Nicaragua: Building Confidence in Financial Services by Improving Consumer Protection
FIRST provided assistance to the Superintendency of Banks and Other Financial Institutions of Nicaragua (SIBOIF), to develop a national program for improving consumer protection for the banking and microfinance sectors. With support from FIRST, a new consumer protection law that includes a financial services chapter was enacted and related transparency regulations to improve consumer confidence in the financial sector were drafted. The project directly linked to FSAP 2009 recommendations and was implemented during 2011-2013 with a total disbursement of $165,000.
The retail financial services industry in Nicaragua was growing rapidly before the global financial crisis, with consumer credit growth of nearly 40 percent year-on-year, peaking in 2007. The speedy growth was not matched by the level of financial education and appropriate consumer protection mechanisms, opening the door to hidden microloan fees, forced savings, and high charges for late payment, which were not presented transparently in financial contracts. The global financial crisis resulted in a drop in international remittances, a funding shortage, and low prices for exports. This produced a drop in the growth of the country's gross domestic product (GDP) of 1 percent in 2009, resulting in greater unemployment. All of these factors, together with the lack of adequate information and transparency, led to the "no-payment movements" and massive defaults on consumer loans from commercial banks and microfinance institutions. Between 2009 and 2010, microfinance institutions lost over $60 million in foreign financing, and their credit portfolio in arrears (over 30 days overdue) skyrocketed to close to 17 percent from some 3 percent before the crisis. Several micro lenders went out of business or had to be heavily recapitalized, and the number of microfinance consumer loans sharply decreased leading to negative growth.
Nicaragua's SIBOIF, with the legal mandate for the soundness, efficiency, and overall performance of the financial sector as a whole, approached FIRST for TA in late 2010. The objective was to strengthen the consumer protection framework in line with the 2009 FSAP findings and recommendations.
The TA provided by FIRST included (i) an assessment of the legal, regulatory, and institutional frameworks for consumer protection; (ii) a consumer research report that gathers demand-side information on consumers' experiences with and concerns about financial consumer protection; (iii) an action plan; (iv) a consensus-building workshop with key stakeholders on a prioritized action plan to implement the recommendations of the diagnostic review; and (v) revisions to laws and regulations related to consumer protection.
These regulations include a methodology for calculating the total annual costs of credit products and a model (summary sheet) for disclosing the terms and conditions of active and passive financial products to consumers in the banking sector, in addition to the contract. In addition, the regulation covered the following concepts:
- Rights and obligations of clients
- Applicable criteria for fees and expenses, including the process for changing them
- Transparency in advertising
- Roles of board of directors and internal audit
- Disclosure of formulas for calculating interests and fees
- Abusive clauses in financial product and services contracts
- System to address claims by financial users
With FIRST support, Nicaragua enacted a new consumer protection law in June 2013. In September 2013, Nicaragua published related regulations to further support an increase in the transparency of financial transactions.
SIBOIF is planning to create a consumer protection department and dedicate staff to the issue. It is still early to assess the impact for individual citizens. However, countries that have strengthened consumer protection frameworks have shown low cases of abusive practices and higher levels of competition.