European Code of Good Conduct for Microcredit Provision - EN

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European Code of Good Conduct for Microcredit Provision - EN
EN

European Code
of Good Conduct
for Microcredit
Provision

                   Version 1.0
Source of photos : © iStockphoto
© European Union, 2011 Reproduction is authorised provided the source is acknowledged.
ISBN 978-92-79-21023-5 doi:10.2776/41012
European Commission, Directorate-General for Regional Policy
Unit B.1 – Communication, Information, Relations with Third Countries
Raphaël Goulet
Avenue de Tervuren 41, 1040 Brussels
BELGIUM
Fax : +32 22966003 E-mail : regio-info@ec.europa.eu
Internet : http://ec.europa.eu/regional_policy/index_en.htm
Foreword
    The European microfinance market is a young and growing sector which has considerable potential. However,
    this market is still quite heterogeneous, due to the disparity of the legal and institutional frameworks in the
    Member States and the diversity of the microcredit providers. In the EU, microloans are provided by financial
    institutions, such as commercial banks, savings banks, cooperative banks and public banks, as well as by a number
    of non-bank entities, such as microfinance institutions, foundations, credit unions, charities, NGOs and others.

    As a result, microcredit lending practice vary considerably depending on the type of institution providing
    microloans, its legal setup, the environment in which it operates and its own ability to apply sound and efficient
    management procedures.

    Under these circumstances, the design of a widely accepted voluntary European Code of Good Conduct for
    microcredit provision was identified by the Commission as an important part of its initiative1 to promote best
    practices in the field of microcredit. By setting out good practice guidelines and identifying expectations and
    common standards, the Commission is seeking to support the sector in facing the challenges of accessing long-
    term finance, maintaining and raising the quality of services and moving towards sustainability.

    The principles regarding governance and management presented in this document are generally not new, but
    they reflect best practices across the sector. The purpose of this document is to detail a set of approved standards
    recognised in the European Union as essential in terms of the operation and reporting of microcredit providers.

    The work to develop this European Code of Good Conduct has been carried out2 in close consultation with many
    actors and stakeholders from the microfinance sector, such as funders, investors, customers, owners, regulators
    and partner organisations. It drew on the expertise and valuable experience gained by many microfinance actors
    in the EU, in particular the trade associations the European Microfinance Network (EMN), Microfinance Centre
    (MFC) and Community Development Finance Association (CDFA).

    It is our hope that the European Code of Good Conduct for Microcredit Provision will contribute to enhancing
    good practice and further improving governance and sound management in the microfinance sector in the
    European Union.

                   Dirk Ahner,                                                Heinz Zourek,
                   Director-General                                           Director-General
                   Directorate-General for Regional Policy                    Directorate-General Enterprise and Industry
                   European Commission                                        European Commission

    1 Communication "A European initiative for the development of microcredit in support of growth and employment" (COM(2007)
      708 final/2 of 20.12.2007)
    2 The European Code of Good Conduct for Microcredit Provision was prepared by Dr Karl Dayson and Pål Vik of Community Finance
      Solutions, University of Salford (UK) under a contract signed with the European Commission

4
Code of Good Conduct for Microcredit Provision

Acknowledgement
The organisations listed below in alphabetical order have contributed to the development of the European
Code of Good Conduct for Microcredit Provision :
● Association of Cooperative Savings and Credit Unions Network of European Credit Unions

● Association pour le Droit à l´Initiative Economique, (ADIE)

● Banca Etica

● Bundesverband Offentlicher Banken Deutschlands

● Centre for European Research in Microfinance (CERMi)

● Community Development Finance Association (CDFA)

● CoopEst

● Deutsche Sparkassen- und Giroverband (DSGV)

● Deutsches Mikrofinanz Institut (DMI)

● Eurom Consultancy & Studies

● European Association of Co-operative Banks (EACB)

● European Association of Public Banks (EAPB)

● European Banking Federation (EBF)

● European Investment Fund (EIF)

● European Microfinance Network (EMN)

● European Network of Credit Unions

● European Savings Banks Group (ESBG)

● Evers & Jung

● Express Finance IFN SA

● Fair Finance

● Fédération Nationale des Caisses d'Epargne

● Finance Policy Department for Business, Innovation and Skills (BIS), SME Finance Team Good.Bee Holding

● Groupe Banques Populaires Caisses d'Epargne (BPCE)

● Kreditanstalt für Wiederaufbau (KfW)
● Luxflag

● MicroBank

● Microfinance Centre for Central Europe and New Independent States (MFC)

● MicroFinanza Rating

● NRW.Bank
● Planet Rating

● Qredits

● The Financial Services Authority (FSA)

● Wirtschaftskammer Oberösterreich (WKÖ)

Many other participants were involved in the process through questionnaires

                                                                                                                 5
Table of contents
    About the Code of Good Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
    How was the Code developed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
    Why a Code of Good Conduct for microcredit providers in the EU? . . . . . . . . . . . . . . . . . . . . . . . . . . .10
    Which institutions are covered by the Code of Good Conduct? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
    Who are the intended audience of the Code of Good Conduct? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
    How should this document be used? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

    1 – Customer and Investor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
    Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
    Customer relations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
       Sufficient information provided to customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
       Customer rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
       Avoiding over-indebtedness of customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
       Customer care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
       Ethical staff and institutional behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
       Customer data protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
       Investor relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

    2 – Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
    Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
    Development of a business plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
    Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
       Independence of board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
       Responsibilities of board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
       Influence of board on microcredit provider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
       Selection and representation of board members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
       Board practical work organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
    Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
       Management expertise and human resource management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
       Operational manuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
       External audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33

6
Code of Good Conduct for Microcredit Provision

3 – Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Risk management framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Management of credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Planning of portfolio quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Management of fraud and security risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Internal audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

4 – Reporting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Common financial reporting standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Common social reporting standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Common disclosure standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

5 – Management Information Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Functional completeness and expandability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Security and staff support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

                                                                                                                                                                                                                           7
Code of Good Conduct for Microcredit Provision

About the Code of
   Good Conduct

                                                           9
About the Code of Good Conduct

     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. These standards are for the benefit of customers,
     investors, funders, owners, regulators and partner organisations.

