> Posted by Danielle Piskadlo, Senior Program Specialist, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

In Chinese, the word “guanxi” translates literally to “relationships” but in reality it is a much more complex term that describes how business is often done in China. Guanxi also loosely means “networking” or “connections,” and is used to describe relationships that may result in the exchanges of favors that are beneficial for the parties involved. In a country rife with corruption, there is sometimes a very blurry line around the true meaning of guanxi.

Deborah Drake of the CFI’s Investing in Inclusive Finance team recently participated in a panel at the Harvard Social Enterprise Conference that examined the issue of corruption and ways of combating it. Among the solutions mentioned, perhaps surprisingly, was microfinance!

In China, as in many countries, one of the biggest obstacles to getting a micro-loan is preferential lending. Loan approval in China often has little to do with your credit-worthiness and everything to do with who you know or “guanxi,” sometimes involving a bribe. This has long been true at many of the locally owned and operated Rural Credit Cooperatives (RCCs) that dominate the micro-lending market in China. The survival of RCCs has been largely based on government regulatory protection, a lack of competition, and subsidized interest rates. Indonesia faced a similar situation decades ago with its government-owned Bank Rakyat Indonesia (BRI). But with the support of the Indonesian ministry of finance and central bank, BRI was turned into a microfinance bank operated on commercial terms. BRI became a microfinance pioneer and remains one of the largest microfinance institutions in the world.

The photo depicts two hands about to shake, with one hand holding a roll of bills.However, in the absence of a major turnaround of state-owned institutions in markets like China, private international microfinance institutions have the opportunity to introduce a truly disruptive business model, changing the way microfinance has traditionally been administered. Contrary to the present model, internationally run MFIs operate with strong credit approval methodologies that result in solid portfolios, they operate with high ethical standards, especially for front line staff, and they have effective operating controls. Perhaps most importantly, MFIs generally operate with a strong social mission to provide quality financial services to traditionally underserved segments of the population – a mission that is protected by governing bodies composed of socially minded funders and investors.

Many international MFIs have managed to firmly establish strong and ethical operating principles and have steered clear of entanglement with government. And by the time such organizations become big enough to attract unwanted attention, it is often too late – a new norm has already been established and strongly supported.

The Harvard Social Enterprise Conference panel also surfaced ways in which technology is playing a role in combating corruption. A new website in India called “I Paid a Bribe” provides a platform for individuals to report the bribes they pay with the hope of increasing transparency and highlighting the prevalence of corruption in India.

Likewise, m-banking has the opportunity to offer government agencies assistance in combating money laundering. According to the Business Daily article “How m-banking can reduce laundering,” “in tackling money laundering, officials generally seek to identify persons of concern and to discern patterns in their transactions. Both goals are predicated on the collection and storage of information. M-banking systems, including M-Pesa, already use extensive safeguards to identify users of their network.”

This is not to say that microfinance is problem-free. Given the financial nature of the business, and the numerous developing countries in which MFIs operate, there is always the potential for corruption. Chief among these is probably fraud, as documented in some of the case studies from the Weathering the Storm paper, which examines MFIs in crisis. Such relatively infrequent examples notwithstanding, however, perhaps one of the major contributions that microfinance can make to the institutional landscape in developing countries is a model of how to operate with little to no corruption.

Image Credit: eyedrd.org

Have you read?

Microfinance’s New Normal

Straight Talk on Client Protection – Standards of Professional Conduct

Colombian MFIs Fight Corruption, Financial Illiteracy to Close Client Protection Gap