Making microfinance work for the client
One of the lessons that we learned from the global financial crisis is that when you expose vulnerable borrowers to unprincipled lenders, the results can be disastrous. That was true of sub-prime borrowers in the US and Europe, and we are now finding it true of the large numbers of vulnerable microfinance borrowers exposed to unscrupulous lenders in the developing world.
In response to these incidences, the Centre for Financial Inclusion launched the Client Protection Certification Program in January 2013 to recognize financial institutions that meet adequate standards of care in how they treat their clients. 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 to all clients.
It is based on a series of fundamental principles (known as the Client Protection Principles, or CPPs) that cover a range of basic notions about credit delivery, summarized as follows:
- lenders will do no harm to clients
- lenders will design and deliver loans with the client in mind
- over-indebtedness will be prevented
- lenders will provide transparent information to borrowers
- pricing, terms and conditions will be responsible
- clients will be treated fairly and respectfully
- client data will be treated privately
- mechanisms will be in place to resolve complaints.
Elisabeth Rhyne, managing director of the Centre for Financial Inclusion, likened the new program to a fair trade certification for the microfinance industry. She hopes the certification program will become an assurance standard for donors, investors, regulators and clients of microfinance institutions (MFIs). As relayed in her Huffington Post blog, she believes that the CPPs represent “a moral touchstone, almost a Hippocratic Oath for financial services.”
The organization I work for, Oikocredit, is one of the world’s largest private funders to the microfinance industry with more than 850 partners in 67 countries. As such, we have a special responsibility to meet the highest standards of client protection and have been following the CPPs since 2008.
Before any institution becomes a partner, Oikocredit measures their performance against social performance criteria, including the CPPs. In 2012, more than 180 Oikocredit microfinance institution (MFI) partners participated in workshops on the client protection principles, and more than 50 have undergone self-assessments.
Oikocredit announced its support of the Client Protection Certification Program in February, acknowledging that it faces high expectations as a socially responsible investor. As stated by Ging Ledesma, Director of Social Performance, “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.”
In the next two years, Oikocredit plans to work with the Smart Campaign and third-party evaluators to assess a number of its MFI partners in Latin America and the Caribbean.
According to the latest statistics, microfinance reaches about 195 million borrowers around the world, a small fraction of the estimated 2.8 billion people who live on less than two dollars a day. While not all of those 2.8 billion people could benefit from microfinance services, it’s fair to say that microfinance has a long way to go before it reaches its full potential. The Client Protection Certification Program represents one step by the industry to improve its practices so that it can expand its reach, helping to alleviate poverty around the globe.
This post was originally published on socialfinance.ca.