     How was the Code developed?                                Which institutions are covered by
                                                                the Code of Good Conduct?
     The Code has been built on recognised best practice
     in the microfinance sector and developed in close          The Code of Good Conduct is primarily designed to
     consultation with the microcredit sector in the EU and     cover non-bank microcredit providers which provide
     its stakeholders. The development of the Code of Good      loans of up to € 25 000 to micro-entrepreneurs.
     Conduct has been guided by the following principles :      However, the microcredit sector in the EU is diverse
     ● An emphasis on incorporating specific and                in terms of size, institutional set-up and the markets
          measurable content, on the basis of which             in which they operate. Consequently, not all practices
          microcredit provider managers and boards can          can be considered good practice or even possible for
          take action to enhance their organisations.           all microcredit providers. In some cases, regulations
     ● An emphasis on developing a Code that is                 may already exist which cover certain domains
          adjusted to the diversity of microcredit providers    and practices. The Code recognises this and, where
          in the EU in terms of market conditions,              applicable, it specifies the type of institutions not
          institutional forms and legal frameworks.             covered by the clause in question.
     ● An emphasis on raising standards by balancing

          the need for introducing best practice with           Who are the intended audience
          realistic operational expectations of the             of the Code of Good Conduct?
          providers.
                                                                This Code of Good Conduct is intended for microcredit
     Why a Code of Good Conduct for                             provider managers, directors, customers, investors,
     microcredit providers in the EU?                           funders, owners, regulators and partner organisations.
                                                                It is designed to be a tool for microcredit provider
     The development of the Code was based on the               board members, stakeholders and managers in
     recognition that – in light of the disparate regulatory    improving the operation of the sector. For customers,
     frameworks in which microcredit providers in the           it is a tool to ensure that they are treated in a fair and
     EU operate – there was a need for a unifying set of        ethical way. For investors and funders, it ensures
     expectations and standards that was common to the          that the sector operates with transparent and pan-
     sector. The goal is to benefit the sector itself as well   EU reporting standards. For regulators, it gives some
     as its funders, investors, customers, owners, regulators   reassurance that the sector operates according to
     and partner organisations. The Code sets out good          sound business practices and principles, and that it
     practice guidelines that will better enable the sector     is well governed.
     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 regulations of microcredit providers. Rather
     it is intended to detail a set of common standards in
     terms of the operation and reporting of microcredit
     providers.

10
Code of Good Conduct for Microcredit Provision

How should this document                                 Priority clauses –
be used?
                                                         Throughout the document, several clauses have been
The Code is divided into five sections :                 identified as priority clauses. These clauses are seen as
● Customer and investor relations : This section         particularly important and are presented as illustrated
   covers obligations of microcredit providers           below.
   towards customers and investors, and rights of
   customers and investors.
● Governance : This section covers standards for           Clause 1.2
   both management and the board of microcredit
   providers.                                              Microcredit providers will disclose the cost as
● Risk management : This section details common            an Annual Percentage Rate of Charge
   approaches and procedure for managing risk.
● Reporting standards : This section details which         The Annual Percentage Rate of Charge must
   indicators microcredit providers must collect,          be disclosed in a credit agreement and in any
   report and disclose.                                    advertising. This refers to the annual value of
● Management information systems : This section            all commitments, drawdowns, repayments and
   details common standards for management                 charges, including fees and taxes paid by the
   information systems.                                    customer and known to the creditor.

The clauses are presented as illustrated below :
                                                         Level of difficulty –          /          /

 Clause 1.1                                              The level of difficulty in implementing a clause
                                                         is indicated by    (low difficulty),     (medium
 For loans of duration of 12 months or longer,           difficulty) and        (high difficulty)
 microcredit providers will provide clear and
 accurate information to their customers about           Large institutions only –
 their loan in an annual statement.
                                                         Where a clause only applies to large institutions, this is
 The annual statement must include the amount            indicated by the symbol , displayed after the clause.
 paid (interest and principal), the balance left         Large institutions are here defined as providers that
 (interest and principal) and the structure of the       have more than 7 000 active borrowers3 and more
 remaining payments (timing, amounts, interest           than 70 employees. In the further guidance to the
 and principal). The annual statement may be             clauses, references are also made to small and medium
 transmitted electronically, on paper or face-to-face.   providers. Small providers refer to organisations with
                                                         fewer than 4 000 customers and 35 employees, while
                                                         medium providers have 4 000 to 7 000 customers and
The clauses themselves are underlined and where there    35 to 70 employees.
is further guidance this is found below the clause.
                                                         All the clauses are summarised in a matrix at the
                                                         beginning of the document. In the matrix, the priority
                                                         clauses are in bold red font.

                                                         A glossary also explains some of the terms used.

                                                         3 Active borrowers are individuals who currently have an
                                                           outstanding loan balance with the microcredit provider or are
                                                           primarily responsible for repaying any portion of the gross loan
                                                           portfolio. Borrowers with multiple loans should be counted as a
                                                           single borrower.

                                                                                                                              11
About the Code of Good Conduct

     Overview matrix
       Clause number

                                                                                                                Large Only
                       Clause

                                                                                                   Difficulty
                                                                                        Priority

                                                                                                                             Page
                       I. Customer and investor relations

                       Sufficient information to customer
                       Microcredit providers will...
     1.1               Disclose costs in advertising                                                                         22

     1.2               Disclose costs as Annual Percentage Rate                                                              22

     1.3               Provide pre-contractual information to customer                                                       22

     1.4               Provide clear information in annual loan statement                                                    22

     1.5               Take measures to ensure customers understand terms and process                                        22

                       Customer rights
                       Customers have the right to...
     1.6               Withdraw from credit agreement or repay within 14 days                                                23

     1.7               Enough time to review terms of contract and ask questions                                             23

     1.8               Early repayment                                                                                       23

     1.9               Have credit history reported to national credit bureaux                                               23

                       Avoiding over-indebtedness of customers
                       Microcredit providers will...
     1.10              Assess repayment capacity and loan affordability                                                      23

     1.11              Have credit policies addressing borrower debt thresholds                                              23

     1.12              Inform borrower without delay of non- or under-payment                                                23

                       Customer care
                       Microcredit providers will...
     1.13              Regularly assess customer satisfaction                                                                24

     1.14              Have policy requiring that complaints be investigated                                                 24

