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consumer protection

Can 'fintech' innovations impact financial inclusion in developing countries?

Margaret Miller's picture
A digital transaction in the Democratic Republic of Congo. Such transactions are made possible in part by FINCA. FINCA's strategy in Africa is to focus operations on underserved markets and groups, namely rural areas and women. Photo: Anna Koblanck/IFC


Financial technology, “fintech,” has been reshaping the financial services industry with the level and speed of innovation that’s simply fascinating.

A month ago, my colleagues and I attended the 5th Annual Lendit USA conference to check out about the latest innovations and thinking in this field and see how we can apply it to our work.

There is growing interest in trying to figure out this new industry and take advantage of the opportunity. Now billed as the largest Fintech industry meeting in the world, Lendit organizers started this event four years ago with about 200 participants. This year’s event attracted more than 5,000 people.

We work on various areas of financial inclusion and are interested in new ways that can help expand access to financial services to hard-to-reach populations and small businesses in developing countries.

We returned with a new appreciation for the magnitude of change that is coming, and how quickly it could occur – and already is in some instances.  Some innovations will help developing countries leapfrog into this new tech era. This could have a significant – and potentially highly positive - impact on financial inclusion, and fundamentally change the nature of financial infrastructure. 

However, these opportunities come with potential risks, such as those related to (un)fair lending practices related to unmonitored use and analysis of big data or increased systemic vulnerabilities due to threats to cybersecurity. 
 

Are Consumer Rights Well Protected in Pakistan's Financial Sector?

Sarmad Shaikh's picture

Walled City of Lahore market. Asad Zaidi / World Bank
Last month, the World Bank released Pakistan’s first ever Consumer Protection and Financial Literacy (CPFL) Diagnostic Review along with convening a workshop where 200 financial sector professionals discussed the recommendations, a first such deliberation on consumer protection and financial literacy in the country.

The assessment compares Pakistan’s performance standards, covering four segments of the financial sector - banking, microfinance, insurance, and securities markets. This approach brought out cross-cutting findings and a comprehensive set of recommendations. The overall objective of the review is to foster a responsible financial system that offers (a) transparency, (b) appropriate choices, (c) redress mechanisms, and (d) privacy of consumer information.

Financial exclusion in Pakistan is high – 56% of the population currently uses no formal or informal financial products – but decreasing. The past decade has seen rapid growth in household lending in Pakistan, leading to many taking on risks and obligations they do not fully understand. This growth underscores the need for CPFL to prevent unfair practices, and improve transparency and efficiency by reaching potential customers to increase their understanding of financial services.

Overall, the report identifies certain gaps and overlaps in the legal, institutional, and regulatory framework for consumer protection in Pakistan and finds that there is a need for some consolidation and much more coordination amongst a fragmented range of consumer protection institutions, including regulators, industry associations and ombudsman offices. Key stakeholders agree that a consolidated approach to regulating market conduct is necessary. One critical area is the microfinance sector which serves close to 3 million active borrowers and 6 million savers. Many of these clients have limited access to consumer protection institutions or information, leaving them vulnerable to consumer rights malpractices. In this sector, microfinance banks (MFBs) are regulated by the State Bank of Pakistan, but other non-deposit taking microfinance institutions (MFIs) are unregulated. In a number of geographical areas, both MFBs and MFIs are serving the same clientele, but there is a difference in market conduct regulations on consumer protection. For example, a microfinance bank is mandated by the prudential regulations of the State Bank of Pakistan to disclose annualized lending and deposit rates in the contract signed with their clients, and to also have an officer read out these terms to their clients. In contrast, a non-deposit taking institution is not subject to these regulations and has the discretion of quoting, say, rupee amounts that might not be representative or comparable.

The key finding on transparency and disclosure is that although financial regulators have strengthened disclosure requirements, there is a lack of standardized, comparable pricing information on financial products. As a result, consumers do not always have simplified, adequate, and comparable information about the prices, terms and conditions, and inherent risks of financial products and services. Regulators, market participants, and other stakeholders agreed with the recommendation on introducing a standard Key Facts Statement sheet, but also stressed the need for some demand-driven research on what information would be most beneficial to Pakistani consumers and what would be most effective way of communicating this information.