By Nishant Choudhary, senior legal adviser, DFDL
Do we now have the necessary framework?
In light of the recent Notification No 1 of 2016 dated August 29, 2016, issued by the Microfinance Business Supervisory Committee (MBSC), its follow-up clarification Letter No. Ka Ka- 1/6 (180/2016) dated December 14, 2016 and Notification 3 of 2016 dated August 29, 2016 (collectively the Notifications) on Consumer Protection and prevention of over-indebtedness, there is a pressing need for additional guidance on the practicalities of compliance by Microfinance Institutions (MFIs). Further clarification is required on the implementation, scope and reach of these Notifications and the extent of their interaction with applicable laws, such as the Evidence Act, insolvency laws, Consumer Protection Law, and the Contract Act, along with more archaic laws such as the Usurious Loans Act of 1918.
The Notifications were issued with the intention of fostering fair business practice methods to be adopted by MFIs principally to safeguard MFI clients (predominantly from lower income groups) against potential predatory lending practices. The central aims are focused on the development of an ethical, socially responsible, and viable MFI sector. Nonetheless, certain thorny issues and areas of ambiguity persist in terms of interpreting these Notifications. Given their stated objectives, and the importance of successfully navigating any areas lacking sufficient clarity, we will now parse and analyse some of these issues in broader detail:
1) Notification 1/2016 read with Letter No. Ka Ka- 1/6 (180/2016) requires MFIs to comply with certain client protection principles, such as: the prevention of over-indebtedness, responsible pricing, fair and respectable treatment of clients and data privacy. Practical concerns on the subject of compliance include the following:
- Over-indebtedness: The Notifications do not provide a clear ratio or definition of what constitutes over-indebtedness. Nor do they factor in how MFIs may gather information on clients’ actual credit situation. This remains a stubborn concern in the absence of any uniform or official credit history of the clients. MFIs may be forced to rely on un-official data from other local individuals residing in a given area or a statement provided by the loan recipient itself. At present there exists no mechanism to authenticate such information. Consequently, this renders MFIs prone to defaulting on their compliance obligations and their duty to clients, placed in the unedifying position of having to bear the responsibility solely.
- Transparency: The requirements of these Notifications cannot be read in isolation. They are enmeshed with other terms of the Notifications itself, along with provisions of Myanmar laws, in order to aid it in achieving its stated ends. The provision of loan terms such as the loan amount, repayment schedule, interest rates, penalty fees, administration fees, and service charges in Burmese is a welcome change. Yet, problems persist in terms of comprehension on the part of clients. The majority of MFI clients come from underprivileged groups unable to read or write even in their own local languages. Nonetheless, they are forced to agree to terms and statements imputing their full comprehension of the loan agreement. There if no mechanism to validate clients’ understanding of the agreements that they enter into.
- Responsible pricing: This is a welcome step, although the Supervisory Committee, in reserving for itself the power to prescribe applicable fees and other official charges, may become an obstacle to effective and ethical financing. This is particularly so given the variance of financing costs for the MFIs based on the spectrum of lenders and regions in which they operate. MFI loans continue to be unsecured with high operational costs attached. Most of the loans obtained by MFIs for on-lending are similarly unsecured are not cheap. In such a situation a prescribed rate of fees by the Supervisory Committee may stand as an impediment for financing, if it does not factor in the real financing costs that these MFIs must bear.
- Fair and respectable treatment to clients: This requirement could well be interpreted as bringing MFIs under a fiduciary relationship, a relationship of care and protection towards their clients, to prevent harmful behavior towards MFI clients. However, the Notification fails to define exactly what harmful behavior consists of, or the levels of fairness and equanimity that must be followed by the MFIs. In tandem with other laws, this places onerous burdens on MFIs in terms of proving that fair and respectable treatment was afforded to their MFI clients by virtue of Section 111 of the Myanmar Evidence Act. Further details of Section 111 will follow later in this article. If a fiduciary relationship between MFIs and their clients is demanded for, a mere allegation by one of them could cause substantial problems for the MFIs in defending themselves against wrongful or spurious allegations. The Notifications fail to adequately outline the degree of care and protection that must be instituted.
