Integrating the Practice of Client Protection Principles in MFIs of Nepal

June 15, 2020

In the last three decades, Microfinance Institutions (MFIs) have been providing financial services in rural areas of Nepal. As of mid-Jan 2020, 87 MFIs are serving more than 4.5 million clients — most of them are low-income households and small businesses.

Nepal Rastra Bank (NRB), the central bank of Nepal, has issued a set of regulations for MFIs keeping clients protection into consideration. For instance, NRB has defined the spread rate to limit interest charges of MFIs to its clients, the ceiling of the maximum amount a client can borrow and the requirement for MFIs to share client’s credit information to Credit Information Bureau (CIB) and also use CIB data before deciding to lend any client, among others. NRB has also regulated that every MFI creates a Client Protection Fund from its annual profits. In addition, Nepal Microfinance Bankers Association (NMBA), an apex institution of MFIs in Nepal, has also introduced a code of conduct to ensure MFIs practice good ethics while providing services to the customers.

However, the effective implementation of the regulations and code of conduct are not visible in the field. In recent times, the number of MFIs have increased with multiple MFIs operating in the same areas. This has given rise to instances of multiple borrowing by many people of such locations. Despite MFIs’ contribution towards deepening financial inclusion in Nepal, there have been questions regarding the higher interest charged by MFIs.

Sakchyam Support in Implementing CPPs

UKaid Sakchyam Access to Finance programme has been working towards enhancing financial inclusion in the remote/rural areas through capacity building interventions for MFIs. The programme has also been promoting financial literacy to help the rural population make informed decisions while availing financial services.

To further these objectives on both demand and supply sides, the programme also initiated dialogue with the MFI industry to focus on client protection. After rounds of discussions with MFIs, Sakchyam and a few MFIs came to the decision to adopt Client Protection Principles (CPPs) developed by the Smart Campaign and receive the internationally recognised Smart Certification. Smart Campaign

Developed by the Smart Campaign, the CPPs are the minimum standards that clients should expect to receive while availing financial services from Financial Institutions (FIs). Its adoption ensures that the MFIs serve the clients following the globally accepted practices for transparent financial services and respectful treatment of the clients. Smart Certification is awarded to those MFIs that fulfil the minimum criteria.

The three areas Smart Certification could help MFIs in Nepal are:

1) CPPs offer broader ranges of client protection practices which may not have been covered by the regulation,

2) Smart Certification gives a global accreditation that MFIs are adhering CPPs,

3) Once a few MFIs receive the Smart Certification, it will create a ripple effect in the industry to adopt CPPs

Sakchyam had organized a three-day workshop in December 2016 to orient the MFIs on CPPs and Smart Certification. Among the 12 participating MFIs, four have started the certification process with Sakchyam support. The financial institutions that are undergoing the process are Chhimek Laghubitta Bittiya Sanstha, Unique Nepal Laghubitta Bittiya Sanstha, Kisan Bahuudyasiya Sahakari Sanstha Limited and Sahara Nepal Saving and Cooperative Society Limited.*

“We believe that CPPs will set a benchmark in the Nepali MFI sector as it uses a client-centric approach in the operational aspects. Conducting our operations keeping with such international standard will enrich the credibility and sustainability of any MFI’s business,” shared Kishwor Karki, Programme Officer, Sahara Nepal. While Dr Gopal Dahit, CEO of another partner MFI, Unique Nepal stated that adoption of client protection will help strengthen the relations between clients and CPPs

For the certification, MFIs need to assess their existing client protection practices using an assessment tool – called Smart Assessment Tool. Based on the assessment, MFIs need to review existing policies and practices. Usually, MFIs sought the help of a Technical Assistance (TA) provider for the preparation process. The TA provider supports the organisation in assessing whether the existing policies and practices adhere to the CPPs. They also help modify current policies, develop new policies, product papers, plans, manuals, tools and other documents as needed. Guiding the organisation in the implementation of the revised policies also falls under the scope TA.

Talking about his experience Karki, said, “While conducting the review, we figured out lapses and gaps in our policies and procedures. As per the policy requirements, we need to adopt various structural changes in our organisation, which simultaneously determines its functional needs.”

MFIs undergoing the certification process have shared that revision of the policy for certification has given them an opportunity to review the entire policies of the organization. It has helped them set up a mechanism to better understand the need of the customers, through client satisfaction survey, exit survey, gap analysis and the identification of areas for improvement.

Dr Dahit informed that along with documenting the revised policies, staff of Unique Nepal also went through orientation training to better understand and implement the policies. He added, “The CPPs calls for the staff to be more accountable and responsible for client service”.

In Nepal, Good Return, an Australian NGO, is providing technical assistance to the four MFIs. Of the four, Unique and Chhimek have already completed the self-assessment and policy revision processes while Kisan is carrying out self-assessment. At the same time, after completing policy revision Sahara is at the implementation phase.

“The Smart Certification will be a global recognition to the Nepali MFIs once they get certified. The unprecedented challenges created by COVID-19 pandemic has put our clients at high risk as most of them are a low-income group or are associated with the informal economy. Keeping clients as the utmost priority, Smart Certification encourages financial institutions to be responsible while doing business with clients. The aim is to mitigate risks like fraud, over-indebtedness, and debt stress for the most vulnerable clients,” shared Mimu Raghubanshi, Nepal Program Coordinator, Good Return.

In the present situation of high competition, the adoption of CPPs and Smart Certification is important for MFIs to provide better service and create loyal customers. Given the increasing instances of multiple borrowing and over-indebtedness, MFIs must take necessary actions to mitigate such issues and the certification can be a useful tool.


As of May 2021, all four partner MFIs — Chhimek Laghubitta Bittiya Sanstha, Unique Nepal Laghubitta Bittiya Sanstha, Kisan Bahuudyasiya Sahakari Sanstha Limited and Sahara Nepal Saving and Cooperative Society Limited — have received the Smart Certification accreditiation. 

Text by Amrit Singh Karki