Good Practices: Banking Sector

Recommendation	No recommendation.
SECTION B	DISCLOSURE AND SALES PRACTICES
Good Practice B.1	Information on Customers When making a recommendation to a consumer, a non-bank credit institution should request sufficient information from the consumer to enable the institution to render an appropriate product or service to that consumer. If the consumer takes up a product or service, such information should be recorded and filed. The extent of information the non-bank credit institution gathers regarding a consumer should: be commensurate with the nature and complexity of the product or service either being proposed to or sought by the consumer; and enable the institution to provide a professional service to the consumer in accordance with that consumer’s capacity.
Description	a, b. The existing legal framework in Tajikistan does not include provisions related to this good practice applicable to MFOs. The Microfinance Law only mentions that MLOs and MDOs may issue microloans in accordance with their internal lending policies. Instruction 137 on the “Order regulating the activities of microloan funds” only mentions that MLFs may provide microloans to businesses and individuals (Art. 19). In 2011 the NBT issued Instruction 186 on “Procedures on issuance of credit and accrual of interest at credit organizations”. Chapter 4 includes information to be gathered from consumers before granting a credit (e.g. information on the borrower and the sector of the economy that the credit resources are expected to be used for; credit history of the borrower; conversation with borrower to determine competency, professional and psychological preparedness; credit request, financial reports, cash flow forecasts, business plan, list of properties with their value or any other information that can help assess the borrower’s financial position). However, this Instruction is currently not applicable to MFOs.
Recommendation	The NBT should incorporate this good practice in the existing legislative framework, for example in the Microfinance Law or in the instructions regulating the activities of MLOs, MDOs and MLFs. For example, the NBT should make the provisions of Instruction 186 on borrower’s information also applicable to MFOs. The NBT should complement these provisions with requirements for MFOs to request sufficient information from a borrower when evaluating the renewal, increase or restructuring of a credit. More generally, the NBT should require all MFOs to request sufficient customer information before recommending any type of product or service (e.g., savings products by MDOs), commensurate with the nature and complexity of such product or service. The NBT should also require that all information gathered by MFOs is properly recorded and filed once the product or service is provided to the customer.
Good Practice B.2	Affordability When a non-bank credit institution makes a recommendation regarding a product or service to a consumer, the product or service it offers to that consumer should be in line with the need of the consumer. Sufficient information on the product or service should be provided to the consumer to enable him or her to select the most suitable and affordable product or service. When a non-bank credit institution offers a new credit product or service that significantly increases the amount of debt assumed by the consumer, the consumer’s credit worthiness should be properly assessed.
Description	a. There is no specific legal or regulatory requirement for MFOs to take into account a client’s needs when offering him or her a financial product or service. At a more general level, the Law on Consumer Protection (Article 6) states that, if the seller of a product or service (e.g., a MFO) has been informed by its customer of the goals for the acquired product or service (e.g., a loan or a deposit), then the seller is obliged to provide a product or service that is suitable for such purposes. b. Instructions 136 and 137 require MLOs and MLFs, respectively, to display in their premises information on interest rates and other conditions of the microloans they offer, following the format included in such instructions. The format includes information on average and maximum loan terms, late fees, as well as average interest rates for unsecured, secured, domestic currency and foreign currency loans. However, Instructions 136 and 137 require MFOs only to have these formats on display and available for consumers, but not to give individual consumers information on different financial products that would allow them to choose the most suitable and affordable option. Instruction 186 (currently not applicable to MFOs) indicates that, prior to the signing of a credit agreement, a customer must be provided with written information about all types of credit provided, terms of lending, terms of repayment, total amount of credit, and acceptable types of collateral. However, the Instruction does not require that this information be provided to a client early enough to allow him or her to evaluate different alternatives. At a more general level, the Law on Consumer Protection (Article 9) mentions that the consumer has the right to demand, and the seller the obligation to provide in due time, all necessary and reliable information about the products or services being offered, to give the customer the opportunity to make the right choice. c. There is no requirement of affordability assessments in the existing legal or regulatory framework for MFOs. The Law on Credit History provides the basic legal framework for the set up of, collection of information from, and provision of information to, credit bureaus in Tajikistan, which would facilitate affordability assessments by MFOs. For example, the Law requires all credit providers to get permission from the borrower for the disclosure of credit information to the credit history bureau, as well as to provide exact borrower’s information to the credit history bureau. The Law also states that all credit providers “are obliged to provide information foreseen by this law only to the credit history bureau”. In terms of actual requirements for financial institutions to use the credit bureau in their process of granting credits, Instruction 186 does include such requirement, but it is not applicable to MFOs. In any case, there is no credit bureau yet operating in Tajikistan. AMFOT promoted exchange of information of borrowers’ credit exposure among MFOs, and members could access such database after signing an agreement with AMFOT. A few MFOs that are concerned on multiple borrowing by their existing or potential clients routinely exchange information of borrowers, on a voluntary basis, to avoid having consumers with parallel loans. Although it is good that the industry has tried to come up with solutions to overcome the lack of credit history information in Tajikistan, these initiatives have several weaknesses, such as lack of information of the total exposure of a borrower in the financial sector, not clear procedures on how to correct wrong data, and absence of confidentiality and privacy rules for their users. Also, the voluntary nature of this data exchange greatly limits its effectiveness. This situation highlights the need to have an operative credit history bureau system in Tajikistan. The Mission learned that some MFOs are transferring foreign exchange risk to borrowers, by issuing them credits denominated in foreign currency (with lower rates than domestic-currency loans), but requiring that all transactions be made in domestic currency, i.e. disbursing and requiring borrowers to pay back principal and interests in the equivalent amount in Somonis, based on the foreign exchange rate of the NBT. Borrowers would have difficulties to know the exact amount due by the payment date.
