In association with a collective of partners, including the members of the Microfinance CEO Working Group (Accion, FINCA, Freedom from Hunger, Grameen Foundation USA, Opportunity International, Pro Mujer, VisionFund International, and Women’s World Banking), Convergences 2015 has developed the “Global Appeal for Responsible Microfinance,” a worldwide effort to build momentum and commitment to financial inclusion and to responsible finance.
Initially launched as the “Paris Appeal for Responsible Microfinance” at the 4th annual Convergences 2015 Forum in May 2011 in front of 3,000 participants, the Appeal serves as a campaign of advocacy and action among all concerned actors: the general public, microfinance professionals, investors and policymakers. In the 16 months since its release, the industry has made additional strides in developing and instituting client-focused microfinance practices. This revised document – the Global Appeal for Responsible Microfinance – articulates a vision for a fully responsible and responsive industry, and outlines a path forward for all relevant stakeholders.
If, like us and the 1,500 individuals and 500 organizations who have already signed the Paris Appeal for Responsible Microfinance, you support the Millennium Development Goals and microfinance as powerful tools for economic development and poverty alleviation, sign the Global Appeal for Responsible Microfinance on www.theglobalappeal.org
Whether you come as a private individual, a beneficiary, a regulator, an investor or an operator, be one of the many who support the following Appeal. We call on all parties to join us in endorsing the following statements on the fundamental values of microfinance, and to commit to implementing responsible practices and rules within your own organizations:
The Global Appeal for Responsible Microfinance
Microcredit has been a tool in the service of development and the fight against poverty for nearly 40 years. In 2010, according to the Microcredit Summit Campaign, 205 million poor in more than 80 developing countries, more than 75% of whom are women, have received a loan to create or develop an income-generating activity. The amounts involved are small and increase gradually as the borrower goes through various borrowing cycles without any repayment incidents. The interest rates are still relatively high, but to a large extent explainable by the high level of operational costs required for the extension of small amount loans to a large number of borrowers. The distribution methods, payment schedules, and guarantee policies are adapted to the reimbursement capacities of the borrowers and to their very low level of financial education.
Today, microfinance extends far beyond microcredit to comprise a full range of simple and accessible financial services that include savings, payments, money transfer, and insurance, in addition to credit. There continue to be beneficial advancements that push the frontiers of microfinance, including the use of mobile technology to expand access to rural residents. In spite of its rapid development, microfinance still reaches only a tiny fraction of potential beneficiaries: by some estimates, as many as 2.7 billion people are disconnected from the formal financial system.
Widely spread within developing and emerging countries, microfinance has been more recently introduced in developed countries as a response to the bank exclusion that affects socially and financially excluded persons, and has been recognized as a means of encouraging the growth of self-employment and the formation and development of micro-enterprises.
Worldwide microfinance activities have been expanded by several thousand specialized institutions of highly varying size and status. These institutions often play a social role which goes beyond their financial function. They contribute to the construction of a civil society more aware of its rights and more confident in its own strengths, to the promotion of women in economic life, and to the implementation of health and education programs. Some institutions develop microfinance for very precarious populations, whose primary objective is the fight against poverty, with support to borrowers using non financial services such as counseling, training and social support.
Microfinance makes a fundamental and original contribution to development issues. Microcredit, for one, is well suited to encouraging commercial, craft and, to a certain extent, agricultural micro-activities. Financial services are fundamental tools that support individuals to manage their businesses, cope with unpredictable cash flows, and pay for expenses, like health emergencies and education. Nonetheless, microfinance cannot replace public social security policies nor the development of the necessary facilities for health and education. It can, however, improve the efficiency of such policies and programs by leveraging its extensive network in the most underprivileged quarters and most remote rural areas. It can also create income streams with which low-income families can pay school fees and defray health care costs.
These direct or induced benefits explain the success of microfinance, its rapid dissemination in more than 80 developing countries and the international recognition it has received, particularly with the International Year of Microcredit in 2005 and the awarding of the Nobel Peace Prize to Professor M. Yunus and the Grameen Bank in 2006.
The impact of microfinance has been the subject of numerous academic studies which have brought forward the importance of financial services in reducing the vulnerability of low-income populations. The evidence regarding the impact on the reduction of poverty varies depending on the regions and types of financial products on offer. Research studies are still in progress to get a better understanding of these phenomena.