This requirement of fair and respectable treatment must also bear in mind any insolvency proceedings regarding MFI clients. While this requirement is generally enshrined under the Myanmar Consumer Protection Law 2014, a separate guideline for MFIs merely adds to the multiplicity and uncertainty over which rules apply.
- Privacy of clients’ data: While the Notifications stipulate that MFIs must not over-indebt clients, taking into account their creditworthiness and repayment capabilities, there is no official data system in Myanmar to verify such information. Furthermore, due to the privacy requirements that MFIs must adhere to, they are barred from sharing client data amongst themselves. Therefore, the only option available to MFIs is to reply to statements from the clients or other local people in the vicinity (who may lack accurate information). This must be viewed together with MFI compliance requirements and the burden of proof that MFIs must bear with respect to the Evidence Act.
2) Similarly, Notification 3/2016 mandates that MFI loans can only be granted based on a client’s actual repayment capacity. As previously noted, this becomes a tedious obligation on the part of MFIs, prone as they are to defaulting on their compliance requirements due to the lack of official data and prohibitions on data sharing with other MFIs.
Consumer Protection Law, 2014
Consumers purchase goods and services based on the contents and quality of products or services portrayed in advertisements. Legal protections for consumers are essential to safeguard them from possible exploitation and deception by suppliers, and to ensure that vendors found in violation are subject to appropriate administrative sanctions or penalties.
In pursuit of this, in 1985, the United Nations General Assembly adopted a resolution recommending member states to take preventative, protective and remedial measures to defend consumer rights.
This resolution required member states to create agencies to adjudicate consumer claims and to create a conducive environment for the protection of consumers. More specifically, the UN General Assembly resolution required the establishment of Consumer Councils to address consumer complaints and claims. In response to this requirement, Myanmar enacted the Consumer Protection Law of 2014. The law envisages the following consumer rights:
1) The right to be heard: The consumer has the right to be heard if he or she has any complaint or grievance regarding the good or service received. This implies that consumer complaints and grievances must receive due attention and consideration at an appropriate forum.
2) The right to safety: The consumers are entitled to protection of their health and safety from the goods and services they buy. They should not be supplied goods or services which are hazardous to their health and safety.
3) The right against exploitation: This covers the right to protection from unfair trade practices and unscrupulous exploitation of consumers by charging excessive prices by suppliers of goods or services.
4) The right to be informed: This implies that consumers should be given correct and full information about the quality of goods that they buy. They should be provided information about the ingredients of the product, freshness of the product, any side effects that may occur as a result of consumption of a commodity. This right particularly concerns pharmaceutical manufacturers and suppliers.
5) The right to choose: This implies that consumers should be provided with a variety of products from which they can make a choice of their liking. The opportunity to choose from limited options restricts this right.
6) The right to get redress: This implies that consumer complaints and grievances about the products and services supplied must be addressed. That is, they should not only be heard but their complaints must be suitably redressed and adequately compensated for.
The Consumer Protection Law, 2014 is a code in itself, which elaborately outlines the levels of service quality, similar to those of MFI services that entrepreneurs must abide by. However, in light of these Notifications, the requirements now incumbent upon MFIs seem to have been taken to a degree higher than those demanded by the Consumer Protection Laws. By virtue of “fair and respectable treatment to clients”, it potentially renders the MFI-client interaction as that of a fiduciary relationship, shifting the burden of proof from the consumer to the provider. While the Consumer Protection Law was a holistic piece of legislation in keeping with the situation and the times, the MFI Notifications may have overreached by placing an onerous and excessive responsibility on MFIs by introducing fiduciary requirements.
Usurious Loan Act, 1918
An old law, Usurious Loan Act, tries to safeguard borrowers against any unfair practices by the lenders. As per the law, when a court is of the opinion that a given transaction has excessive interest or the transaction is somehow unfair, the court can re-open such transactions. The court has the power to relieve the debtor or any excessive interest and set the parties on an equitable footing.