Recommendation	The NBT should incorporate the requirements of suitability and affordability assessments in the existing legislative framework, for example in the Microfinance Law or in instructions applicable to MLOs, MDOs and MLFs. The NBT should also require that all MFOs provide consumers with sufficient information of financial products or services early enough in the selling process, for consumers to be able to choose the most suitable option to their needs. This information should be simple, easy to read, concise and clear, for example in the form of a key facts statement (as described in Good Practice B.5). There is urgent need to establish a credit history system to have an official mechanism to exchange credit information of borrowers and facilitate the conduction of affordability assessments of microfinance customers. In addition, the NBT should closely monitor the practices of issuing ‘indexed’ loans that transfer foreign currency risk to low-income borrowers, whether this type of loan is requested by consumers, their risks properly explained to them and understood by them, and the difficulties they may be facing during the life of the contract.
Good Practice B.3	Cooling-off Period Unless explicitly waived by the consumer in writing, a non-bank credit institution should provide the consumer a cooling-off period of a reasonable number of days immediately following the signing of an agreement between the institution and the consumer. On his or her written notice to the non-bank credit institution during the cooling- off period, the consumer should be permitted to cancel or treat the agreement as null and void without penalty to the consumer of any kind.
Description	a, b. There is no cooling-off period provision in the legal or regulatory framework for MFOs in Tajikistan. The Civil Code in a way incorporates the spirit of the cooling-off period, by establishing that “the borrower shall have the right to refuse to receive credit in whole or in part” (Article 840), as long as the borrower notifies the creditor of the refusal “before the time established by the contract for granting of the credit.” Therefore there is no definition of time periods after the agreement is signed, or the inapplicability of penalty against the borrower. Furthermore, there is no requirement for MFOs to give a copy of the financial contract to the consumer once it is signed. The Mission learned that MFOs might only give the payment schedule to their clients, but not a copy of the actual contract after the consumer signed the original. Also, it is not common industry practice to let the consumer take a copy of the contract home to read it or share it with relatives or friends before signing it. It is worth noting, however, that some MFOs do provide short cooling-off periods as part of their own business practices rules.
Recommendation	The NBT should require MFOs to provide consumers with a cooling-off period that is reasonable, taking into account the term of the product (e.g. 5 days for 1-month credits). In the case of credit products, MFOs should not disburse funds during the cooling-off period. If a MFO offers short-term quick loans, special rules may need to apply restricting cancelation to customers who return any disbursed funds simultaneously with the written cancelation notice. The NBT should also require that MFOs give one free copy of the signed contract to the borrower.
Good Practice B.4	Bundling and Tying Clauses As much as possible, non-bank credit institutions should avoid the use of tying clauses in contracts that restrict the choice of consumers. In particular, whenever a borrower is required by a non-bank credit institution to purchase any product, including an insurance policy, as a pre-condition for receiving a loan, the borrower should be free to choose the provider of the product and this information should be made known to the borrower. Also, whenever a non-bank credit institution contracts with a merchant as a distribution channel for its credit contracts, no exclusionary dealings should be permitted.
Description	a. Tying refers to the sale of two or more products or services together as a single product and refusal of the seller to separate the products and sell each of them separately (or allow the buyer to buy one of them from another seller). Bundling refers to the sale of two or more products or services together as a package when the products can also be purchased separately. Bundling and tying practices are not common in Tajikistan. MFOs do not yet require or offer insurance when issuing a credit. The variety of products offered by MFOs to consumers is limited, so there is little packaging of multiple products and services or discounts on additional services. At least one MDO has recently thought of offering bundles of products to clients (e.g., remittances and savings accounts, savings accounts and loans), with discounts or better conditions for the products included in the bundle compared to the products offered separately. b. The microfinance legal framework has not contemplated bundling or tying practices yet either. At a more general level, the Law on Competition in its Article 4 (Abuse of market) prohibits the practice of tying unrelated products and/or services.
