Plenary: Balancing financial inclusion, market stability and client protection

  • Antonique KONING, CGAP
  • Kim WILSON, Fletcher School at Tufts University
  • Narda SOTOMAYOR, SBS Peru
  • Armenuhi MKRTCHYAN, Central Bank of Armenia


Antonique KONING kicked off the Opening Plenary by explaining the concept of balancing "ISIP": financial Inclusion, market Stability, Integrity and client Protection. In her work for CGAP's Work stream Customer Empowerment, an enabling environment which takes up issues related to ‘ISIP' is of vital importance. She also asked her fellow panellists to explain how their work relates to finding this balance.

Growing up in a rural area, Narda SOTOMAYOR learned at an early age how a lack of access to finance makes people vulnerable to risks and takes away their ability to invest in their livelihoods. She described her work at the Superintendence of Banks of Peru (SBS Peru), improving microfinance regulation to achieve social impact and market stability, as a balancing act in itself. As head of Consumer Protection and Financial Education at the Central Bank of Armenia, Armenuhi MKRTCHYAN learned that supply-side development of the financial sector is not sufficient for deep inclusion. Trust and understanding are needed to build the demand side. Empowerment and financial literacy help consumers understand products and take better decisions, benefiting themselves, their financial service providers and the financial system as a whole. Kim WILSON, the former head of Microfinance at Catholic Relief Services and Faculty member at Tufts University closed the introduction round, mentioning that impacts of microfinance are not always positive. Without standards, regulatory systems and impact measurement, practitioners had to work by instinct to balance the system. In her current work at the Fletcher School Leadership programme she trains the next generation of practitioners to think outside the box and find innovative solutions to imbalances in the microfinance sector and its institutions.

Koning asked the audience to consider three statements. Half of the audience agreed that "there is no trade-off between financial inclusion and financial stability". One contribution was that when you provide financial services, considering customer needs and protection will pay off in financial returns. On the statement "by definition financial inclusion implies consumer protection", a key insight from the audience was that the definition does not always materialise in practice. Finally, the audience agreed unanimously on the statement that "Financial education is an essential part of consumer protection".

Koning then asked the speakers to consider the synergies between financial inclusion, market stability, integrity and client protection. Sotomayor explained how adequate policies to boost financial inclusion and to improve consumer protection can reinforce market stability. Incentives for supply side development need to go hand in hand with transparency rules to ensure clients are well informed about financial products and services, their benefits and risks, and the terms and conditions agreed upon when contracting. When consumers understand their obligations, they are more likely to honour them; thus supporting the institution's bottom line and the stability of the financial system as a whole. According to Mkrtchyan, it is financial exclusion which threatens financial stability and integrity since services remain out of supervisory regulation and control of the formal financial system. She stressed the importance of bringing microfinance within the scope of regulation. Wilson referred to the Banana Skin Report, which marked volatility in household income as one of the main risks perceived by practitioners. She mentioned that when the MFI is promoting household stability, it is also supporting its own stability.

On possible trade-offs and challenges Mkrtchyan cautioned policy makers not to cap interest rates to protect consumers. Instead, she proposed that the most effective way to decide on appropriate interest rates is to leave it to the market. Sotomayor partly supported her, by adding that interest caps introduced in Peru in the mid 80's were actually hurting the people they were supposed to help. Similarly, credit targeting quotas led to a sub-optimal allocation of resources and mandated institutions to serve (rural, bottom-of-the-pyramid, remote) populations, they were not ready to serve. These types of market interventions hurt both the financial sustainability and ability of MFIs to serve the poor.

Wilson stressed the need to consider interest rate caps in their context. As credit markets are not fully transparent, caps can be suitable in certain cases, but need to be carefully considered. Sotomayor cautioned that caps on interest rates for loans can also affect deposit taking as financial institutions need to reduce deposit rates to neutralize the reduction of their margins. In response, Mkrtchyan proposed the alternative of subsidising interest for specific vulnerable populations instead of capping interest rates.

Sotomayor also mentioned false trade-offs. As Peruvian banks are moving into a still profitable microfinance market, MFIs are reaching further down the pyramid to more vulnerable and remote populations. On the one hand, this greatly improves financial inclusion. On the other hand, it can also result in deteriorating portfolio quality if MFIs do not adjust their methodology to appropriately serve their new client base. Mkrtchyan added that increasing competition can drive down prices, but also result in over-selling and extending loans to populations without repayment capacities. Wilson underlined that by communicating, practitioners and regulators can stave-off trade-offs.


The discussion first turned to how to balance the ISIP principles in the case of insurance. Mkrtchyan explained how insurance is about perceptions and stressed the need for financial education. Without pay outs, many clients consider themselves taxed, instead of lucky that no insurance event affected their household. Therefore, the Central Bank introduced compulsory motor vehicle insurance to raise awareness of the merits of insurance. Against expectations, this did not result in consumers buying voluntary insurance in other fields. Sotomayor explained how allowing agents to act as a delivery channel for insurance and allowing group insurance products show promising results in Peru.

The panel then considered the international dialogue on client protection between regulators. According to Mkrtchyan, there are initiatives to establish best practice, for example World Bank best practices on client protection and the Alliance for Financial Inclusion guidelines on client protection. However, no single global standard setting body exists to address client protection. All such global protection efforts are part of other standard setting, regulating, funding and policy-making bodies. Vital in this dialogue are the voices of financial service providers that often are missing from such discussions. Sotomayor added that regulators exchange experiences in diverse fora, assuring that Peru is recognized as having a strong consumer protection regulatory framework. Regulators from around the world visit Peru to learn from its experiences engaging with service providers.

The discussion then turned back to the issue of interest rate caps. The panel agreed that credit is diverse: differences exist between products, regions and markets, even within countries. Mkrtchyan proposed to force financial institutions
to be transparent about the costs of their products in order to reduce rates and fight the inefficiencies in markets. Wilson agreed, adding that it is difficult to make MFIs comply with such caps when they are put in place.

As a closing statement, Wilson stressed that as regulators are different we need to be aware of who is regulating whom. Sotomayor reiterated the need for interaction between industry and regulators. Such interaction allows regulators to learn from private sector experiences and improves buy-in and compliance. Mkrtchyan added that a gap will remain between regulation, enforcement and implementation as the sector continues to develop. Koning closed the session by stating that there is always a cost to intervention. We can reduce trade-offs by cooperating, building synergies and by ensuring policies and practices fit within the national context and take continued development of the sector into consideration.