12
Code of Good Conduct for Microcredit Provision

  Clause number

                                                                                                                   Large Only
                  Clause

                                                                                                      Difficulty
                                                                                           Priority

                                                                                                                                Page
1.15              Have mechanism to deal with customer complaints                                                               24

1.16              Ensure customers are informed of right to complain                                                            24

                  Ethical staff and institutional behaviour
                  Microcredit providers will...
1.17              Not discriminate in selection and treatment of customers                                                      24

1.18              Set out acceptable and unacceptable debt-collection practices                                                 24

1.19              Have explicit policy on acceptable pledges of collateral                                                      24

1.20              Conduct regular staff appraisals                                                                              25

                  Customer data protection
                  Microcredit providers will...
1.21              Have written privacy policy concerning customer data                                                          25

1.22              Have systems to protect customers’ personal and financial                                                     25
                  information
1.23              Train staff to protect customers’ personal and financial information                                          25

1.24              Inform customers about use of information and rights to withdraw                                              25
                  permission
1.25              Require written customer consent to publicly disclose information                                             25

                  Investor relations
                  Microcredit providers will...
1.26              Take responsibility not to mislead investors                                                                  25

1.27              Provide relevant information to enable investors to make informed                                             25
                  decisions
1.28              Endeavour to target investors equipped to understand risk                                                     25

1.29              Take steps to verify investors’ identity to prevent money laundering                                          25

                  II. Governance

                  Business planning
                  Microcredit providers will...
2.1               Produce a business plan that is reviewed regularly                                                            28

2.2               Produce a business plan covering a minimum of 3-5 years                                                       28

                                                                                                                                       13
About the Code of Good Conduct

       Clause number

                                                                                                                Large Only
                       Clause

                                                                                                   Difficulty
                                                                                        Priority

                                                                                                                             Page
     2.3               Ensure that the business plan covers a minimum number of                                              28
                       aspects of business
     2.4               Measure, disclose and improve financial and social performance                                        28

     2.5               Use management control and performance tools                                                          29

                       Board
     2.6               Microcredit providers will have a board of directors or                                               29
                       equivalent
     2.7               The board will have an audit or supervisory committee                                                 29

                       The audit or supervisory committee will...
     2.8               Be independent of management                                                                          29

     2.9               Meet with external auditors on annual basis                                                           29

     2.10              Have expertise in financial analysis and accounting                                                   29

                       The board will...
     2.11              Have a minimum number of members                                                                      29

     2.12              Be composed of a majority of independent board members                                                29

     2.13              Be selected by Annual General Meeting or equivalent body                                              30

     2.14              Be reviewed by Annual General Meeting or equivalent body                                              30

     2.15              Supervise the performance of the senior management                                                    30

     2.16              Be accountable for compliance with laws and regulations                                               30

     2.17              Review whether provider is carrying out the mission                                                   30
                       and business plan
     2.18              Monitor financial performance on a regular basis                                                      30

     2.19              Be represented on interview panel when hiring chief executive                                         30

     2.20              Have the right to veto executive management appointments                                              30

     2.21              Decide level of remuneration for executive management posts                                           30

     2.22              Approve any changes in pricing policies                                                               31

     2.23              Be given portfolio quality and financial performance reports                                          31

     2.24              Have members with understanding of banking and finance                                                31

     2.25              Have members that will develop understanding of credit risk                                           31

14
Code of Good Conduct for Microcredit Provision

 Clause number

                                                                                                                    Large Only
                 Clause

                                                                                                       Difficulty
                                                                                            Priority

                                                                                                                                 Page
                 Microcredit providers will...
2.26             Have rules excluding improper persons from becoming board                                                       31
                 members
2.27             Have rules stipulating term limits and rotation                                                                 31

2.28             Require disclosure of conflicts of interest of board members                                                    31

2.29             Have board members with qualifications in finance, business,                                                    31
                 management and law
2.30             Be able to remove board members not attending meetings without                                                  31
                 valid reason

                 The board will...
2.31             Meet at least four times a year                                                                                 31

                 Microcredit providers will...
2.32             Have quorum preventing staff or management majority on board                                                    32

2.33             Disclose proportion of related-party lending in annual report                                                   32

                 Management
2.34             Management will be qualified to undertake key management                                                        32
                 functions

                 Microcredit providers will...
2.35             Have succession plan for executive management                                                                   32

2.36             Have personnel policies set out in personnel manuals                                                            32

2.37             Have a formal training and induction programme                                                                  32

2.38             Have operational manuals covering financial operations                                                          32
                 and management
2.39             Have operational manuals covering treasury                                                                      32

                 External audit
2.40             Microcredit providers will have external audit on annual basis                                                  33

2.41             Auditor will be appropriately qualified                                                                         33

2.42             External audit will adhere to national or international accounting                                              33
                 standards
2.43             External audit will be accompanied by letter from auditor                                                       33

2.44             Microcredit provider will address issues raised by auditor                                                      33

                                                                                                                                        15
About the Code of Good Conduct

       Clause number

                                                                                                                     Large Only
                       Clause

                                                                                                        Difficulty
                                                                                             Priority

                                                                                                                                  Page
                       III. Risk management

                       Risk management framework
                       Microcredit providers will...
     3.1               Have processes to identify, assess and prioritise risks                                                    36

     3.2               Appoint senior manager to be accountable for risk                                                          36
                       management
     3.3               Assign responsibility for implementing risk controls                                                       36

     3.4               Assign responsibility for monitoring and providing management                                              36
                       with relevant data

                       Managing credit risk
                       Microcredit providers will...
     3.5               Take into account risk when designing loan products                                                        37

     3.6               Limit credit risks by requiring that two people approve                                                    37
                       all loans
     3.7               Review aggregate exposure to concentrations of credit risk                                                 37

     3.8               Ensure any staff incentives are not linked only to loan origination                                        38

     3.9               Measure and track loan portfolio performance                                                               38

     3.10              Revise loan loss provisioning rates and methodology regularly                                              38

     3.11              Disclose loan loss provisioning methodology to funders and                                                 38
                       investors
     3.12              Have explicit policy on write-offs and apply it consistently                                               38

                       Managing fraud and security risk
                       Microcredit providers will...
     3.13              Specify lending limits for various ranks of officers and credit                                            38
                       committees
     3.14              Have procedures for rescheduling loans                                                                     38