Recommendation	Even though tying practices are not common in Tajikistan, it would be useful already to prohibit MFOs from requiring obligatory purchase of additional services from the MFO itself as a condition to the issuance of a financial product or service. This provision would be similar to the existing article 55(99) of the Law on Banking Activity. Also the NBT should monitor tying and bundling practices undertaken by MFOs, and evaluate the need to issue more detailed instructions if necessary. Several countries have witnessed increasing consumer problems raising from widespread tying and bundling practices, for example, requiring a client to purchase a life insurance policy from a specific insurer (or from an insurer included in a list of preferred insurers) before obtaining any consumer credit, or requiring a client to purchase a new policy before getting a new loan with the same institution even though the existing policy would still be valid for some more months. It is important that the NBT and the insurance regulator maintain a close dialogue regarding this issue and jointly monitor the development of such type of practices.
Good Practice B.5		Key Facts Statement Non-bank credit institutions should have a Key Facts Statement for each type of account, loan or other products or services. The Key Facts Statement should be written in plain language, summarizing in a page or two the key terms and conditions of the specific financial product or service, and allowing consumers the possibility of easily comparing products offered by different institutions.
Description		a, b. The Microfinance Law allows for the implementation of a requirement to present a key facts statement in the future. Article 15 states that the NBT may require MFOs to submit “information in a standard format on their interest rates and commission fees to allow clients and prospective clients to compare the cost of borrowing.” As a good first step, the NBT issued Instructions 136 and 137 regulating the activities of MLOs and MLFs, respectively, requiring such organizations to disclose “information on interest rates and other conditions of service regarding microloans”, by placing a specific format in the premises of the MFOs, in a place accessible to consumers. The format includes information on the average and maximum term of microloans; the average and maximum size of microloans; the interest rates for unsecured, secured, domestic currency and foreign currency loans; and the fine to be charged in the event of failure or inadequate performance. It also explains how the interest rates are calculated, and indicates that interest rates are annual and accrued on the unpaid balance of the loan.
Recommendation		In addition to the average information required to be disclosed by MFOs in the format “information on interest rates and other conditions of service regarding microloans”, the NBT should require the disclosure of standardized “key facts statements” that summarize in plain language the key terms and conditions of specific contract agreements and that allow comparison of offers by different providers. To ensure comparability, the standardized 1-2 page key facts statements should be consistent for all types of institutions that provide the same financial product (e.g. agricultural loans by banks, MLFs, MLOs, MDOs; savings offered by banks and MDOs). The key facts statements could be progressively developed for basic loans by the NBT, in close collaboration with the microfinance and banking industry associations. It would also be helpful to undertake consumer testing of key facts statements in order to make sure that their content is easily understood by consumers and that the format covers all key information needed by them. The key facts statement for a consumer credit should include: (1) the total amount of the credit; (2) the amounts of monthly payments; (3) the final maturity of the credit; (4) the total amount of payments to be made; (5) all fees, including prepayment and overdue penalty fees, taxes, and any other charges that could be incurred; (6) if the loan is indexed in foreign currency, a clear indication of the exchange rate to be used to calculate disbursements and repayments; (8) any collateral that is required to maintain the credit; (10) if the credit is used to finance a product, the cash price of the product without financing charges; (11) warnings on key risks assumed by the consumer, such as foreign currency risk, risk of having negative information in the credit bureau, risk of losing a home or other collateral; (12) mechanisms for recourse available to the consumer in the event of a complaint. It is also important that key facts statements be available in the language most spoken in the location where the financial product or service is offered. Key facts statements have been developed in the EU, USA, Peru, South Africa, Ghana, Australia, Mexico, among other countries.
Good Practice B.6	Advertising and Sales Materials Non-bank credit institutions should ensure that their advertising and sales materials and procedures do not mislead customers. All advertising and sales materials should be easily readable and understandable by the general public. Non-bank credit institutions should be legally responsible for all statements made in advertising and sales materials (i.e. be subject to the penalties under the law for making any false or misleading statements).
