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Financial systems development

Consumer protection and responsible financing


German de­vel­op­ment co­op­er­a­tion puts its faith in strict regulations for microfinance. Microfinance is only good if it complies with clear principles. Before loans are awarded, for instance, clients should be required to de­mon­strate their commit­ment to financial discipline by building up savings.

Over and above this, in all projects that involve refinancing local micro­finance institutions, Germany adopts strict rules of ethical financing: loans are only extended to micro­finance institutions meeting the client pro­tec­tion principles of the Consultative Group to Assist the Poor (CGAP). These include ensuring that staff comply fully with the principles of ethical conduct, for instance, that they cannot be bribed. The con­fi­den­ti­a­lity of client data must also be guaranteed. Institutions failing to meet these standards will not receive any re­fi­nanc­ing loan from Germany.

The Federal Republic of Germany is a pioneer in the field of responsible microfinance and uses a three-pillar model:

  • Client protection
    German de­vel­op­ment co­op­er­a­tion strengthens the regulation and supervision of the entire microfinance sector so as to protect clients from unethical business practices and from becoming excessively indebted. One German approach is to advise ministries of finance and central banks on the introduction of the following regulations: Banks inform their clients in a clear and easy to understand manner about all interest rates and costs incurred. They treat their clients fairly. And they have an efficient point of contact to handle complaints.
  • Self-regulation of financial institutions
    In addition to statutory client protection, Germany also encourages the across-the-board introduction of specific codes of conduct and standards of responsible microfinance. In this, German experts cooperate with microfinance associations.
  • Financial literacy
    German de­vel­op­ment policy works with ministries of education and finance in co­op­er­a­tion coun­tries to teach schoolchildren to how to manage money responsibly. This is a good way of preventing indebtedness at a later date.

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