Against the very promising background outlined above, some microfinance institutions have emphasized the rapid growth of clientele, at the risk of weakening the relationships of proximity and trust which lie at the heart of their economic model. They have increased their credit portfolios at a very fast rate, at the risk of weakening the implementation of progressive financing cycles, reimbursement discipline, and the attention paid to the nature of the activities financed. To refinance their booming credit portfolio, some institutions incurred excessive debts or exposed themselves to currency exchange rate risk beyond their control. Institutions defaulted in certain countries, and such defaults were at times aggravated by political interference, as in India and Nicaragua. In taking these steps, some organizations lost focus on the best interests of the client. In a number of cases, clients were affected and reactive political and regulatory measures were brought in. These real excesses have nonetheless been contained. Furthermore, necessary steps to prevent the reoccurrence of such issues are relatively well defined:
- Strengthening the capacities of institutions, in particular in terms of governance, internal controls, risk management, information systems and training of credit agents;
- Pursuing more sustainable and geographically better distributed growth, accompanied by over-indebtedness control mechanisms like credit bureaus;
- Improving the regulatory framework, in particular prudential rules, and reinforcing supervision.
In addition to the institutional risk, the industry must also recognize the broad reputational risk it incurs through the single-minded pursuit of growth. Microfinance has from the outset aimed to serve vulnerable, low-income populations. This target market necessitates heightened ethical awareness and action to ensure that the industry’s products and services ultimately add value to the lives of the clients. When institutions adopt overly aggressive development policies, charge excessive interest rates, and implement abusive recovery policies, they discredit the very model of microfinance.
During the past several years, the global microfinance industry has been working to raise awareness of and establish safeguards for responsible and client-centered finance. Significant efforts include:
- On the client protection front, a worldwide Smart Campaign is being pursued to improve products and practices. The Smart Campaign represents an unprecedented effort, led by the industry itself, to embed a set of Client Protection Principles into industry culture and practice. This year the Campaign will launch a certification program, through which MFIs can demonstrate their adherence to the Principles.
- The organization MFTransparency has enabled the industry to demonstrate its commitment to transparency in pricing, with the publication of pricing data on over 400 MFIs in 17 countries. MFT has also proved an important platform for educating MFIs, investors, and the public.
- Through the Social Performance Task Force (SPTF) and the MIX, standardized social performance indicators have been developed and more than 400 microfinance institutions have integrated them in their reporting. The SPTF has also recently launched the Universal Standards for Social Performance Management, a set of management standards that establish a global, shared understanding of strong social performance management – a first for the microfinance industry.
- Specialized rating agencies have been set up with the support of public sector agencies, and they issue more than 200 social ratings each year aside from their financial ratings.
- Specific tools have been developed to assist MFIs to measure their poverty outreach (PPI and PAT).
- For organizations whose missions emphasize the alleviation of poverty, the Microcredit Summit is developing a Seal of Excellence for Poverty Outreach and Transformation in microfinance, intended to serve as an inspiration and recognition of what microfinance can achieve.
- On the sector regulation front, the Basel Committee on Banking Supervision has published a series of recommendations on the supervision of microfinance institutions that mobilize savings. Additionally, more than 80 countries have signed on to the Alliance for Financial Inclusion’s “Maya Declaration on Financial Inclusion,” committing to enacting policies that enable the expansion of financial inclusion.
These initiatives represent serious efforts, largely industry-led, to promote responsible microfinance services that protect and benefit clients. However, many of them remain in their early states; sustained action is needed to fully integrate them throughout the microfinance industry in order to prevent future crises or mission drifts and foster responsible microfinance. Political impetus and a global initiative are needed to enhance trust and confidence in microfinance and to embark on new paths for development.
To meet its objective fully, such a global initiative must involve all microfinance stakeholders, whether field institutions and their national or regional associations, providers of capital and of specialized services, international institutions and regulatory and supervisory authorities.
Microfinance has not in fact followed a single model during the course of its very rapid development, but has adapted to the conditions of each country. Some institutions are more focused on poverty reduction while others seek primarily financial inclusion. Some institutions even pursue a triple-bottom line, meaning they establish social and environmental goals as well as financial. Some define themselves as social businesses, re-investing all the profit in the institution to further develop its outreach and improve its scope of services. The diversity of legal statuses remains considerable. This diversity is a valuable asset which must be preserved, but in a globalised and interconnected world, it must not stand in the way of a basic set of principles and guidelines – which are required in order to maintain the trust of the public and to confirm sustainable and responsible growth.
This base should comprise principles along the following lines:
- MFIs Serve Clients in a Responsible Manner. Microfinance institutions should apply the Smart Campaign’s Client Protection Principles and adhere to high standards of pricing transparency and fairness as promoted by MFTransparency. These initiatives represent some of the best thinking of the industry on how to protect the interests of clients. Organizations that endorse and cooperate with these initiatives can incorporate their suggested guidelines into policies, procedures, staff training, marketing, etc. Every interaction with clients should reflect these high standards, which form the foundation for responsible finance.
