European Code of Good Conduct for Microcredit Provision - EN
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European Code
of Good Conduct
for Microcredit
Provision
Version 1.0Source 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
4Code 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
5Table 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
6Code 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
7Code of Good Conduct for Microcredit Provision
About the Code of
Good Conduct
9About 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.
10Code 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.
11About 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
12Code 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
13About 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
14Code 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
15About 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
16Code 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
17About 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
18Code 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
19Code of Good Conduct for Microcredit Provision
1 – Customer and
Investor Relations
211 – 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.
22Code 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.
231 – 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.
24Code 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.
25Code of Good Conduct for Microcredit Provision
2 – Governance
272 – 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.
28Code 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.
292 – 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.
30Code 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.
312 – 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.
32Code 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.
33Code of Good Conduct for Microcredit Provision
3 – Risk
Management
353 – 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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