Description	a, b. The Law on Advertising explicitly applies to the financial sector, according to Article 1. This law defines and prohibits unethical, unfair, misleading, false and hidden advertising, and mentions cases that could easily apply to the financial system (e.g., unfair advertising would include practices that take advantage of the consumer’s lack of experience and knowledge or that omit substantial information, while misleading advertising would include practices that contain false information on cost or price). In addition, Article 18 of the law specifically prohibits certain advertising practices in the financial sector, including two that are relevant to the microfinance sector, such as providing information that has no direct relation to the advertised financial service and holding back at least one of the conditions of the financial service contract (which would be impractical to comply with given the length and complexity of the financial services contract). There is no requirement for MFOs to properly disclose information on interest rates and cost of credit in their advertising and marketing materials. Currently, Instructions 136 and 137 define the way that MLOs and MLFs have to calculate their interest rates and disclose this information in their premises, but neither instruction refers to the way the interest rates have to be advertised by MLOs, MLFs and MDOs. c. The Law on Advertising indicates that the advertiser is responsible for any violation of the law, unless it is proved that the violation was made by the producer or the distributor of the advertisement. The advertiser shall be liable for violations related to the design and production of the advertisement (Art. 30).
Recommendation	The NBT should issue regulations dealing with advertising and marketing materials in the microfinance sector (and the banking sector). These regulations could start by applying key concepts included in the Law on Advertising (e.g., unfair, misleading and false advertising) to the particularities of the microfinance sector. The NBT regulations should provide that every time MFOs include any information on interest rates in their advertisements and marketing materials, they must also prominently disclose the effective interest rate (if this is not the advertised interest rate). The NBT should define the interest rate calculation method that all MFOs should use. The NBT should also require that a minimum font size be used to disclose the effective interest rate and any other key information for the consumer. The NBT should coordinate with AMA to ensure that advertising of MFOs is properly monitored, including regarding compliance with requirements on disclosure of interest rate.
Good Practice B.7	General Practices Specific rules on disclosure and sales practices should be included in the non-bank credit institutions’ code of conduct and monitored by the relevant supervisory authority.
Description	In 2011 the NBT issued a regulation on issuance of credit and accrual of interest (Instruction 186), which provides guidance on the minimum information that a credit agreement must contain, as well as the minimum information required to be obtained from, and disclosed to, a consumer before a credit contract is signed. However, this regulation is not applicable to MFOs. Some of those issues were addressed by the NBT’s Instructions 136 and 137 that required MLOs and MLFs, respectively, to display in their premises a format with information on average and maximum loan terms, late fees, and average interest rates for unsecured, secured and domestic and foreign currency loans. However, the Instructions do not include any minimum standards on advertising. There is no similar instruction applicable to MDOs (Instruction 135 focused on prudential requirements, initial capital and management skills of MDOs). Several MFOs currently use different methods of calculation of interest rate (e.g., flat interest instead of declining balance), which makes it hard for consumers to compare offers advertised by different providers and to understand the real cost of credit. AMFOT’s code of ethics deals with the fair treatment of clients by staff of MFOs, along with other ethical values to be followed by staff when dealing with clients. However, there is no mechanism to enforce this code by either AMFOT or the NBT. AMFOT is also starting to promote the endorsement of the Smart Campaign’s client protection principles by its members. These principles include transparency (i.e. provision of clear, sufficient and timely information in a manner and language that is understandable by clients so that they can make informed decisions, particularly information on pricing and terms and conditions of products); prevention of over-indebtedness (i.e. determination of clients’ capacity to repay without becoming overindebted in all phases of the credit process, and implementation and monitoring of internal systems that improve market level credit risk management); fair and respectful treatment of clients (i.e., ensuring safeguards to detect and correct corruption and aggressive or abusive treatment by providers’ staff and agents, particularly during loan sales); and responsible pricing (i.e., setting pricing, terms and conditions that are affordable to clients while allowing for financial institutions to be sustainable).
Recommendation	Following on the recommendation from Good Practice A.2, AMFOT should continue promoting the endorsement and implementation of the Smart Campaign’s client protection principles by all its members, and then work on the development of a code of conduct to be complied with by all its members. The code should take into account the Smart Campaign’s principles, and incorporate guidance on minimum requirements of information from borrowers, and disclosure of information to borrowers. The NBT should also consider making some provisions from Instruction 186 applicable to MFOs, especially related to the minimum contract requirements, disclosure of information to borrowers and gathering of information from borrowers. Also, the NBT should issue regulations on advertising applicable to MFOs, so that if they include any information on interest rates, they also display the effective interest rate, using the calculation defined by the NBT. The NBT should properly monitor compliance with all these regulations.
Good Practice B.8	Disclosure of Financial Situation The relevant supervisory authority should publish annual public reports on the development, health, strength and penetration of the non-bank credit institutions, either as a special report or as part of the disclosure and accountability requirements under the law that governs these. Non-bank credit institutions should be required to disclose their financial information to enable the general public to form an opinion regarding the financial viability of the institution.