     3.15              Have policies and procedures on dealing with collateral                                                    39

     3.16              Have policies classifying restricted and unrestricted fund account                                         39
                       activity
     3.17              Limit handling of cash through banks or using electronic transfers                                         39

     3.18              Have the following measures in place when handling cash...                                                 39
     3.18.1               Sufficient security measures to protect cash and assets                                                 39

     3.18.2               Standardised and consistent procedures for cash transactions                                            39

16
Code of Good Conduct for Microcredit Provision

  Clause number

                                                                                                                   Large Only
                  Clause

                                                                                                      Difficulty
                                                                                           Priority

                                                                                                                                Page
3.18.3               Segregation of duties for handling and recording cash                                                      39
                     transactions
3.19              Segregate duties for approving and disbursing loans                                                           39

                  Internal audit
3.20              Microcredit providers will have explicit internal audit function                                              40
                  adjusted to size of organisation
3.21              Internal auditor will report directly to board                                                                40

3.22              Internal audit will determine :                                                                               40
3.22.1               The reliability of existing information                                                                    40

3.22.2               The reliability and accuracy of financial and operational                                                  40
                     information
3.22.3               Violations of internal controls                                                                            40

3.22.4               Existence of uncontrolled risks                                                                            40

3.23              Internal audit will be conducted regularly                                                                    40

                  IV. Reporting standards

                  Common financial reporting standards
                  Microcredit providers will...
4.1               Adhere to common way of measuring and reporting :                                                             44
4.1.1                Current loan portfolio                                                                                     44

4.1.2                Gross loan portfolio                                                                                       44

4.1.3                Net loan portfolio                                                                                         44

4.1.4                Active borrowers                                                                                           44

4.1.5                Financial revenue                                                                                          44

4.1.6                Operating revenue                                                                                          44

4.1.7                Personnel expense                                                                                          45

4.1.8                Administrative expense                                                                                     45

4.1.9                Financial expense                                                                                          45

4.1.10               Portfolio at Risk                                                                                          45

4.1.11               Write-offs                                                                                                 45

4.1.12               Impairment loss allowance and provision expense                                                            45

4.1.13               Assets                                                                                                     45

4.1.14               Liabilities                                                                                                45

                                                                                                                                       17
About the Code of Good Conduct

       Clause number

                                                                                                                       Large Only
                       Clause

                                                                                                          Difficulty
                                                                                               Priority

                                                                                                                                    Page
     4.1.15               Operational sustainability ratio                                                                          46

     4.1.16               Financial sustainability ratio                                                                            46

     4.1.17               Adjustments to sustainability ratios taking into account subsidies                                        46

                       Common social reporting standards
                       Microcredit providers will...
     4.2               Publicly disclose...
     4.2.1                Social mission                                                                                            46

     4.2.2                Average disbursed loan size                                                                               46

     4.2.3                Median loan size as % of gross national income                                                            46

                       if relevant for target market and mission...
     4.2.4                % of female customers                                                                                     46

     4.2.5                % of rural customers                                                                                      46

     4.2.6                % of poor customers                                                                                       46

     4.2.7                % of customers graduating to mainstream finance                                                           46

     4.2.8                % of ethnic minority or indigenous customers                                                              46

     4.2.9                % of start-up businesses funded                                                                           46

     4.2.10               % of customers on welfare benefits                                                                        46

                       Common disclosure standards
     4.3               Members of public will be able to access information                                                         47

                       Microcredit providers will...
     4.4               Publicly disclose...
     4.4.1                Number of active borrowers                                                                                47

     4.4.2                Number and value of loans issued and outstanding                                                          47

     4.4.3                Value of current, gross and net portfolio                                                                 47

     4.4.4                Portfolio at Risk                                                                                         47

     4.4.5                Total value of assets and liabilities                                                                     47

     4.4.6                Operational sustainability ratio                                                                          47

     4.4.7                Financial sustainability ratio                                                                            47

     4.4.8                % of cost per loan subsidised                                                                             47

     4.4.9                Number of loan officers and (total) personnel                                                             47

18
Code of Good Conduct for Microcredit Provision

  Clause number

                                                                                                                      Large Only
                  Clause

                                                                                                         Difficulty
                                                                                              Priority

                                                                                                                                   Page
4.5               Record complaints by applicants and past and current customers                                                   47

4.6               Publicly disclose...                                                                                             47
4.6.1                Number of complaints by applicants and past and current                                                       47
                     customers
4.6.2                Complaints as % of applicants and past and current                                                            47
                     customers

                  V. Management information systems

                  Functional completeness and expandability
                  Microcredit providers will have an MIS that...
5.1               Produces key operational and financial reports                                                                   50

5.1.1                Income statement                                                                                              50

5.1.2                Balance sheet                                                                                                 50

5.1.3                Daily loan and delinquency report, ratios and trends                                                          50

5.2               Enables provider to perform full range accounting activities                                                     50

5.3               Operates in accordance with recognised accounting standards                                                      50

5.4               Can monitor and manage loan portfolio quality and functions                                                      50

5.5               Can manage and maintain information about clients                                                                50

5.6               Can facilitate prompt access to relevant information for                                                         50
                  management, staff and board
5.7               Can handle and incorporate new products, multiple offices,                                                       51
                  services and delivery channels
5.8               Can cope with planned growth                                                                                     51

                  Security & staff support
                  Microcredit providers will...
5.9               Restrict access to data captured by an MIS                                                                       51

5.10              Operate with different levels of user access                                                                     51

5.11              Have provisions to store and restore information                                                                 51

5.12              Have an MIS that can perform regular back-ups                                                                    51

5.13              Have safeguards to prevent illicit or accidental alteration                                                      51
                  of data files
5.14              Have an MIS that can produce audit trail on crucial operations                                                   51

5.15              Provide training and/or manuals to staff                                                                         51

