> Posted by Charlotte Connors

The Smart Campaign today published an unprecedented compilation of third-party assessments of client protection at microfinance institutions (MFIs).  “Implementing Client Protection in Microfinance: The State of the Practice, 2011,” is a first look at how the microfinance industry is doing when it comes to client protection.  The short answer is:  It’s doing pretty well.

The report, commissioned by the Smart Campaign’s Steering Committee, is based on 479 third-party assessments of client protection practices at more than 300 MFIs in five global regions, and has two main purposes.  The first is to document the extent to which the Smart Campaign and actors throughout the microfinance industry are working to move from simply raising awareness about client protection to capacity building, implementation, and finally certification. The second purpose is to provide a first look at how the microfinance industry is doing on the implementation of the Client Protection Principles (CPPs).

We found that the industry has a solid foundation of good client protection practices on which  it can build. Eighty-eight percent of the rated MFIs received overall passing marks (3.0 or higher on a 1-5 scale) with an average score of 3.8. These results also held for the two all-important principles, Avoiding Over-indebtedness and Transparency. While there was relatively little overall variation by region or institution size or type, smaller institutions underperformed the average, as did MFIs in Sub-Saharan Africa.

The lowest average aggregate score for a given CPP, 3.5, was for Responsible Pricing, which also had a smaller data set than the other CPPs because only two-thirds of raters broke it out separately. This is in part due to the complexity of the issue. Multiple factors go into a responsible price — the efficiency of the provider, decisions about profitability, cost of business, size of loans… these factors interact with each other, and are moreover highly context-specific, making it difficult to set specific price guidelines. The more robust data set and higher scores for Transparency, which is equally complex, reflect in part the efforts of the advocacy group MFTransparency, which has developed tools that allow lenders to calculate pricing using a standardized methodology. MFTransparency’s tools, like the CPPs, have been taken up by microfinance investors and donors — underscoring the key role both of standardized benchmarks and of those who finance MFIs in influencing MFI conduct.

The sheer volume of client protection assessments available for analysis in this report demonstrates a growing willingness among MFIs to hold themselves accountable, and among investors and donors to hold MFIs accountable, for the quality of their interaction with clients. In the last year, at least 10 major microfinance investment funds managing over US$2 billion have integrated client protection assessment into their due diligence and reporting.  The stage is set for the Campaign’s planned launch of a certification program in early 2012 – at which point, MFIs will be able to apply for certification by undertaking an assessment from one of the four specialized microfinance rating agencies. Certification will be available in conjunction with financial or social ratings or as a stand-alone event. In future years, it is expected that additional entities will be licensed as certifiers in order to broaden the reach of certification.

Of course, the industry has significant room for improvement, and will continue to face critical challenges that it must respond to in the face of changing competitive conditions.  But industry initiatives including Client Protection Certification, the Universal Standards, and the Seal of Excellence tell us that the industry has a strong will to maintain its pro-client roots.

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