Description	a. The NBT publishes statistics on the microfinance sector in their periodic public reports, including information on the size of the portfolio of the three microfinance segments, and prudential information on MDOs. b. All MFOs are required to have an annual audit by external auditors, and to submit their annual reports to the NBT. In addition, the Microfinance Law requires MDOs to publish their audited annual report, including balance sheet and profit and loss statements, in accordance with forms and by the date established by the NBT.
Recommendation	No recommendation.
SECTION C		CUSTOMER ACCOUNT HANDLING AND MAINTENANCE
Good Practice C.1		Statements Unless a non-bank credit institution receives a customer’s prior signed authorization to the contrary, the non-bank credit institution should issue, and provide the customer with, a monthly statement regarding every account the non-bank credit institution operates for the customer. Each such statement should: (i) set out all transactions concerning the account during the period covered by the statement; and (ii) provide details of the interest rate(s) applied to the account during the period covered by the statement. Each credit card statement should set out the minimum payment required and the total interest cost that will accrue, if the cardholder makes only the required minimum payment. Each mortgage or other loan account statement should clearly indicate the amount paid during the period covered by the statement, the total outstanding amount still owing, the allocation of payment to the principal and interest and, if applicable, the up-to-date accrual of taxes paid. A non-bank credit institution should notify a customer of long periods of inactivity of any account of the customer and provide reasonable final notice in writing to the customer if the funds are to be transferred to the government. When a customer signs up for paperless statements, such statements should be in an easy-to-read and readily understandable format.
Description		MFOs do not provide customers with regular statements of accounts. Industry practice is to provide customers with a payments schedule that they would use to keep track of their payments. However customers may pay their monthly installment without presenting their payments schedule and not given any sort of document that informs the customer on how the balance or interest of the credit was reduced. MFOs told the mission that customers are free to ask for information on the status of their loans either in person or through the hotline, and could ask for a new copy of the payments schedule for free at any time.
Recommendation		The NBT should require MFOs to provide simple periodic statements of account to their customers unless the customer waives this right in writing (in a document separate from the standard contract). These statements might not need to be submitted to the client’s mailing address, but at a minimum they should be given or shown to the client when he pays his monthly owed amount in the premises of the MFO.
Good Practice C.2		Notification of Changes in Interest Rates and Non-Interest Charges A customer of a non-bank credit institution should be notified in writing by the non-bank credit institution of any change in: the interest rate to be paid or charged on any account of the customer as soon as possible; and a non-interest charge on any account of the customer a reasonable period in advance of the effective date of the change. If the revised terms are not acceptable to the customer, he or she should have the right to exit the contract without penalty, provided such right is exercised within a reasonable period. The non-bank credit institution should inform the customer of the foregoing right whenever a notice of change under paragraph a. is made by the institution.
Description		a. According to Article 15 of the Microfinance Law, a MFO may not unilaterally change interest rates on microloans, or the commissions, fees and terms of these loan agreements with clients, except as provided in the loan agreement. In practice, this provision could be interpreted in a way that would end up not protecting a consumer. For example, in some cases the loan agreement could indicate that interest rates and other conditions could change upon the decision of the management. In practice, such type of contract clause would allow for unilateral changes of terms of the loan agreement. b, c. At the same time, the Law does not address the customer’s right to exit the contract without penalty if he/she does not agree with the changes in the contract terms.
Recommendation		The NBT should modify Article 15 of the Microfinance Law to incorporate the provisions indicated in this Good Practice.
Good Practice C.3		Customer Records A non-bank credit institution should maintain up-to-date records in respect of each customer of the non-bank credit institution that contain the following: a copy of all documents required to identify the customer and provide the customer’s profile; the customer’s address, telephone number and all other customer contact details; any information or document in connection with the customer that has been prepared in compliance with any statute, regulation or code of conduct; details of all products and services provided by the non-bank credit institution to the customer; a copy of all correspondence from the customer to the non-bank credit institution and vice-versa and details of any other information provided to the customer in relation to any product or service offered or provided to the customer; all documents and applications of the non-bank credit institution completed, signed and submitted to the non-bank credit institution by the customer; a copy of all original documents submitted by the customer in support of an application by the customer for the provision of a product or service by the non-bank credit institution; and any other relevant information concerning the customer. A law or regulation should provide the minimum permissible period for retaining all such records and, throughout this period, the customer should be provided ready free access to all such records.
Description		a. There is no specific legal, regulatory or code of conduct provision regarding maintenance of customer records by MFOs. Some MFOs maintain customer records with contact information, copies of identity documents, applications, and documents signed and submitted by customers, but copies of offers and other documents provided by a MFO to its customers are not often included in their records. b. MFOs have different retention periods of customer records (e.g., 3 and 5 years), and they do not provide customers with ready free access to such records.
