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Executive Summary

As one of the fastest growing economies in Latin America, Peru has experienced remarkable and sustained economic growth since the early nineties. The economic changes Peru has experienced during this time have directly affected its consumers. Consequently, Peru has strived to strengthen its consumer protection framework. The enactment of a Consumer Protection Law in 1991 pushed consumer protection into the spotlight for the businesses and people of Peru.

• Peru’s General Law of the Financial and Insurance Systems includes statutes that strive to protect clients through provisions demanding privacy and avoid over-indebtedness of the financial services client.
• The Consumer Protection Law for Financial Service Clients establishes a strong framework that calls for transparency, ethical staff behavior, privacy of client data and mechanisms for redress of grievances.
• SBS, Peru’s Banking Superintendent, seeks to minimize consumer grievances through preventative measures, while INDECOPI and DCF are among the agencies providing mechanisms for the redress of client grievances.

Introduction

Responding to the 1980s economic crisis, Peru adopted a series of policies that catalyzed an extensive process of structural readjustment and stabilization. With such policies, Peru provided a solid fiscal and monetary base, contained inflation, and adopted sound exchange rate policies in the new free floating Nuevo Sol currency. As well, comprehensive tax reform implemented by the autonomous revenue agency, SUNAT, led to a recovery in the tax-to-GDP ratio. The government also cut expenditure on subsidies to state-owned enterprises and import-competing firms, effectively doubled its social expenditure as percent of GDP during the 1990s. The tax reform process aided Peru in opening its economy to private enterprise. In its new role as regulator, the government worked to attract both foreign and domestic investment in its economy. By 1996 Peru entered the top 10 list of recipients of foreign direct investment among developing countries. More recently, trade liberalization policies have contributed to Peru’s strong growth rate of 9% in 2008, a growth rate which has supported a reduction in the national poverty rate by 15% since 2002. Peru’s significant economic growth is due in part to effective policy management by the government and in part to increased world prices for commodities. However, Peru’s overdependence on the minerals and metals abundant in its mountainous regions expose its economy to shocks from volatile commodity prices.

As the Peruvian financial system has become increasingly integrated into the global market, authorities have become aware of the need for consumer protection law and regulation in the financial industry. As such, Peru has built a legal and regulatory framework for consumer protection in the industry. Though not specifically designed for microfinance clients, the framework protects the rights of all financial service clients and offers mechanisms for redress of grievances.

Peru topped the Economist Intelligence Unit’s 2008 Microscope on Microfinance Business Environment in Latin America and the Caribbean, an evaluation of the framework and outlook for growth in microfinance. Though regulatory framework topped the list of scoring criteria, it is unclear from the report whether the study accounted for client protection within the overall regulatory framework.

In 2004, an unofficial UNCTAD report found that Peru is making notable progress in the area of consumer protection. It highlights the work of INDECOPI, the PAU of SBS and the DCF of ASBANC in the area of consumer protection and mechanisms for redress of grievances for the financial client. In its report, UNCTAD issued a series of consumer protection recommendations, among them official consumer protection policy, which Peru adopted the following year in the Complementary Law to the Consumer Protection Law for Financial Service Clients.

Composition of the Microfinance Sector

In Peru, small and micro enterprises account for 95% of all business in the country’s manufacturing, commercial and service sectors. Such enterprises also employ 65% of Peru’s urban workforce. In spite of the credit needs of such enterprises, combined loans from the formal financial sector, international development agencies and NGOs met only 5% of this demand in 1994. Supply is steadily catching up to demand. From 1995-2005, loan portfolios of microfinance institutions (MFIs) enjoyed an annual growth rate of 32.3%. MFIs hold an estimated 30%-40% of the borrowers in the Peruvian financial system. As the the fastest growing financial institutions in Peru, MFIs direct most of their credit toward micro-enterprise efforts as opposed to consumer credit.

The following entities, which form the regulated microfinance sector, must comply with auditing and reporting requirements stipulated by the Banking and Insurance Superintendent known by its Spanish acronym SBS (see below for more information on SBS), report to the SBS on a monthly basis and conduct strict loan loss provisioning.