                                                                                                                                          19
Code of Good Conduct for Microcredit Provision

 1 – Customer and
Investor Relations

                                                           21
1 – Customer and Investor Relations

     Introduction                                                Clause 1.3

     Microcredit providers have clear obligations towards        Microcredit providers will provide the following pre-
     customers and investors. The well-being of customers        contractual information to the customer and set it up
     is intimately linked to the mission of microcredit          in the credit agreement :
     providers to combat poverty and social and financial
     exclusion, while private and public investors are           Clause 1.3.1 : the identity and geographical address
     increasingly important in the funding of the sector.        of the lender
     Hence, establishing principles that guide the
     treatment of customers and principles that ensure           Clause 1.3.2 : the amount
     transparency and reliability in dealing with investors is
     of great importance. This section of the Code sets out      Clause 1.3.3 : the duration of the credit agreement
     a series of obligations incumbent upon microcredit
     providers towards their customers and investors. This       Clause 1.3.4 :the borrowing rate
     includes a fair and transparent lending process, right
     to redress, avoidance of customer over-indebtedness,        Clause 1.3.5 : total amount payable
     protection of customer data and transparency vis-à-
     vis investors.                                              Clause 1.3.6 : charges for late repayments

     Customer relations                                          Clause 1.3.7 : right of early withdrawal

     Sufficient information provided to                          Clause 1.3.8 : debt-collection practices
     customer
                                                                 Clause 1.4
     Clause 1.1
                                                                 For loans of duration of 12 months or longer,
     Microcredit providers will disclose lending costs in        microcredit providers will provide clear and accurate
     their advertising.                                          information to their customers about their loan in an
                                                                 annual statement.
     This will include borrowing rates, charges and an
     illustrative example.                                       The annual statement must include the amount paid
                                                                 (interest and principal), the balance left (interest and
                                                                 principal) and the structure of the remaining payments
      Clause 1.2                                                 (timing, amounts, interest and principal). The annual
                                                                 statement may be transmitted electronically, on paper
      Microcredit providers will disclose the cost as            or face-to-face.
      an Annual Percentage Rate of Charge
                                                                 Clause 1.5
      This clause has been identified as a priority clause
      because disclosing the cost of borrowing is crucial        Microcredit providers will take adequate measures to
      in enabling the customer to make informed                  ensure that customers fully understand the products,
      financial decisions. The Annual Percentage Rate            process and terms of the contract.
      of Charge must be disclosed in a credit agreement
      and in any advertising. This refers to the annual          This may, where necessary and appropriate, include
      value of all commitments, drawdowns, repayments            training customer-facing staff to communicate
      and charges, including fees and taxes paid by the          effectively with all customers, reading contracts out
      customer and known to the creditor.                        load for visually impaired or illiterate customers, or
                                                                 providing materials in local languages.

22
Code of Good Conduct for Microcredit Provision

Customer rights                                            Avoiding over-indebtedness of
                                                           customers

 Clause 1.6                                                Clause 1.10

 Customers have the right to either                        Microcredit providers will assess repayment capacity
                                                           and loan affordability on the basis of sufficient
 a) withdraw within 14 calendar days of the                information from the applicant, database and/or
 signing of the credit agreement or                        competitors.

 b) repay their loan in its entirety without               At a minimum this must involve calculating the
 incurring extra costs within 14 calendar days             customer’s working capital, business and household
 of the signing of the credit agreement, without           surplus, and assets and liabilities. It should include
 having to give a reason.                                  an investigation of the capacity to carry forward the
                                                           project. In that sense, referring to internal business
 This clause has been identified as a priority clause      development services or external partners to assist in
 because it is an important and widely recognised          the assessment is considered good practice.
 customer right. This right will be enshrined in the
 credit agreement.                                         Clause 1.11

                                                           Microcredit providers will have credit policies which
Clause 1.7                                                 give explicit guidance on borrower debt thresholds
                                                           and acceptable levels of debt from other sources.
Customers will be given adequate time to review the
terms of contract and given the opportunity to ask         The credit policy may indicate debt thresholds as a
questions and get answers prior to signing.                percentage of or a range of percentages of disposable
                                                           income that a borrower can reasonably be expected to
Clause 1.8                                                 manage. This should be based on a realistic assessment
                                                           of disposable income, allowing for fluctuations and
Customers have the right to early repayment, though        including an allowance for other debts.
the microcredit provider can claim compensation for
reasonable costs linked to early repayment.                Clause 1.12

This right will be enshrined in the credit agreement.      If there is significant non- or under-payment exceeding
The costs linked to early repayment should also be set     one month’s credit, the microcredit provider should
out in the agreement.                                      inform the borrower without delay of the non- or
                                                           under-payment through the appropriate medium.
Clause 1.9
                                                           This will include the amount involved, the borrowing
Customers have the right to have the credit history they   rate, and penalties, charges or interest applicable on
accumulate with a microcredit provider reported to         arrears.
national credit bureaux and databases where these exist.

Where applicable this right should be set out in the
credit agreement. This is so that customers can build
a positive credit score. This clause only applies in
countries where national credit bureaux and databases
collecting positive credit history exist.

                                                                                                                      23
1 – Customer and Investor Relations

     Customer care                                            The right to complain and who to contact to make a
                                                              complaint should be included in information material
     Clause 1.13                                              handed to loan applicants, and should be discussed
                                                              with the applicant.
     Microcredit providers will regularly assess customer
     satisfaction.                                            Ethical staff and institutional
                                                              behaviour
     For large microcredit providers, this must entail more
     formalised and regular assessments involving the use     Clause 1.17
     of recognised market research methods, such as focus
     groups, surveys, questionnaires or customer panels.      Microcredit providers will not discriminate on the basis
     For small providers, the assessment may be more          of race, ethnicity, gender, political affiliation, disability,
     informal, involving customer conversations or group      religion or sexual orientation in the selection and
     discussions.                                             treatment of customers.

     Clause 1.14                                              Non-discriminatory treatment is important for
                                                              providing access to financial services to all clients
     Microcredit providers will have an explicit policy       who can use them and builds their confidence in the
     known by all staff members requiring customer            fairness of the provider.
     complaints to be fully investigated and resolved in
     a timely manner.                                         Clause 1.18

     For large microcredit providers, this policy will be     Acceptable and unacceptable debt-collection
     written. For small and medium microcredit providers,     practices will be clearly set out in institutional
     this may be an unwritten but explicit and well-known     documentation which will also apply to use of external
     policy or it may be incorporated into other policy       debt collectors.
     manuals.
                                                              Institutional documentation includes staff rules and a
                                                              debt-collection manual. The debt-collection policies
      Clause 1.15                                             should state that customers should be treated in a
                                                              professional and respectful manner and that coercion
      Microcredit providers will have a mechanism             or intimidation techniques, including physical
      for dealing with customer complaints with               force, humiliation and contacting the customer at
      dedicated staff resources.                              inappropriate times, should not be used.