Recommendation		The NBT should issue a regulation covering this Good Practice, applicable to MFOs.
Good Practice C.5		Debt Recovery All non-bank credit institutions, agents of a non-bank credit institutions and third parties should be prohibited from employing any abusive debt collection practice against any customer of the non-bank credit institution, including the use of any false statement, any unfair practice or the giving of false credit information to others. The type of debt that can be collected on behalf of a non-bank credit institution, the person who can collect any such debt and the manner in which that debt can be collected should be indicated to the customer of the non-bank credit institution when the credit agreement giving rise to the debt is entered into between the non-bank credit institution and the customer. A debt collector should not contact any third party about a non-bank credit institution customer’s debt without informing that party of the debt collector’s right to do so and the type of information that the debt collector is seeking. Where sale or transfer of debt without borrower consent is allowed by law, the borrower should be: notified of the sale or transfer within a reasonable number of days; informed that the borrower remains obligated on the debt; and provided with information as to where to make payment, as well as the purchaser’s or transferee’s contact information.
Description		a. Currently debt recovery is undertaken by special departments within MFOs. AMFOT’s code of ethics deals with the ethical behavior of staff when dealing with clients, including debt collection. The Smart Campaign includes a client protection principle on fair and respectful treatment of clients that refers to the need of providers to ensure adequate safeguards to detect aggressive or abusive treatment by staff and agents, particularly during debt collection processes. b. There is no specific legal or regulatory provision regarding debt collection practices by MFOs, and no disclosure appears to be made by MFOs in the contract agreement.. c, d. According to information provided by the NBT and MFOs during the mission, third-party debt collection practices and sale or transfer of debt are not practiced in Tajikistan.
Recommendation		The NBT should issue a regulation covering this Good Practice, applicable to MFOs.
SECTION D	PRIVACY AND DATA PROTECTION
Good Practice D.1	Confidentiality and Security of Customers’ Information The financial transactions of any customer of a non-bank credit institution should be kept confidential by the institution. The law should require non-bank credit institutions to ensure that they protect the confidentiality and security of personal data of their customers against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access.
Description	a, b. Article 39 of the Law on MFIs protects the confidentiality of the customers of any MFO, by prohibiting all its founders, shareholders, employees and agents from disclosing to third parties, or from wrongfully using, any confidential information to which they had access while performing their duties. This prohibition includes: (i) not allowing the use of information received from any client for the benefit of the MFO or any other person, except with the permission or upon the instruction of the client; and (ii) not disclosing available information to third parties, except as otherwise provided by law. Exceptions to the duty of secrecy include cases of reorganization and liquidation of MFOs, and any other exceptions provided by law. In addition, MDOs and MLOs are subject to the provisions on banking secrecy as defined in the Banking Law (Chapter 8). This law defines and describes confidential information, indicates who could receive confidential information and under which circumstances. The law also indicates that executives, employees, current or former staff of a MFO, employees and inspectors of the NBT are prohibited from disclosing confidential information to third parties, or divulging or enabling its analysis. In addition, the law specifies exceptions to the confidentiality provisions, which are related to audits, anti-money laundering activities, information on customer indebtedness necessary for the NBT to analyze soundness of the system, judicial disputes, and information provided by the NBT to other supervisory authorities according to its statutory law. In addition to the provisions in the Microfinance and Banking laws, the Law on Credit History requires the future users of credit bureaus (e.g. MFOs) to maintain confidentiality of the credit report and not to disclose the information contained therein to third parties, and to use the information contained in the credit report only for purposes foreseen by the law (Article 20). Despite all these provisions on protection of confidentiality of customer information, it is widely reported that customers have the perception that their information is not adequately protected, especially by banks, but also by MFOs, which negatively affects their confidence in the financial sector. In the microfinance sector, consumers may not know or fully understand the existing agreements between MFOs to exchange information on the credit exposure of borrowers, through AMFOT and other more specific agreements (more information in Good Practice D.2). The Mission learned that a recently proposed amendment to the tax code would require credit institutions to provide information on customer accounts and transactions to the tax authority, without a court order or presentation of fraud evidence by a tax inspector. This legal change is concerning since it would contribute to the public concern on the lack of protection of customer information.
Recommendation	The NBT should pay special attention to the monitoring of compliance with requirements on confidentiality and security of customers’ information by MFOs. The NBT should also issue provisions regarding maintenance of security of customers’ information in physical and electronic means, especially considering the increasing use of technology by MFOs. The NBT should coordinate with the tax authority to make sure that confidentiality of customer information is adequately protected in the tax code, and that the proposed amendments do not give the tax authority unrestricted access to customers’ information.