The law defines “excessive as anything which the court deems reasonable having regard to the risk incurred by the creditor”. In considering whether interest is excessive under this section, the Court must take into account any amounts charged or paid, whether in cash or in kind, for expenses, inquiries, fines, bonuses, premiums, renewals or any other charges. If compound interest is charged, the periods at which it is calculated and the total advantage which may reasonably have been expected from the transaction will also be considered.
Furthermore, on the question of risk, the Court will take into account the presence or absence of security and the value thereof, the financial condition of the debtor, and the result of any previous transactions of the debtor.
In considering whether a transaction was substantially unfair, the Court will take into account all circumstances materially affecting the relations of the parties at the time of the loan or tending to show that the transaction was unfair, including the necessities of the debtor at the time of the loan, so far as the same were known, or taken to have been known, to the creditor.
While, the Notifications to some extend address the concerns covered by the Usurious Loan Act, it places additional requirements on the lenders to prove that such a loan was not usurious and an MFI client may merely have to lodge an allegation and bide his or her time.
Evidence Act 1872
Section 111 of the Evidence Act states:
“Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the utility of transaction is on the party in the position of active confidence.”
In the situation where a party is alleging against a transaction, the law presumes everything against such a transaction and the onus is placed upon the person holding the position of confidence to show that the transaction is perfectly fair and reasonable. Also, that no advantage has been taken of his or her position and that no information has been withheld.
This should be considered in light of the requirements prescribed by the Notifications. They mandate a requirement of “fair and respectful treatment to clients”. On the face of it, this is a welcoming statement when read in isolation, but in terms of practical applicability on the ground in Myanmar, it becomes a weighty burden on MFIs. The Notifications also mandate that MFIs must prevent over-indebtedness of the clients. Yet, there is no mechanism in Myanmar to correctly ascertain the situation of any customer. MFIs generally rely on client statements and information gathered from the relevant group or individuals in the locality. The Notifications also restrict the sharing of data between the MFIs, further hampering the adoption of correct, adequately informed positions. No official credit rating agency or government data base exists that can be relied upon before considering any microfinance loan. With no access to such records, MFIs must rely on unofficial and often unreliable information. In this situation, where any MFI has been wrongly informed about the previous debts taken by the customer or the defaults it may have performed with other MFIs, the burden under Section 111 of the Evidence Act would still fall on the MFI to ensure that the transaction is fair and equitable.
Would the law safeguard borrowers against any legal recourse, if a borrower were to simply allege that the loan-issuance was not fair and created over-indebtedness? What would the consequences be and would the courts relieve the customer of any repayment obligations?
What role would this play in the course of insolvency proceeding involving the defaulting customer? If the MFI were unable to prove whether over-indebtedness was caused through no fault of the MFI, will the claims of the MFI be rejected? Myriad such questions remain unanswered.
However, it is at least settled that the scope Section 111 does not extend beyond the parties to the transaction. It does not apply where the complainant is not a bona fide of a transaction but to the real nature of the transaction.
To illustrate- Section 111 would not apply to over-indebtedness per se but only as to the question of whether the MFI knowingly over-indebted the customer in bad faith. Where the question a court must decide upon is entirely outside the sphere of good faith, and the transaction is impugned from another angle all together, just because the transaction took place between an MFI and its customer, does not imply that the method of impugning it should be different. Therefore Section 111 should still apply.
However, this largely depends upon how the Myanmar courts interpret the requirement under Section 111 and there is clear lack of judicial precedent where MFIs are concerned.
Contract Act 1872
The parameters of undue influence provided under the Myanmar Contract Section 16 differ from those provided under Section 111 of the Evidence Act. Here, whenever the good faith of a transaction is in question between persons, one of whom stands in a position of active confidence, the burden of proving good faith is placed on the person holding that position. However, under Section 16 (3) of the Contract Act, the burden of proof is placed on the person in a position of dominance. When the transaction appears unconscionable, it must first be proven that that the dominant position was used to the detriment of the other person.
