Client Protection and Microfinance: Crossing a Threshold
The following post was originally published on the Huffington Post Business Blog.
The global microfinance industry realized a significant and long-awaited goal this week with the introduction of Client Protection Certification as promoted by the Smart Campaign. With certification, lenders and banks for low-income people will be able to demonstrate — on the basis of an on-site, third-party evaluation — that they take adequate care to protect their clients.
As one of the founders of the Smart Campaign, my high hopes are that Client Protection Certification will become a kind of Fair Trade mark for the microfinance industry. If established as we envision, donors, investors, regulators, and even clients will check the certification registry before they invest in or bank with microfinance institutions, choosing the ones that meet the standards. This in turn will create positive incentives for institutions to improve, ultimately leading to safer, more respectful services for the low income clients microfinance reaches.
This certification program is part of an ongoing process that gained momentum in 2008 as we in the microfinance industry, perhaps a little smugly, observed how poor client protection among U.S. subprime mortgage lenders triggered the global financial crisis. Many of the leading players in microfinance said to each other, “Microfinance is not like that.” We naively believed that because of their deep pro-poor motivations, micro-lenders would always put clients’ welfare first.
That conviction prompted a small group, led by the Consultative Group to Assist the Poor (CGAP), a microfinance center hosted at the World Bank, together with several of the industry’s leading investors to adopt a set of Client Protection Principles. These principles provide a moral touchstone, almost a Hippocratic Oath for financial services. They include the elements that come to mind when we ask what constitutes fair treatment, including preventing over-indebtedness, transparent communications, responsible pricing, appropriate collections and the like. As a Center for Financial Inclusion publication states, “Good client protection is especially important for anyone lacking experience with financial services and for the vulnerable populations microfinance serves, such as the poor, women, youth, rural dwellers and persons with disabilities.”
Unfortunately, in 2009 and 2010, microfinance suffered its own series of bubbles, as microfinance markets in India, Bosnia, and Nicaragua, among others, overheated and sent many clients into severe debt stress. These crises revealed that microfinance institutions, now often operating as banks and finance companies, could also be susceptible to the encroachment of poor practices.
The microfinance industry acted quickly in response. The Center for Financial Inclusion at Accion, together with CGAP, led a coalition to create the Smart Campaign to put the client protection principles into practice. Over 1,100 microfinance institutions and over 2,200 additional individuals and organizations (e.g., investors, donors, and networks) have endorsed the Smart Campaign principles. The Campaign and its supporters recognized that the industry would need more than lip service to a set of principles, however. They would need a sturdy supporting architecture. With today’s certification launch, a major portion of that architecture is now open for public inspection.
To develop certification, the Smart Campaign and its task forces translated the seven principles into 30 specific standards of practice within organizations. The standard-setting process drew upon norms, values, and practices already present within microfinance, but not always formally recognized. Expert field teams developed the methodology to be used when investigators conduct on-site verification visits. Starting today, any organization that meets the standards and passes the verification visit will be publicly acknowledged as “Client Protection Certified.”
For transparency, as an example, the principle requires providers to give clear, sufficient and timely information, especially on prices, in a manner that clients can understand. The standards accompanying this principle include more than simple disclosure. They require institutions to consider factors like their clients’ limited literacy, and to apply procedures that will ensure that clients can be genuinely informed when the time comes to make decisions.
The first group of certified institutions announced today are from two countries where the microfinance sector experienced an over-lending crisis and saw the need to prioritize client protection: India and Bosnia. Before seeking certification, these institutions examined their policies and practices internally and made needed adjustments. Through this upgrading process, the certification program has already begun to add value for clients. When the institutions were ready, they invited one of the four certifiers licensed by the Smart Campaign (Planet Rating, Microfinanza, M-CRIL and MicroRate) to examine them on-site. In order be certified, the institutions had to pass all 30 standards, quite an accomplishment.
The Smart Campaign enjoys widespread support across the microfinance industry, because most of the practitioners of microfinance do, in fact, care greatly about client welfare. With a clear framework now in place, they are ready to hold themselves to a highly visible standard. This resolve is what makes me proud to be part of this industry.
Over the past twenty years, microfinance brought financial services to hundreds of millions of people who were previously ignored. In the next few years, it may demonstrate that a committed group of financial institutions serving low-income clients can lead the financial sector in implementing responsible financial services.
Have you read?