- MFIs Advance the SPTF Universal Standards for Social Performance Management (USSPM). The Standards were developed with broad industry consensus, and now the task is to determine how to translate them into practice. The search for effective social performance is rooted in the ongoing concern to reach low-income and excluded populations and to provide clients with services that contribute to improving their quality of life in a potentially wide range of ways. Examples include reaching out to remote and excluded populations, offering a wide range of financial products and developing non-financial services. Institutions need to ensure that their social mission and its relevant performance indicators are integrated into operations, and they should report systematically on social performance and make decisions in light of social performance indicators.
- MFIs Operate with Sound Governance and Financial Responsibility. Microfinance institutions can develop in a sustainable manner only if they inspire trust and confidence through effective governance, robust risk management and efficient report, control, and audit systems. These systems must be open to external supervision and rating according to transparent and objective methods.
- Regulators and Policy Makers Support a Sound Microfinance Sector. In many countries, MFIs still lack clear and appropriate regulation. Policy makers and regulators have a responsibility to develop a policy environment that allows for the expansion of responsible, effective services to their citizens. Commitments should go beyond statements of support to outline plans for fostering the microfinance environment, complete with metrics. National and regional microfinance associations should be ready to engage a dialogue with policy makers, based on the guidelines of the Global Appeal, to establish rules and standards aimed at creating a sound and proportional regulatory framework.
- Investors in Microfinance Uphold the Principles for Investors in Inclusive Finance. Investors specialized in microfinance have a duty to act with due respect for the long-term interests of the institutions they support and to make financial independence their objective. This vision is based on compliance with an investors’ code of conduct, such as the Principles for Investors in Inclusive Finance developed with the support of the UN PRI. These principles not only confirm investor commitment to the Client Protection Principles and USSPM, they also ensure that investors treat investee institutions and other investors according to ethical and beneficial market conduct standards. For example they are intended to guarantee that the conditions, in particular of duration and guarantee, of their investments meet quality standards, that the rates and commissions charged are moderate, and that the assistance offered does not expose the financed institutions to an unreasonable currency exchange rate risk.
- Researchers Assist the Microfinance Industry to Learn. Academics and researchers should intensify dialogue with the microfinance sector. They should continue to carry out objective studies, taking into account the diversity of local contexts. They are also encouraged to widely disseminate conclusions.
- Donors, International Financial Institutions and Foundations Support the Industry and Push Boundaries. Donors and foundations have an essential role to play in promoting good practices, encouraging innovation and supporting the expansion and diversification of microfinance activities. Aid programs should aim to reach the most underprivileged countries, population segments and economic sectors where microfinance can contribute to economic and social development, such as sub-Saharan Africa, the farming sector and marginalized groups. Particular attention should be paid to non-financial services, including counseling and education offered. These action priorities could be set out in a framework document on medium-term orientation, to be adhered to by the major international financial institutions, UN agencies, development banks, and cooperation agencies.
We are confident that the vast majority of participants in the microfinance industry agree with these principles and are committed to upholding the best interest of the client in word and deed. We believe, however, that precise plans and commitments must be publically stated in order to hold the industry – and ourselves – accountable.
The industry now has many tools needed to implement responsible microfinance practices at all levels. It is incumbent upon microfinance institutions, and those organizations that support them, to follow through.
In keeping with the diversity of organizational missions and structures, the signatories of the Global Appeal for Responsible Microfinance commit to these principles and ask that, over the coming year and by December 31, 2013, all stakeholders in microfinance make measurable and time-specific commitments to incorporating the above relevant principles into their organizations and into their practices.
The signatories of the Global Appeal for Responsible Microfinance and Convergences 2015
Paris, September 19th, 2012 www.microcreditsummit.org/state_of_the_campaign_report/  CGAP, “Financial Access 2009: Measuring Access to Financial Services around the World,” September 2009, www.cgap.org/gm/document-1.9.38735/FA2009.pdf.  www.smartcampaign.org  www.mftransparency.org  www.sptf.info  www.themix.org  The Progress out of Poverty Index is a practical tool to assess the likelihood that a household is living below a poverty line. The PPI is now available for 45 countries.  The Poverty Assessment Tool is a variant of the PPI as it considers evolution over time within a target group by comparing the score obtained over the years without the poverty level notion.  www.unpri.org/piif/