In the wake of the global financial crisis and a number of instances of market overheating in microfinance, notably in India in 2010, the microfinance community has turned its attention to the need for explicit action on consumer protection. To ensure that clients can rely on receiving prudent and respectful treatment from their microfinance institutions (MFIs), industry leaders encouraged development of the Smart Campaign, a global drive to embed a set of seven Client Protection Principles deep into the fabric of MFIs.
The principles address the most common ways in which financial services can go wrong, especially for the vulnerable and often poorly educated clients served by MFIs: appropriate product design and delivery, fair and respectful treatment, transparency, privacy, responsible pricing, and redress of grievances. Particular attention is given to preventing debt stress and to humane collections practices.
These principles and the Smart Campaign now have more than twenty-five hundred endorsers, including most of the world's leading MFIs, serving an estimated forty million clients. Of course, endorsing is the easy part. Everyone loves the principles, but practicing them requires thoughtful attention and effort. The campaign is working with microfinance associations in more than thirty countries to train members, assess institutions, and build detailed standards of practice for turning widely applauded principles into specific actions that occur whenever clients and providers interact. Most important, it has triggered a rapidly spreading movement to subject MFIs to third-party assessments of their client protection practices. In the last year, at least ten major microfinance investment funds managing more than $2 billion have integrated client protection assessment into their due diligence and reporting.
Responding to Microfinance Crises
It could be argued that, after two decades, microfinance was slow to develop a client protection consciousness. (One might say something even stronger about the mainstream financial sector in the U.S.) After all, a sector built with intent to improve the lives of the poor should have the best interests of its clients at heart. And I believe it does. But the microfinance community and here I include myself was naïve in thinking that its good intentions would always benefit clients. We assumed too readily that borrowers always benefited from our services and thus the more borrowers, the greater the benefit. The drive for growth caused some providers to cut corners, lose their focus on quality, or simply be blind to the possibility that some clients were experiencing substandard treatment.
It took several instances of rapid growth leading to client over-indebtedness 8212 particularly in Bosnia, India, Morocco, and Nicaragua 8212 to make it clear that a model geared toward reaching people as fast as possible needed adjustment. In addition to the Smart Campaign, the microfinance industry is working on initiatives such as Microfinance Transparency (which promotes the release of comprehensive pricing data), as well as efforts to increase credit information reporting to identify clients who may be over-indebted. In Bosnia, MFIs have worked together to create a debt counseling center.
As the Smart Campaign has delved into the actual practices of MFIs through on-site observation, we find that most MFIs implicitly have been practicing client protection, even if they have not made explicit reference to the principles. The Smart Campaign recently analyzed the results of on-site third-party assessments of more than three hundred and fifty MFIs. The overwhelming majority (88 percent) earned passing scores. This exercise was a first-ever assessment of practices, mostly by social investors carrying out pre-investment due diligence, and we expect such assessments to grow more rigorous in coming years. Meanwhile, on-site assessments of MFIs like these are helping organizations identify their weaknesses and take steps to correct them.
Social Investors and Donors Step Up
Social investors are playing an important role here, as they seek to hold their investee MFIs accountable for good practices. Private investors like Blue Orchard and the Deutsche Bank and Calvert foundations and public social investors like the International Finance Corporation and the InterAmerican Development Bank are incorporating the Client Protection Principles into their selection of, negotiation with, and monitoring of microfinance investments.
Investors and donors are keen for the Smart Campaign to move to the next step: public certification. During 2012, the campaign will launch the trial year of a client protection certification program that will result in a stamp of approval for certified MFIs signifying that they meet adequate standards of care for protecting clients. This program is being developed in collaboration with the four rating agencies that specialize in microfinance Planet Rating, Microfinanza, M-CRIL, and Microrate. It will take some time to scale the certification program to cover a significant number of MFIs, but in two to three years, if all goes well, investors and donors will be able to direct their involvement specifically to organizations that have been Smart-Certified. This will be a major milestone for the microfinance sector.
Many of the supporters of the Client Protection Principles I have talked with secretly harbor even bigger hopes. They hope that one day client protection will be so much a part of microfinance that the mainstream financial sector will take note of what microfinance has done and emulate some of its attitudes. Microfinance will demonstrate that an industry can embrace client protection and thrive.
Elisabeth Rhyne is Managing Director of the Center for Financial Inclusion at ACCION and a member of the Smart Campaign Steering Committee.