Good Practices: Banking Sector

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Diagnostic Review of

Consumer Protection and

Financial Literacy

Volume II

Comparison with Good Practices
April 2013

The World Bank

Financial Inclusion Practice, Micro and SME Finance

Financial and Private Sector Development Vice-Presidency

Washington, DC

This Diagnostic Review is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent.

Diagnostic Review of Consumer Protection and

Financial Literacy
Volume II – Comparison with Good Practices


Consumer Protection in the Banking Sector 4

Overview 4

1.Tajikistan’s banking sector shows a low rate of use of banking services by the population. A large percentage of the population lives in rural areas in which access to banking services may be difficult and consumer choice limited or absent. Most daily transactions are conducted in cash, and there are still few opportunities for most consumers to use any other means of payment. For this reason, immediate access to money in the form of cash is especially important to consumers. Most banks currently offer a narrow range of simple banking services to consumers, including money transfers (remittances), time deposits for savings, and “plastic card” accounts that allow consumers to receive payments, obtain cash from cash machines, and to make a limited number of payments. Small loans are also available to individuals to fund income-earning activities. Consumer credit is very limited and consists mostly of mortgage loans. 4

2.A very large amount of money circulates in the form of cash held outside of the banking system. If a greater share of this money were to be held in banks, it could provide greater safety and additional incomes to account holders as well as liquidity and available lending funds to banks. But consumer confidence in banks remains low, retarding growth of deposits. While there are many factors that affect a consumer’s decision to deposit funds in a bank, several important concerns were repeated during the review: 4

3.With respect to the first concern, there are several broader matters not usually addressed as “consumer protection” that are of great importance. Lack of sufficient banking infrastructure is clearly a primary consideration. The availability of bank branches and other sources of service, the availability of ATMs and their states of repair, and other similar issues clearly play a significant role in whether consumers are able to quickly and reliably obtain the cash needed to conduct daily transactions. As long as these facilities are not sufficient to meet demand, some consumers will continue to be unwilling to leave money in banks outside sums earmarked for longer term savings. Rules concerning bank liquidity and requirements for the availability of currency at bank branches are important in insuring consumers’ access to their funds, although these certainly are not purely consumer protection measures. As ATMs become more important in providing consumers access to cash, factors such as the condition of the stock of circulating currency and the ease with which banks can obtain bills in appropriate condition for machine use can also play a role in assisting or hindering smooth functioning of the system for both banks and consumers. 4

4.Consumer protection rules, however, can also be important both in ensuring that consumers have ready access to their money in cash and in setting clear expectations that build trust in the system and allow consumers to plan appropriately. Rules of this kind might include requirements concerning the treatment of consumer withdrawals of cash, requirements concerning the service of customers at cashier windows, and clarity concerning the circumstances in which a bank may require prior notice for a withdrawal due to the type of account, size of withdrawal, or other factors. 5

5.In addition to measures that may be taken to address consumer concerns about the immediate availability of their funds in cash, there are a variety of other measures that may be taken to improve consumer protection in the banking sphere and to address concerns about privacy of information, concerns about consumer understanding and information, and other important issues. These are addressed in the attached review of the legal framework and practices of Tajikistan against a list of good practices in the banking area. 5

6.The review of Tajikistan’s law and practices presented here is based on interviews and conversations with banks, government officials and other counterparts, as well as with a small number of consumers of banking services. A few test visits to bank offices were made to determine what information might be provided by those offices to an ordinary citizen of Tajikistan inquiring about banking services. It should be noted, however, that although they were requested, no examples of the packages of documents usually provided by banks to their customers could be obtained for review, either from the banks during discussion or by the visitors to bank offices. Thus, there remains some question about precisely what banks are doing in practice in terms of the information content of these materials. 5

Comparison with Good Practices for the Banking Sector 6

Consumer Protection in the Microfinance Sector 73

Overview 73

1.The Law on Microfinance Organizations defines three types of formal MFOs (MFOs) in Tajikistan. These are micro-credit deposit organizations (MDO), micro-lending organizations (MLO) and micro-lending funds (MLF). A MDO and a MLO shall be formed as a closed type joint stock company or a limited liability company, whereas a MLF may only operate as a social fund, with no capital requirement. 73

7.The relative size of the microfinance sector has practically doubled over the past five years. The MFOs’ microcredit portfolio has expanded from about US$44.6 million (1.21 percent of GDP) in 2007 to US$182.2 million (2.49 percent of GDP) as of September 2012, which represented an increase of 308 percent in absolute terms (106 percent in relative terms). In the same period, the microcredit portfolio of banks and credit societies increased 55 percent (from US$142 million to US$220 million). Thus, the MFOs’ share of microcredit granted by all formal credit providers increased from 24 percent in 2007 to 41 percent by March 2012 (Table ). 73