      This clause has been identified as a priority clause    Clause 1.19
      because the right to complaint and redress is an
      important and widely recognised customer right.         Microcredit providers involved in secured lending
                                                              will have an explicit policy on acceptable pledges of
      This must be the responsibility of one or several       collateral.
      staff members. This can be part of one or a group
      of staff members’ job description.                      The policy should address the issue of accepting collateral
                                                              which may deprive borrowers of their basic survival
                                                              capacity. This may include productive assets without
     Clause 1.16                                              which the borrower may be unable to sustain a basic level
                                                              of household consumption or fall deeper into poverty.
     Microcredit providers will, in the course of the loan    The policy may state that the provider does not accept
     application process, ensure that customers are           such collateral, that this should be carefully considered
     informed about their right to complain and how to        by the loan officer or that stricter underwriting should
     make a complaint to the appropriate person.              be applied where this may be the case.

24
Code of Good Conduct for Microcredit Provision

Clause 1.20                                               Clause 1.25

Microcredit providers will conduct staff appraisals       Written customer consent is required for use of any
regularly to assess performance, ethical behaviour,       customer information in promotions, marketing
professional conduct and quality of interaction with      material and other publicly disclosed information.
customers.
                                                          This means that such use of customer information
Customer data protection                                  requires the signature of the customer.

Clause 1.21                                               Investor relations

Microcredit providers will have a written privacy         Clause 1.26
policy governing the gathering, processing, use and
distribution of customer data.                            Microcredit providers have the responsibility not to
                                                          mislead investors.
Clause 1.22
                                                          For example, they cannot say that financial promotions
Microcredit providers will ensure they have systems       are subject to regulation by a statutory agency if this
(including IT) in place to protect the confidentiality,   is not the case.
security, accuracy and integrity of customers’ personal
and financial information.                                Clause 1.27

This may include password protection or encryption        Microcredit providers will give relevant information
of customer databases.                                    enabling investors to make informed decisions.

Clause 1.23                                               The extent and nature of risk must be made explicit, and
                                                          clear and transparent accounts and reports in accordance
Staff will be trained to protect the confidentiality,     with the reporting standards laid out in the Code of Good
security, accuracy and integrity of customers’ personal   Conduct will be made available. Microcredit providers
and financial information.                                will make it clear that any investment in the institution
                                                          is risk capital and not equivalent to deposits.
This will include explaining the rights of customers,
and the processes and procedures in place in the          Clause 1.28
provider to protect customer data. It should be
included in the training programme of the provider.       Microcredit providers will endeavour to target prospective
                                                          investors equipped to understand risk (or have access to
Clause 1.24                                               external, professional advice related to investments).

Customers will be informed about how their                Microcredit providers offering fixed, low-cost shares
information will be used and about their right to         as a form of membership, such as credit unions, are
withdraw their permission for this use.                   exempt from this clause.

This should include explaining how the data will          Clause 1.29
be used and presented, and that the customer can
withdraw their permission for the particular use.         Microcredit providers should take the necessary steps to
This should be explained to a customer before the         verify investors’ identity to prevent money laundering.
customer is requested to submit the information in
question.                                                 For individuals investing, this is done by acquiring their
                                                          name, photo identification, and place of residence
                                                          and birth. For companies, one would have to check
                                                          company register details and details of their directors.

                                                                                                                       25
Code of Good Conduct for Microcredit Provision

2 – Governance

                                                        27
2 – Governance

     Introduction
                                                               Clause 2.3
     According to the Handbook for the Analysis of the
     Governance of Microfinance Institutions, governance       The business plan will, at a minimum, cover the
     “encompasses all the mechanisms by which                  following aspects of the business :
     stakeholders... define and pursue the institution’s
     mission... and ensure its sustainability by adapting      This clause has been identified as a priority clause
     to the environment, preventing and overcoming             because without these elements a business plan
     crises.” Strong and accountable governance structures     may not offer sufficient guidance for the direction
     are of great importance in microcredit institutions,      of the organisation.
     as they ensure that providers are driven by clearly
     setting out road maps and that they do not deviate        Clause 2.3.1: Its mission, goals and objectives
     from this course. This is particularly important for
     preventing mission drift. This section covers business    Clause 2.3.3 : Customer and product mix,
     planning, the role and responsibilities of the board      including piloting and rolling out any new
     and management, and external audits.                      products and reaching out to new customer
                                                               groups
     Development of a business plan
                                                               Clause 2.3.4 : Delivery model, including current
                                                               and future staffing requirements, delivery
      Clause 2.1                                               partners

      The microcredit provider will produce a business         Clause 2.3.5: Legal and institutional form,
      plan that is reviewed on a regular basis, at least       including any proposed changes to the legal
      once a year, and updated if necessary.                   and institutional structure of the institution

      This clause has been identified as a priority clause     Clause 2.3.6 : Detailed budget and forecasting,
      because a business plan may serve as a road map          including income, expenditure, bad debt
      that sets the direction of the organisation and          provisioning, cash flow and balance
      guides its policies and strategies. The components
      of the business plan are set out in Clause 2.3.          Clause 2.3.7 : Funding, including revenue and
                                                               capital funding
     Clause 2.2
                                                               Clause 2.3.8 : Identification of key risks and how
     The business plan will cover a minimum of a 3-5 year      these will be managed
     period.

                                                              Clause 2.4

                                                              Microcredit providers will commit to measure, disclose
                                                              and improve their financial and social performance.

                                                              Microcredit providers will measure and disclose the
                                                              financial and social performance indicators stipulated
                                                              in ‘Reporting Standards’ in the Code of Good Conduct.

28
Code of Good Conduct for Microcredit Provision

Clause 2.5                                               Clause 2.9

Microcredit providers will use management control        The audit or supervisory committee will meet with
and performance tools in business planning.              external auditors on an annual basis.

This will, at a minimum, include budgeting and           Minutes for the meetings should be recorded and
variance analysis (i.e. calculating difference between   kept for reference. While management may be
budgeted and targeted expenditure and revenue – see      present at the meetings with the auditors, the audit
glossary). The use of such tools should be evident in    or supervisory committee will have the right to meet
the business plan.                                       without the management team if necessary.