Good Practice D.2	Credit Reporting Credit reporting should be subject to appropriate oversight, with sufficient enforcement authority. The credit reporting system should have accurate, timely and sufficient data. The system should also maintain rigorous standards of security and reliability. The overall legal and regulatory framework for the credit reporting system should be: (i) clear, predictable, non-discriminatory, proportionate and supportive of consumer rights; and (ii) supported by effective judicial or extrajudicial dispute resolution mechanisms. Proportionate and supportive consumer rights should include the right of the consumer to consent to information-sharing based upon the knowledge of the institution’s information-sharing practices; to access his or her credit report free of charge (at least once a year), subject to proper identification; to know about adverse action in credit decisions or less-than-optimal conditions/prices due to credit report information; to be informed about all inquiries within a period of time, such as six months; to correct factually incorrect information or to have it deleted and to mark (flag) information that is in dispute; to reasonable retention periods of credit history; and to have information kept confidential and with sufficient security measures in place to prevent unauthorized access, misuse of data, or loss or destruction of data. The credit registers, regulator and associations of non-bank credit institutions should undertake campaigns to inform and educate the public on the rights of consumers in the above respects, as well as the consequences of a negative personal credit history.
Description	a. The Law on Credit History establishes the NBT as the authority in charge of overseeing the system. Although the law was approved in 2009, this system has not yet been implemented. b. MFOs are in dire need of having a mechanism to ensure that their clients are not becoming overindebted due to irresponsible multiple or parallel borrowing. In this context, AMFOT developed a credit database that allowed exchange of information on borrowers among its members. Later, several credit institutions (MFOs and banks) agreed to exchange information among themselves in the context of the creation of a credit bureau; however not all institutions agreed to participate in this exchange. These arrangements have been an industry reaction to the lack of an official credit database. However, they seem to be contributing to the general perception that customer confidentiality and security of information is not well protected. c, d. The Law on Credit History indicates the rights of credit history entities (i.e. borrowers), including the rights: to consent to sharing information on the borrower and on his or her personal credit history; to get a free personal credit report once a year (and any other time subject to charge); to request from the credit report user a copy of the credit report or to be familiarized with it, during the process of application for credit; to contest information contained in the credit report; to request from sources of information to correct invalid information. The Law indicates that the credit bureau maintains records up to 5 years from the date of receiving the latest information. The Law also requires credit bureaus to take measures to secure confidentiality and security of information of borrowers, including conditions of implementation of organizational, technical and technological measures by information providers and recipients. The Law does not include the rights of borrowers to know about adverse action in credit decisions or less-than-optimal conditions (e.g., credit refusal, high interest rate, low credit limit) due to credit history information, to be informed about all inquiries within a period of time, and to mark information that is in dispute.
Recommendation	There is urgent need to establish a credit bureau to have an official mechanism to exchange credit information of borrowers, which would follow appropriate confidentiality, privacy and security requirements. The NBT should ensure that the rights of consumers are well protected, through an adequate legal framework, consumer awareness campaigns and supervisory mechanisms. The NBT should consider amending the Law on Credit History to incorporate the rights of consumers to know about adverse action in credit decisions or less-than-optimal conditions due to credit history information, to be informed about all inquiries within a period of time, and to mark information that is in dispute. The NBT should also make sure that a similar level of protection of confidentiality of customer information, which is currently required of banks and MFOs, is also required of other providers and recipients of credit history information, once the credit bureau starts to operate. The NBT should also ensure that consumers are well informed about the credit bureau, its functions and their rights in relation to credit history information and its use by lenders. Clear and simple brochures and other disclosure formats should be given to consumers when they sign a contract with a MFO. Consideration could be given to the agreement on a simple consent form that is commonly used by all credit providers, so that it is easier for consumers to identify and understand. Reference to negative reporting in the credit bureau should also be included in key facts statements for credit products. The NBT, AMFOT and consumer organizations should coordinate in the development of campaigns to raise awareness on consumers’ rights regarding the credit history system.
SECTION E	DISPUTE RESOLUTION MECHANISM
Good Practice E.1	Internal Complaints Procedure Complaint resolution procedures should be included in the non-bank credit institutions’ code of conduct and monitored by the supervisory authority.
Description	AMFOT’s code of ethics does not include provisions on complaints resolution procedures. One of the client protection principles included in the Smart Campaign refers to the need for microfinance providers to have in place timely and responsive mechanisms for complaints and problem resolution for their clients and to use these mechanisms both to resolve individual problems and to improve products and services. However the specific procedures are not included in any code, let alone monitored by AMFOT or by the NBT. Several microfinance institutions have some form of internal mechanism to receive complaints from the public. The mission was told that microfinance institutions usually have a locked box in all their premises in order to receive inquiries or complaints by consumers (or even staff); the box is locked and only the internal auditor opens it about once a week and then gets in touch with the correspondent staff that can address such complaint. Also, several microfinance institutions have hotlines to attend consumer inquiries or complaints, and the number is given to consumers when they receive the contract. In some cases statistics on complaints are produced and analyzed. However, the information of the hotline does not seem to be clearly displayed in the premises.
