Despite technological advancements and high levels of consumer awareness, financial fraud is common these days because fraudsters are highly adaptive and creative.

The risk of financial loss at the hands of scammers, hackers and swindlers is evenly spread across the developed and developing world. The difference, perhaps, lies in the level of sophistication of these attacks, where the loose legal, regulatory and technical frameworks of third world countries make it easy for simple scams to be carried out repeatedly [Source: OECD Observer]. What makes matters worse are the low levels of formal education and financial literacy rates at the bottom of the pyramid, where fraud is a part of life. Whatever little assets these individuals possess, can be lost in a matter of minutes.

This all being said, consumers themselves can follow certain practices to proactively safeguard their financial assets, and that is what we discuss today.

fraud prevention, microfinance fraud, client protection in microfinance

The following tips are shared specifically in the context of the microfinance sector. They are universal in nature and can be used to educate clients to improve consumer protection efforts at the most basic level.

1. Ask for identification

Microfinance clients are typically spread over large geographical areas in rural landscapes, and often do not have to means to make regular trips to an MFI’s office to pay loan installments. For this reason, loan officers frequently visit clients at their homes in order to collect or make payments, even though it adds significantly to operational costs. This business model makes room for scammers to impersonate loan officers and visit a client’s home, claiming to be a recently hired employee seeking to collect the installment money.

2. Keep your PIN safe

The collection and disbursement of microloans is often carried out digitally, via mobile banking platforms, because of convenience and cost-cutting motives. Each financial transaction carried out through this digital platform must be verified with a unique Personal Identification Number (PIN) that has been assigned to the loan officer or microfinance client. If this PIN were to fall into the wrong hands, money could easily be stolen.

3. Verify mobile number of recipient before sending money

Microfinance clients may send loan installments to their loan officers via mobile banking platforms each month, which reduces transport costs for both clients and MFIs. For this purpose, clients visit the nearest mobile money kiosk to transmit money electronically to the MFI’s account. The kiosk agent will ask clients for a destination mobile number in order to send the money and complete the transaction. Clients must ensure the mobile numbers used are accurate and authentic.

4. Record all transaction details for possible fraud report

MFIs that use digital financial platforms (mobile money) to offer microfinance services to clients often have to rely on third parties to conduct transactions. A number of mobile money kiosks are operated by different agents, who may be regular merchants offering money transfers as a value added service to their community.

Corrupt kiosk operators can charge extra fees, make duplicate transactions or deliberately send money to themselves instead of the correct recipient without the customer’s knowledge.

5. Regularly check mobile account balance

Mobile money systems are more simplified in developing countries as opposed to developed countries to improve customer acquisition rates, which can also make these systems less secure. In addition to this, users of mobile banking services among microfinance clients often lack basic education and technical skills needed to operate their mobile banking accounts diligently. This creates room for unscrupulous agents or MFI employees to take advantage of clients and steal money from their accounts.

6. Keep a copy of the loan installment plan

Loan officers are vetted for their moral integrity before they are sent out to deal with microfinance clients because it may be extremely easy, hence tempting, to mislead them. An ‘over collection’ of debt installments may be made by telling clients an inflated installment figure, or by failing to dispatch a receipt as proof of the transaction. The obvious solution to this issue is to introduce better internal controls so the possibility of fraud is minimized. Clients can also be trained in this regard.

This list represents a minimum standard for financial literacy campaigns and also contributes to the goal of eliminating fraud faced by microfinance clients, who are no strange to financial volatility. It is by no means an all-inclusive list, but it will provide a baseline of protective behaviours microfinance clients can utilize to maintain their security.

Can you think of any other types of fraud that microfinance clients may be exposed to? Please share them in the comments section below.

This article was written by Fehmeen, the owner of Top Money Hacks.

About Fehmeen Khan

Hi, I'm a finance blogger who is interested in how different financial tools, including microfinance, can deliver real value to consumers.
  • Abhishek Kumar

    My name is Abhishek and I am from Bihar.And one person contacted me that that “Jagriti Mahila evam Bal vikash samiti” in Nanital is running a Micro finance company and He is asking me for 30,000 rupess to deposit in a Axis account and they will offer me a job of state head in this micro finance company of Jharkhand company . He shared an offer letter of some other person. I have attached that offer letter.

    Can you please help is this a frud company in the name of microfinance. As I have searched every where I have not find this name in micro finance.
    Thanks in advance for your help.