The dream of Mohammed Yunus to use microfinance to relegate poverty to museums has taken a beating in recent years. The tremendous growth of the microfinance industry has prompted some aggressive and unethical players to prey on the poor with high interest rates, multiple loans and coercive collections.
But a new generation of microfinance providers is now coming forward. With an emphasis on client protection, borrower accountability and social standard setting, there is a new wave of responsible microfinance underway.
This has been led by the Washington-based Centre for Financial Inclusion, which launched the Client Protection Certification Program two years ago to recognize financial institutions meeting standards of care in client treatment. The certification program is part of a global initiative known as The Smart Campaign, which provides microfinance institutions with tools and resources to deliver transparent, respectful, and prudent financial services.
It is based on a series of principles known as the Client Protection Principles (CPPs) that cover a range of basic notions about credit delivery. Here they are:
- Products will be designed and delivered to ensure that providers do no harm to clients
- Providers will take care to prevent overindebtedness
- Providers will communicate in a clear and transparent manner
- Pricing, terms and conditions will be set in a way that is affordable to clients and sustainable for institutions
- Providers will treat clients fairly and respectfully
- The privacy of client data will be respected
- Mechanisms will be in place to resolve complaints.
The CPPs represent “a moral touchstone, almost a Hippocratic Oath for financial services,” says Elisabeth Rhyne, managing director of the Centre for Financial Inclusion.
Thirty microfinance institutions (MFIs) around the world have been certified to date, and this past April the certification program announced changes to expand the program.
The organization I work for, Oikocredit, announced its support of the Client Protection Certification Program in 2013, acknowledging that it faces high expectations as a socially responsible investor. “The need to define good performance has become even more imperative for Oikocredit as a social investor as well as for the MFIs we invest in,” stated Ging Ledesma, Oikocredit’s Director of Social Performance.
The Client Protection Principles is just one of many reforms underway by the microfinance industry. The Social Performance Task Force, a group of 800 microfinance leaders, has created a universal standards manual for MFIs to achieve social goals. The Task Force has also helped to develop a global research project on social performance data known as the Social Performance Indicators project. The Task Force includes MFIs, donors, investors, rating agencies, research companies and individuals from around the world.
Research is also underway to track the poverty impacts of MFIs through the Progress Out of Poverty Index, a project of the Grameen Foundation in Washington.
Investors in microfinance, including Oikocredit, have signed the Principles for Investors in Inclusive Finance (PIIF), a series of principles aimed at holding MFIs accountable to investors for their social outcomes. The PIIF is an initiative of the London-based Principles for Responsible Investment, which includes nearly 300 major institutional investors worldwide and more than 900 investment managers.
While there is strong progress on many fronts, not all of these reforms have been sustainable. MFTransparency, a US-based non-governmental organization collecting MFI pricing data, announced earlier this year that it would close, saying it couldn’t keep pace with growth of the industry.
These reforms, while not perfect, are holding the microfinance industry accountable to clients and to investors. The beneficiaries are the millions of poor borrowers who make use of microfinance services.
But impact investors can also be assured that these reforms are helping to ensure that their investment dollars are financing reputable and socially responsible institutions that treat their clients with respect, fairness and accountability.
For more information, visit www.oikocredit.ca.
This blog originally appeared in the June 2015 issue of Your Guide to Responsible Investing, published as a supplement to the Globe and Mail and Investment Executive.