Table : Total Microcredit Portfolio of Microfinance Organizations 73

8.The expansion of the microfinance sector has been led by MLOs. The value of the MLO microcredit portfolio has grown almost tenfold over the past five years, whereas its share of microloans granted by formal credit providers has increased from 4 percent in 2007 to 21 percent in 2011. In terms of clientele, the MLO segment increased its market participation from 7 percent to 53 percent in the same period. At the same time, the number of MLF clients decreased significantly, which led to a decline in the MLFs’ share of the number of MFO clients from 80 percent in 2007 to 17 percent in 2011. Table shows that before 2009 the greater number of MLO borrowers was associated with the entry of new MLOs; however from 2009 to 2011 only one MLO entered the market, and the number of borrowers increased by 73 percent showing higher penetration efforts of existing MLOs. 74

Table : Number and Outreach of Microfinance Organizations 74

9.There are two authorities with responsibilities on consumer protection issues for the microfinance sector in Tajikistan. The National Bank of Tajikistan (NBT) is an independent legal entity that reports to the lower house of the Parliament. Its main goals, according to its statutory law, are: to support a stable level of prices within the limits of its authority, to assure development and strengthening of the country's banking system, and to facilitate efficient and smooth operation of the payment system. The NBT also has the exclusive right to regulate and supervise the activities of credit institutions, with the main goal of maintaining stability of the system and protecting the interests of depositors and creditors. The Antimonopoly Agency (AMA) is in charge of enforcing and monitoring compliance with the Law on Consumer Protection, and has the rights to go to court when detecting infringements of consumer rights, to represent a class of consumers in court, and to demand the termination of an activity that violates the law, among others. AMA is also in charge of monitoring compliance with the Law on Advertising, and has the authority to order the cessation of violations of the law, and to go to court representing a group of consumers affected by noncompliance with the law. AMA also monitors compliance with the Law on Competition and Restriction of Monopolistic Activity on Goods Markets. 74

10.There is one industry association representing the microfinance sector. The Association of Microfinance Organizations of Tajikistan (AMFOT) is a non-commercial organization which offers different services to its member MFOs on a voluntary basis, including training, lobbying and dissemination of information. Although AMFOT was officially registered in January 2004, it started its activities in 2000 when several national and international NGOs involved in implementing microfinance programs in Tajikistan formed a voluntary microfinance coalition. AMFOT now has more than 70 members. Consistent with its mission, AMFOT contributes to developing a favorable legal environment, provides professional training and technical assistance to MFOs and promotes the introduction of standards in the microfinance sector. 75

11.There is also a consumer organization active in several economic areas, but not in the financial sector. Consumers Union of Tajikistan is a non-profit, public, non-governmental organization created with the purpose of providing assistance in consumers’ rights and interests’ protection, and building a fair and competitive market of goods and services in Tajikistan. The Consumers Union was founded in July 2002 as a local Dushanbe-based association, and in 2007 it transformed into a national organization, which now has offices in Khujand and Qurghon-Teppa. The Consumers Union has organized consumer rights awareness events for both the adult and young population, has developed a school program named “Basics of consumer knowledge” that is being taught in 20 schools in Tajikistan, and implemented special programs for judges and state officials on consumer rights protection. Since 2003, the Consumers Union has administered a hotline for consumers, which has helped them receive more communications from consumers. The Consumers Union has received over 3,500 consumer complaints and more than 60 cases have been taken to the courts. Most complaints relate to public utilities and housing projects. The Consumers Unions has not received any complaints related to the financial sector. 75

List of Reviewed Laws and Regulations 75

12.The main laws, regulations and guidelines relevant for the assessment of MFOs are as follows: 75

Good Practices: Non-Bank Credit (/Microfinance) Institutions 77

Consumer Protection in the Insurance Sector 96

Overview 96

Comparison with Good Practices for the Insurance Sector 97

13.SISS currently lacks sufficient independence, training and specialist expertise (insurance, actuarial and legal). It is better placed to monitor the activities of the insurance industry than to actively supervise them. 99

15.SISS currently lacks the capacity and ability to fully analyze the information it collects and to publish it in a form that fosters fair competition and consumer choice by providing an overall picture of the stability and performance of the industry. 99

17.SISS has power to suspend or withdraw the license of an insurance company, but this is appropriate only for serious misconduct. It lacks the power to impose lesser sanctions (such as public warnings and fines) to punish and discourage lesser misconduct. 99

18.SISS should: 104

Financial Literacy 113

Overview 113

Comparison with Good Practices for Financial Literacy 113

TAJIKISTAN: Annex 1: Consumer Protection Issues in the Remittances Market 119

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