However, there is a lack of clarity as to which standards the courts in Myanmar will apply. Will it apply the strict standard under the Evidence Act, ignoring the Contract Act, or apply the standards under the Contract Act. There is lack of precedent in this regard.
Myanmar does not have any bankruptcy law but has two insolvency laws: (i) the Yangon Insolvency Act, 1909 (applies to Yangon division only, the “Yangon Act”) and (ii) the Myanmar Insolvency Act, 1920 (applies to all of Myanmar, other than the Yangon region, the “Myanmar Act”). The Yangon Act and Myanmar Act are collectively called as the “Insolvency Laws”. Both Acts contain almost the same provisions with a difference in the arrangement of the sections.
Section 25 of the Myanmar Act states:
“In the case of a petition presented by a creditor, where the Court is not satisfied with the proof of his right to present the petition or of the service on the debtor of notice of the order admitting the petition, or of the alleged act of insolvency, or is satisfied by the debtor that he is able to pay his debts, or that for any other sufficient cause no order ought to be made, the Court shall dismiss the petition.
The power granted under the Insolvency Laws, allow the courts to dismiss petitions lodged by creditors. This assumes that any sufficient grounds may be stretched to include that the principles of “fair and respectable treatment” was not followed and the credit extended was forced over-indebtedness by an MFI. In the event that the insolvency courts agree that the forced over-indebtedness did not follow fair and respectable treatment principles, this can be grounds for dismissing the petition lodged by such an MFI.
Another question is whether the insolvency courts would follow the Myanmar Contract Act. Must the transaction first be proven to be unconscionable, shifting the burden of fairness onto the MFIs? Alternatively, would the courts follow Section 111 of the Evidence Act, where the obligation would rest upon the MFIs from the very beginning?
Worth bearing in mind is that dismissal of a petition is not tantamount to a rejection of a claim in Myanmar courts.
In light of Section 35 of the Myanmar Act, where all claims to debt (except for debts incapable of being fairly estimated or demands due to liquidated damages) will be admitted; how this will be harmonised with the Notifications remains another question.
In the case of a borrower, uncertainty persists as to the suitable forum in which to raise the breach of fair and respectable treatment or an act of forceful over-indebtedness. Will the borrower approach the consumer dispute settlement committee under the Consumer Protection Law or an insolvency court?
An insolvency court would usually only be approached in the event that the borrower declares itself insolvent. A consumer dispute settlement committee or the regular civil court may be petitioned however, to enforce his or her rights under the Notification without declaring insolvency.
a) Protection of Certain Transactions (Claw Back)
Are there any safeguards for payments made by MFIs in the event that a borrower declares itself insolvent and a period of suspicion is triggered? Yes, the following conditions apply:
Section 55 of the Yangon Act and Section 53 of the Myanmar Act provides that any transaction made within two years prior to the adjudication of insolvency will be void. This means that even if a transaction took place within two years prior to insolvency, it will still be held valid if performed in good faith and for valuable consideration.
Section 57 of the Yangon Act and Section 55 of the Myanmar Act provide that noting contained in the Insolvency Laws will apply to any payments to any of its creditors; any payments or delivery to the insolvent party or any transfer by the insolvent party for valuable consideration.
The safeguards depend solely on how the courts would view fair and respectable treatment and forced over-indebtedness. To a large degree it would depend on the level of evidence sought by the court: ie, which will be primarily followed, the Myanmar Contract Act or the Myanmar Evidence Act?
Nishant Choudhary is a senior legal advisor based in the Yangon office of DFDL. He has more than 10 years of experience practising law. In addition to banking and finance, his areas of expertise include power generation, oil and gas, real estate, general corporate, telecommunications and competition law. He has worked extensively in a wide range of sectors in Myanmar on diverse transactions, including offshore project financing, the largest onshore syndicate financing of Myanmar foreign banks branches and the licensing of one of these branches. Nishant also has substantial experience in the Micro Finance Institution (MFI) sector, where he has assisted with the licensing and financial structuring of MFIs for loan provision purposes.