• Commercial Banks with Microfinance Operations (such as Mi Banco and Banco de Trabajo), though relatively new to the sector, have rapidly built up substantial microfinance portfolios.
• Rural Credit and Savings Institutions, known by the Spanish acronym CRAC, are owned by private entrepreneurs and operate mainly in rural areas with large exposure to agriculture and livestock sectors. CRACs filled the void left when 1992 financial reforms closed the Agrarian Bank in 1992.
• Municipal Savings and Credit Institutions, known by the Spanish acronym CMAC, are owned by local governments. They are the largest and most profitable non-bank formal MFIs due in part to their ability to take deposits.
• Entitities for the Development of Small and Micro Enterprises, known by the Spanish acronym EDPYME, were created in the mid 1990s as credit-only institutions to formalize loan-granting NGOs. They are limited by their inability to take deposits.

Unregulated MFIs share their information on a voluntary basis with the Consortium for Private Organizations Promoting the Development of Small and Medium Enterprises, known by the Spanish acronym COPEME (see below for more information on COPEME). Though the self-regulatory body of COPEME is better than an entire absence of regulation, its voluntary reporting principles make it less effective than the compulsory framework for regulated MFIs set forth by SBS. For example, some NGOs appear not to conduct any loan loss provisioning.

 Legal Framework

Peru’s General Law of the Financial and Insurance Systems, last modified in 2008, established the rules and regulations for all banks and financial institutions of Peru. Beyond generic banking codes, a few items emerge as salient to the client protection library:

1.      The state shall not participate in the financial system.

2.      Companies of the financial system may freely set interest rates, fees and charges with respect to their loans and deposit services. In the case of fixing interest rates, they must observe the limits set forth by the Central Bank.

3.      SBS holds the power to measure the overall indebtedness of individuals by requesting credit checks from companies of the financial system.

4.      Every six months, all companies of the financial system accepting deposits from the public must receive a rating from at least two rating agencies.

5.      Companies, directors and employees of the financial system are prohibited from sharing any information with respect to client deposits without the written authorization of the client.

Banking and Insurance Superintendent (SBS)

The regulation and supervision of Peru’s financial system is primarily the responsibility of the functionally autonomous SBS. Among its objectives, functions and duties established in the  General Law of the Financial System and Insurance System, the SBS protects public interest by ensuring the stability and solvency of the firms that form the financial system of Peru. Both regulated under the same financial law, MFIs and commercial banks have similar regulatory framework. Regulated microfinance institutions must comply with auditing and reporting requirements of SBS and report to SBS on monthly basis.

The SBS calls for financial institutions issuing loans to formally assess the financial situation of the client. Though not explicitly stated on the SBS website, such assessment contributes to the avoidance of over-indebtedness for each client. Recognizing the nature of microenterprise loans, the SBS allows each financial institution to establish their own background information requirement for clients.

All financial institutions report their clients to SBS, which consolidates and shares the information with all financial institutions through its credit bureau. Such a system ensures that loaning facilities will not put borrowers at significant risk of over-indebtedness.

The Consumer Protection Agency (INDECOPI)

INDECOPI is the Peruvian Consumer Protection Agency. The decentralized public agency created in 1991 by Law 25868 also works to promote competition and protect intellectual property rights in the Peruvian economy. It maintains technical, economic, budgetary and administrative autonomy. It is the body responsible for applying fines in violation of consumer protection law.

Both SBS and INDECOPI maintain specific entities designed to meet customer service needs. SBS’s Client Protection Platform (PAU) and INDECOPI’s Consumer Support System (SAC) have entered into an agreement to assist consumers in the redress of complaints and grievances.

The Consumer Protection Commission (CPC)

CPC is the body of INDECOPI designed to impose administrative sanctions and corrective measures established in the Consumer Protection Law. The Service Office of Citizen Attention provides a free service to help consumers resolve their grievances with service providers.

