Relevant and clear information should be made available to enable individual/retail investors to make informed decisions (e.g. historical data on delinquency where return on investment is dependent on performance of portfolio). The extent and nature of risk is made clear (i.e. if return on investment is dependent on performance on portfolio etc.). This does not apply to providers offering fixed, low- cost shares as a form of membership (i.e. credit unions and coops). Clause 1.22: Microcredit providers taking investment from individual or retail investors will have documented processes to ensure understanding of risk. (★) This could include using disclaimers about risk when signing up as investor (e.g. having to tick a box to confirm that they understand that they may lose money), signposting to independent, professional advice and resources, and providing contact point within provider for further information. If the provider does not have investment from individuals this clause will not be applicable. Microcredit providers offering fixed, low cost shares as form of membership, such as credit unions, are exempt from this clause. 2 govErnancE introduction Governance “encompasses all the mechanisms by which stakeholders…define and pursue the institution’s mission…and ensure its sustainability by adapting to the environment, preventing and overcoming crises.”2 Strong and accountable governance structures are of great importance in microcredit institutions, as they ensure that providers are driven by clearly set out road maps and that they do not deviate from this course. This is particularly important for preventing mission drift. This section covers business planning, role and responsibilities of the board and management, and external audits. development of a business plan Clause 2.1: The microcredit provider will produce strategic documents (e.g. business plan, strategy, operational plan) that is reviewed on a regular basis, at least once a year, and updated if necessary. (★★) This clause has been identified as a priority clause because strategic documents (e.g. business plan, strategy, operational plan) may serve as a road map that sets the direction of the organisation and guides its policies and strategies. The components of the strategic documents are set out in Clause 2.3. Clause 2.2: The strategic documents (e.g. business plan, strategy, operational plan) will cover a minimum of a 3 years. (★★) Clause 2.3: The strategic documents (e.g. business plan, strategy, operational plan) will, at a minimum, cover the following aspects of the business: (★★) This clause has been identified as a priority clause because