Consumers’ Protection in Microfinance Institutions in North Shewa Zone of the Amhara National Regional State: The Law and the Practice

Abstract

Microfinance institutions (hereinafter MFIs) provide financial services to the poor. Consumers need protection from the malpractice of MFIs. The major problems in consumer protection in MFIs are unfair contractual terms, fees, and charges; unsafe debt collection practices; limitation of disclosure and awareness; unfair credit-related practices; unauthorized transactions; and erroneous interest rate calculation. The objective of the study is to appraise the law and practice of consumer protection in MFIs in Amhara National Regional State (hereinafter ANRS), with a particular reference to the North Shewa zone. To accomplish the study, mixed research methods are utilized. Both primary and secondary sources of data are used as data collection instruments. The study's major findings include: unfair contractual terms, fees, and charges; limitations on consumer supervision once they obtain loans; unsafe debt collection practices; deficiency of disclosure and awareness; weak enforcement of the CRB; use of any asset to recover debt; improper interest rate calculation; and limited MFI networking. The study found a gap in the implementation of consumer protection laws in MFIs. Besides, the existing laws have gaps and are inadequate to protect consumers in MFIs. It is concluded that unfair contractual terms, fees, and charges; unfair debt collection practices; limited supervision of consumers by MFIs; erroneous interest rate calculation; and violating key principles of MFI consumer protection lead to over-indebtedness of MFI consumers. It is recommended that consumer protection in MFIs be improved by revising adhesion contracts that include unfair contractual terms, fees, and charges; networking of MFIs; revising MFI consumer protection laws; strengthening the performance of the CRB; implementing proper regulation of MFIs' debt collection system; frequent supervision of MFI consumers; and designing MFIs' consumer protection education in a curriculum. To protect consumers in MFIs, the NBE should monitor and supervise the protection of MFIs‘ consumers not only through a report system, but also through a surprise inspection of institutions, and take corrective action through proper regulation. It is also suggested that the issuance of a comprehensive over-indebtedness directive, a separate consumer protection MFI directive, and revision of the MFI proclamation to incorporate the formation of an independent judge and tribunal to settle grievances of MFI consumers would enable the protection of consumers. Concisely, the implementation gaps in consumer protection in MFIs can be solved by implementing the existing laws, and redrafting laws that have a gap can solve the legal gaps.