Board                                                    Clause 2.10

Independence of board                                    The audit or supervisory committee will have expertise
                                                         in financial analysis and accounting.

 Clause 2.6                                              Clause 2.11

 All microcredit providers will have a board of          The board of large microcredit providers will have
 directors or equivalent body.                           a minimum of seven board members. Small and
                                                         medium microcredit providers will have a minimum
 This clause has been identified as a priority clause    of five board members.
 because having a board is an essential part of
 ensuring the sustainability of the provider and         In its Consensus Statement on corporate governance,
 that it is fulfilling its corporate mission.            the Council of Microfinance Equity Funds suggests that
                                                         seven to nine members are ideal and common. Fewer
 The board or equivalent body should have a known        than seven is not advisable, as the quorum becomes
 membership and a chairperson, have regular              small, especially if a representative of management
 meetings covered by written minutes and comply          is on the board.
 with the clauses set out in the Code.

                                                          Clause 2.12
Clause 2.7
                                                          The majority of board members will be
The board will have an audit or supervisory committee.    independent.

The committee should have a membership named              This means that the majority of a board should not
by the board and have regular meetings covered by         be composed of any combination of management,
written minutes.                                          staff, customers or their immediate family.

Clause 2.8                                                This clause has been identified as a priority clause
                                                          because having an independent board is crucial to
The audit or supervisory committee will be                ensuring effective oversight of and the provision
independent of management.                                of guidance to management on strategic issues.

Representatives from management should be kept to         This clause does not apply to cooperatives in
a minimum and constitute only a minority of members       which the board is constituted by customers who
of the audit or supervisory committee.                    are cooperative shareholders. Cooperative and
                                                          mutual providers should strive to ensure that any
                                                          combination of management, staff or immediate
                                                          family does not make up the majority of the board.

                                                                                                                    29
2 – Governance

     Clause 2.13                                               Clause 2.17

     The selection of chairperson and board members and        The board on a regular basis reviews whether a
     any remuneration they receive will be decided by the      microcredit provider is fulfilling its mission and
     General Assembly, the Annual General Meeting or the       business plan.
     highest body within the organisation.
                                                               This should be discussed at board meetings on at
     The election of the chairperson and board members         least an annual basis. The discussion should include
     should be included in the minutes of the General          whether the institution is reaching its target group
     Assembly or the Annual General Meeting.                   and achieving its financial performance.

     Clause 2.14                                               Clause 2.18

     The effectiveness of the board will be reviewed           The board monitors financial indicators on a regular
     periodically by the General Assembly or the Annual        basis.
     General Meeting or equivalent body.
                                                               As a minimum this will happen on a quarterly basis.
     The performance and effectiveness of the board
     should be raised as a specific agenda item, and the       Influence of board on microcredit
     discussion should be covered in the minutes of the        provider
     General Assembly or the Annual General Meeting or
     equivalent body.                                          Clause 2.19

     Responsibilities of board                                 The board will be represented on the interview panel
                                                               when hiring a new chief executive. It will also decide
     Clause 2.15                                               if her/his contract should be renewed.

     The board will supervise the performance of the           These rules should be enshrined in the governance
     executive management.                                     documents and any HR manuals of the institution.

     The performance of the senior management should           Clause 2.20
     be raised as a specific agenda item during at least one
     board meeting annually. This will include discussing      The board has the right to veto the appointments of
     the performance of executive management in                executive management.
     key management functions, such as planning,
     organisation, and implementation of plans, human          This should be enshrined in the governance
     resources, leadership and direction, and control and      documents and any HR manuals of the institution.
     monitoring.                                               This refers to the Chief Executive Officer, Managing
                                                               Director, Financial Director or the two most senior
     Clause 2.16                                               posts in the organisation.

     The board or equivalent body as defined by national       Clause 2.21
     legislation is accountable for the compliance of
     the microcredit provider with relevant laws and           The board decides the level of remuneration for the
     regulations.                                              executive management posts.

     The board will ensure compliance in liaison with the      This should be enshrined in the governance
     person responsible for the internal audit function.       documents and any HR manuals of the institution.

30
Code of Good Conduct for Microcredit Provision

Clause 2.22                                                  This will, for example, include people with unspent
                                                             convictions. The exclusions should be clearly set out
The board has to approve and has the right to veto           in any governance documentation.
any significant changes in pricing policies.
                                                             Clause 2.27
Pricing policy does not refer to minor adjustments to
interest rates due to changes in base rates, but rather to   All microcredit providers will have rules stipulating
more fundamental changes, such as the introduction           term limits and rotation for board members.
of fees or considerable changes in interest rates.
                                                             These rules should be clearly set out in any governance
Clause 2.23                                                  documentation.

The board members are given monthly or quarterly             Clause 2.28
reporting data regarding portfolio quality, financial
performance and customer data.                               All microcredit providers will have rules requiring
                                                             full disclosure of any conflicts of interest of board
It is important that customer data refers to global          members.
rather than individual customer data.
                                                             Any conflicts of interest should be disclosed in the
Clause 2.24                                                  annual report or other documents available to the
                                                             public or, at least, to investors and members.
All members will develop working capacity for financial
statement analysis and understanding of banking.             Clause 2.29

Financial statement analysis refers to the process of        All microcredit providers’ boards will have members with
identifying the financial strengths and weaknesses           qualifications or equivalent experience in the following
of the organisation by establishing relationships            fields: finance, business, management and law.
between items in the balance sheet and profit and loss
account. In small and medium microcredit providers,          Clause 2.30
the finance of the organisation must be explained to
board members.                                               The board, at the Annual General Meeting, in
                                                             accordance with national legislation, are entitled to
Clause 2.25                                                  remove board members not attending a set number
                                                             of consecutive meetings without presenting a valid
All members will develop an understanding of credit          reason.
risk in the provision of microcredit.
                                                             This should be clearly set out in any governance
This will include how microcredit providers monitor          documentation.
and control credit risk, and how to respond to credit
risk problems.                                               Board practical work organisation

Selection and representation of board                        Clause 2.31
members
                                                             The board will meet a minimum of four times a year.
Clause 2.26
                                                             The meetings should be covered by minutes made
Improper persons are excluded from becoming board            available to stakeholders.
members in accordance with national legislation.

