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Designing Disclosure Regimes for Responsible Financial Inclusion

In East Africa, a microborrower who goes to pay off his loan early is surprised by a hefty prepayment penalty that was not mentioned in his loan agreement. A small business owner in Southeast Asia becomes frustrated trying to determine which of several loans is the least expensive–one comes with a flat charge, another a weekly interest rate, and still another a monthly rate with an upfront deduction.

Situations like these can be quite common. Country-level policy makers working to expand financial inclusion are increasingly recognizing the need for complementary efforts in financial consumer protection. Recent initiatives at the global level include the G-20 High-Level Principles on Financial Consumer Protection and work within the Global Partnership for Financial Inclusion. If financial service delivery is transparent, services will be used more, customers will benefit more, and inclusion in the formal financial sector will pose fewer risks for vulnerable, low-income people who have less experience with formal finance and lower levels of financial literacy and capability.

Transparency is a basic element of consumer protection. To determine whether a product or service is appropriate to them, consumers first need to know what they are getting. Pricing and other terms of financial products can often be opaque or even deceptive, particularly for low-income consumers. This focus note from CGAP explores transparency and disclosure issues.

CGAP is a global partnership of more than 30 leading development organizations that works to advance the lives of poor people through financial inclusion. Using action-oriented research, we test, learn and share knowledge intended to help build inclusive and responsible financial systems that move people out of poverty, protect their economic gains and advance broader development goals. We research and experiment to achieve proof of concept and extract lessons that can be built to scale by our partners, who apply our insights in the marketplace.

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