 Complementary Law to the Consumer Protection Law for Financial Services

Peru’s most comprehensive effort to protect the financial service clients of Peru is the 2005 addition to the Consumer Protection Law for Financial Service Clients. This Complementary Law includes provisions for transparent pricing, requiring financial institutions to post accurate information concerning interest rates and bank fees inside the institution, on all contracts with clients and on the institution webpage. Banking institution websites must provide official formulas for calculating interest as well interest rate simulation programs. The Complementary Law requires that each financial institution establish a customer service body in order to provide quality service to the financial client. SBS presents a summary of the law  on its homepage.

The Data Protection Law of Peru

The Data Protection Law of Peru, enacted in August 2001, covers the private credit bureaus that collect and process credit information of both individuals and companies. The law specifies that credit information on a data subject obtained from a source other than the subject directly, must be provided to the subject. The law specifies what type of information and records credit bureaus can legally collect. The Law also states that individuals have the right to information and the right to modify or cancel their personal data.

Networks

The Association of Peruvian Banks (known for by Spanish acronym ASBANC)

The Association of Peruvian Banks is the association representing entities in the financial private sector in Peru. It was created in 1967 with the objective to represent, develop and administer the common interests of financial institutions in Peru. It offers technical studies and consulting to its 18 associated entities.

ASBANC created the Financial Client Defender (DFC) in April, 2003. In the spirit of an ombudsman, the DCF works to defend the rights of financial clients in the ASBANC network. It acts as an independent mediator in striving to prevent or resolve conflicts between clients and the providers of financial services.  DCF offers its services free of charge for clients of associated banks, including Citibank of Peru, HSBC Bank Peru and MiBanco.

The Consortium of Private Organizations to Promote the Development of Small and Micro Enterprises (known by its Spanish acronym COPEME)

The Consortium of Private Organizations to Promote the Development of Small and Micro Enterprises is a non profit organization founded in 1990 and dedicated to the development of micro and small enterprises in Peru. To achieve its aims, COPEME works in alliance with international organizations and government institutions. COPEME is comprised of more than 60 institutions, 40 of them NGOs, with credit programs in urban and rural areas. Non-regulated MFI associates report to COPEME on a voluntary basis, though it is unclear to what percentage of MFIs in the consortium report and in what capacity COPEME regulates the reporting. By not including any consumer protection information on its website, COPEME does not appear to specifically lobby for the protection of financial clients in its network.

 Network Details:

Source (2005)

Conclusion

Peru responded quickly and appropriately to the economic crisis of the 1980s. With the establishment of sound economic policy throughout the 1990s, Peru has emerged in the 21st century as one of Latin America’s fastest growing economies. Keeping up with such radical economic change, Peru has built a significant legal and regulatory framework providing for the protection of financial service clients. Though not specifically designed for microfinance clients, MFI clients benefits from the rights extended to them through the General Financial Law, the Consumer Protection Law and the Complementary Law to the Consumer Protection Law.

Clients of regulated MFIs enjoy the supervision of the SBS, which promotes and enforces the avoidance of over-indebtedness, transparent pricing, ethical staff behavior, mechanisms for redress of grievances, and privacy of client data. Though voluntary reporting has probably promoted better practices among unregulated MFIs, COPEME does not offer a detailed description of the reporting practices of its affiliates. Furthermore, COPEME does not appear to specifically lobby for the protection of financial clients in its network.

Overall, the outlook for financial consumers in Peru is good. With the adoption of the Complementary Law to the Consumer Protection Law for Financial Service Clients, Peru demonstrated its commitment to adapting its legal framework to serve the evolving needs of its financial service clients. As the economy continues to grow at impressive rates, Peru should ensure that its consumer protection regulatory framework will evolve with it.

These profiles are not exhaustive and have not been reviewed by country experts. If you notice a gap or error in any of the profiles, we would very much appreciate your comments about how they can be improved. In this way we can work together to expand our understanding of the variety of client protection strategies and initiatives that are being pursued in different parts of the world.

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