Recommendation	At a minimum, the NBT should require that all MFOs have a contact person or unit in charge of receiving and handling complaints, and that the information of this person or unit is given (and easily displayed) to the consumer. The NBT should also establish guidelines on the internal procedure for MFOs to handle complaints, including for example: (1) include a summary of the internal procedure in the institution’s general terms and conditions and “key facts” given to customers; (2) provide the customer with detailed information of the person or unit appointed to deal with any complaints, both in the documents given to the consumer and in posters displayed in the premises; (3) provide the complainant with a regular written update on the progress of the investigation of the complaint; (4) inform the customer in writing of the outcome of the investigation within a maximum number of days; (5) explain in simple terms the nature of any offer of settlement made to the customer; (6) offer to treat a verbal complaint as a written complaint; (7) maintain up-to-date records of all complaints received; (8) make these records available for review by authorities; (8) produce internal reports on number and types of complaints received and how they were dealt with internally. The NBT should also require MFOs to send statistics on consumer complaints, and then the NBT should use this information as input to their supervisory activities. Complaints statistics provide with important warning signs not only on consumer protection, but also on reputational and operational risks. Based on the analysis of complaint statistics, the NBT could also propose guidelines, instructions or awareness campaigns that address the common problems identified in complaints reports.
Good Practice E.2	Formal Dispute Settlement Mechanisms A system should be in place that allows consumers to seek affordable and efficient third-party recourse, such as an ombudsman, in the event the complaint with the non-bank credit institution is not resolved to the consumer’s satisfaction in accordance with internal procedures. The role of an ombudsman or equivalent institution in dealing with consumer disputes should be made known to the public. The ombudsman or equivalent institution should be impartial and act independently from the appointing authority, the industry and the parties to the dispute. The decisions of the ombudsman or equivalent institution should be binding upon non-bank credit institutions. The mechanisms to ensure the enforcement of these decisions should be established and publicized.
Description	There is no external dispute resolution mechanism for MFOs. Consumers have to go to the Economic Court of Tajikistan when complaints or disputes are not responded satisfactorily by the financial institutions. The court also deals with disputes from MFOs against their clients on matters such as debt collection and seizure of collateral, and in some cases the court has invited the NBT to clarify legal provisions. In general, neither consumers nor MFOs trust the courts, especially because the court processes are slow, unpredictable and handled by low-paid judges with limited knowledge on financial sector issues. Consumers have also approached the NBT in a few cases, although the NBT does not have explicit responsibility to deal with individual disputes. The AMA is responsible for the enforcement of the consumer protection, advertising and competition laws, on the basis of specific complaints and own-initiative investigations. However, the AMA has very limited resources to enforce these laws across all sectors, and in particular in the financial sector. The AMA has neither received any complaint against MFOs, nor started any investigation against MFOs. The Microfinance Law leaves room for the setup of an out-of-court dispute resolution mechanism, by stating that “disputes between MFOs and their clients (individuals and legal entities) shall be settled in the manner established by the legislation of the Republic of Tajikistan” (Art. 40).
Recommendation	Consumers should have an external recourse mechanism that helps them resolve their complaints against MFOs before going to the courts. Currently, very few consumers complain to NBT, AMA or the Consumers Union on general issues, let alone on financial consumer protection issues, either because consumers do not know how those institutions could help them or because consumers do not trust such institutions would do anything for them. It is important that the authorities start to raise awareness on the consumers’ right to complain when their rights are violated. AMA and NBT should develop a MoU to clarify their roles in handling consumer complaints, to establish mechanisms for NBT to provide technical expertise on financial sector issues to AMA regarding specific complaints against financial institutions, and for NBT to receive periodic information from AMA on the number of cases they investigate in the financial sector. In the long-term, consideration should be given to the establishment of a financial services ombudsman, including an assessment of the most appropriate institutional set-up for Tajikistan. The analysis should take into account issues of independence, sustainability, accessibility for consumers, and capacity to make binding decisions to ensure the effectiveness of the system. Several institutional options can be evaluated, following on successful international experiences, for example a scheme established by law to function as an independent institution (UK), or a requirement for financial institutions to join a central bank-approved ombudsman scheme with binding rules for all member institutions (Armenia). Regardless of the way in which the scheme is established, it should be developed in close consultation with all relevant stakeholders including relevant Ministries, the financial industry, NBT and consumer representatives.