                                                                                                                        31
2 – Governance

     Clause 2.32                                               Clause 2.36

     The microcredit provider will have rules on quorums,      Microcredit providers will have clear personnel policies
     which must ensure that there is never a majority of       set out in written personnel manuals.
     staff or management at board meetings.
                                                               This will cover promotions, disciplinary procedures
     This means that the majority of a board should never      and salary policy. For small microcredit providers,
     be composed of any combination of management,             an explicit policy well known by all relevant staff
     staff or customers for valid transactions. These          members is sufficient.
     rules should be clearly set out in any governance
     documentation.                                            Clause 2.37

     Clause 2.33                                               Microcredit providers will have a formal training and
                                                               induction programme.
     Microcredit providers will disclose the proportion of
     related-party (insider) lending in its annual report.     For small microcredit providers, an informal training
                                                               and induction programme may be sufficient.
     Related-party (insider) lending refers to board
     members, staff or immediate family receiving loans        Operational manuals
     or investment from microcredit providers.
                                                               Clause 2.38
     Management
                                                               Microcredit providers will have operational manuals
     Management expertise and human                            detailing financial operations and management.
     resource management
                                                               This will cover aspects such as budget controls,
     Clause 2.34                                               producing accurate financial statements, credit
                                                               applications, approvals and refinancing, portfolio
     Executive managers of microcredit providers will be       quality review and provisioning. For small microcredit
     qualified to undertake key management functions.          providers, an explicit policy well known by all relevant
                                                               staff members is sufficient.
     This will include planning, organisation, and
     implementation of plans, human resources, leadership      Clause 2.39
     and direction, and control and monitoring. This will be
     addressed by the board as per Clause 2.15.                Microcredit providers must have operational manuals
                                                               detailing procedures for treasury.
     Clause 2.35
                                                               This will cover aspects such as how cash is handled,
     Microcredit providers will have a succession plan for     accounting, investments, funding and liquidity
     executive management.                                     management.

     Microcredit providers will plan for the planned (e.g.
     retirement) and unplanned departure of their chief
     executive. This should be an explicit if not written
     plan known by the board and may include potential
     candidates, training of potential in-house candidates
     and temporary arrangements.

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Code of Good Conduct for Microcredit Provision

External audit

 Clause 2.40

 Microcredit providers will be audited by an
 external auditor on an annual basis.

 This clause has been identified as a priority
 clause because having external audits is one of
 the principal means of assuring the accuracy and
 meaningfulness of financial reports.

Clause 2.41

The auditor will have the appropriate qualifications,
accreditations and experience in accordance with
national or international accounting standards.

Clause 2.42

The external audit will adhere to national or
international accounting standards.

Clause 2.43

The external audit will be accompanied by a letter
from the auditor.

The letter must contain an opinion paragraph which
renders one of the following types of opinion :
unqualified opinion, unqualified opinion with an
emphasis of matter, qualified opinion, disclaimer of
opinion, or adverse opinion.

Clause 2.44

If the letter is qualified, then the microcredit provider
will address the issues raised in the letter with
appropriate action.

The actions taken or proposed to address the issues in
the letter should be made explicit to the board and, if
appropriate, addressed in the business plan.

                                                                                                             33
Code of Good Conduct for Microcredit Provision

    3 – Risk
Management

                                                      35
3 – Risk Management

     Introduction
                                                                 Clause 3.2
     Microcredit providers face numerous risks that
     threaten their financial and institutional viability        A senior member of the executive management
     and long-term development. Their portfolio may              will be accountable for risk management within
     suffer sudden rises in loan delinquency and arrears.        the institution.
     Providers may be subject to fraudulent loans made
     by their loan officers. Therefore, it is imperative that    This clause has been identified as a priority
     providers have robust systems and procedures for            clause because management sets the tone for
     identifying, assessing and prioritising risks, internal     the approach to risk and internal control in the
     controls for preventing or detecting undesirable            organisation.
     outcomes (e.g. credit committees), and an internal
     audit function for uncovering breaches of internal          It is important that the staff members responsible
     controls and fraudulent behaviour. This section of the      are not operational staff, such as loan officers and
     Code sets out common standards for the management           administrative staff. Instead, it should preferably be
     of credit, fraud and security risk and for the internal     the Chief Financial Officer. In larger organisations,
     audit function.                                             the person given overall responsibility for risk
                                                                 management should not be involved in operational
     Risk management framework                                   activities, but should instead be dedicated to risk
                                                                 management.

      Clause 3.1
                                                                Clause 3.3
      Microcredit providers will have formalised and
      explicit processes and procedures in place to             Microcredit providers will have a clear and explicit
      identify, to assess and to prioritise risks.              assignment of responsibility for the implementation
                                                                of risk controls and ensuring that they are respected.
      This clause has been identified as a priority clause
      because these processes and procedures are                Risk controls are ex-ante mechanisms built into the
      essential in reducing the likelihood that a loss          organisational design, procedures and daily operations
      occurs and minimise the magnitude of the loss             to ensure acceptable levels of risk.
      should it occur.
                                                                Typical risk controls include policies requiring dual
      These processes should ensure that risks are              signatures on loans to reduce credit risk and risk of
      examined and assessed regularly (frequency                fraudulent lending, and safes, vaults or security guards
      depending on priority assigned to the risk in             to protect cash and other assets. The responsibility for
      question). This may involve having regular                the implementation of new risk controls and ensuring
      management meetings to discuss risks using a              that these are respected should be assigned to a
      risk matrix or register.                                  specific staff member or post. The provider may decide
                                                                to make different staff members and posts responsible
      A risk matrix or register identifies risks, determines    for different risk controls. It is important that the staff
      the likelihood and the severity of the risks (e.g. low,   members responsible are not operational staff, such
      moderate or high), and produces an aggregate risk         as loan officers and administrative staff.
      profile combining the measures (likelihood and
      severity).                                                Clause 3.4

      It may also incorporate the quality of existing risk      Microcredit providers will have a clear and explicit
      management in terms of controlling the risk (e.g.         assignment of responsibility for monitoring and
      strong, acceptable or weak) and the trend of the          ensuring appropriate senior management receive the
      risks (e.g. stable, increasing or decreasing).            information necessary to conduct their tasks.

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