> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign
Over 165 investors and donors have endorsed the Smart Campaign and the Client Protection Principles. But our Campaign staff wanted to dig deeper: what does this support mean in practice? Are investors using the Client Protection Principles in their everyday work? How? Earlier this year, we embarked on a project to find out.
The Campaign worked with three Virtual Volunteers from Credit Suisse – Lloyd Yetton, Meha Jain, and Nicolas Vucekovic – to create a short survey aimed at understanding how investors incorporate client protection into their due diligence, post-investment monitoring, and reporting. The virtual volunteers spoke with representatives from 12 of the leading microfinance investors.¹ The findings, highlighted below, will help the Campaign shape its engagement with this pivotal stakeholder group.
Client Protection Universally Important But Not Uniformly Applied
All the investors interviewed stated that client protection was important to them from both a social perspective and for their bottom line. Most had seen first-hand the positive influence from strong client protection practices as well as the problems and instability that sprang up in their absence. Such universal recognition is an encouraging step forward from earlier days of the Campaign. In addition to understanding the importance of client protection, nearly all respondents said that client protection was already explicitly incorporated into due diligence. Investors are indeed scrutinizing a microfinance institution’s client protection practices before investing in it.
However, the application of the client protection principles (CPPs) in the investors’ due diligence varied widely. About half of those surveyed incorporate all seven CPPs equally, while the other half emphasize some principles more than others, particularly “Prevention of Overindebtedness,” “Transparency,” and “Responsible Pricing.”
Few investors reported using or requiring any of the Smart Campaign’s available tools, with the exception of the Getting Started Questionnaire, which was required by four of the twelve. Instead, many investors developed their own tool or scoring system into which the CPPs were incorporated; these proprietary tools/scorecards were largely focused on social performance, though some incorporated the CPPs into their financial risk analysis as well.
This year the Campaign released a set of 30 Client Protection Certification standards with 95 indicators by which to measure those standards. These indicators are used in the field by licensed certifiers (the specialized microfinance rating agencies) as well as accredited Lead and Support Assessors in Smart Assessments. Investors also use these indicators in their due diligence tools and scorecards, but many expressed questions or doubts about the application of an indicator in certain markets or specific institutional contexts. Several respondents desired more training and guidance in the application of the principles and the related standards and indicators.
While investors may be reviewing client protection, few appear to be using their leverage to require improvements up front. Instead, if client protection gaps are identified during due diligence, most investors ask for a commitment to fix the problem over the life of the subsequent investment. Half of the respondents said that they use internal or third-party technical assistance providers to help their investees improve their practices.
Few investors had requirements for Smart Assessments or Certification and none incorporated them into their covenants or post-investment monitoring. Rather, the trend for monitoring seemed to be using the same or a variant of the due diligence scorecard/toolkit to track performance over time; some even required a minimum benchmark of performance over time. Despite it not being currently used, there was some interest in having Client Protection Certification as a cost-effective replacement for parts of a monitoring and reporting system.
Moving Ahead
This survey was useful in helping the Campaign stay up-to-date on how key investors in the microfinance ecosystem are using client protection in their work. It is heartening that the case for client protection appears to have been made, at least for this group of investors. Elisabeth Rhyne, a member of the Smart Campaign Steering Committee, said, “Investors need to apply client protection standards in a way that builds a firm platform of consistent standards across the industry, and not only for their own selection and risk mitigation purposes.”
Given that most investors have developed due diligence and monitoring tools that incorporate client protection, the Campaign will work to ensure that the most up-to-date standards and indicators are easily accessible. In addition, there appears to be opportunities for the Campaign to engage more with investors to conduct client protection ‘upgrades’ with their partners, given the existing technical assistance provided by many. Finally, the Campaign will continue to encourage investors to complement their existing due diligence and monitoring with Smart Assessments and Client Protection Certification. Investors have a stake both in ensuring that individual organizations they invest in follow good practices, and in building an industry that is publicly understood to treat its clients according to strong client protection standards. We are confident that with continued incorporation of client protection through Smart Campaign tools and certification, investors have the motivation and the potential to play an integral role in the creation of a more responsible and stable industry.
Have you read?
Six To-Dos Now for Responsible Investors
The Smart Campaign Challenges Investors to Get Involved With Certification
Making History: Investors in Microfinance Agree on Principles of Conduct
[1] Thanks so much to the respondents who took the time to speak with us from Bamboo, responsAbility, Developing World Markets, World Vision International, IncoFin, AccessHoldings, Progressional Capital Africa, KfW, Blue Orchard, Caspian GrassRoot, Cordaid, and Triodos
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November 25, 2013 at 11:56 am
Hugh Sinclair
Were an investor concerned not only about the broad topics of client protection but also wished to ensure the children of clients were protected, Smart’s CPPs seem to be lacking. For example, there is no requirement that the underlying enterprises obey local child-labour laws, which exist in almost every country on earth. There have been various academic papers suggesting the poverty alleviating properties of microfinance are less magnificent than once claimed, but there could well be an intra-generational impact as a result of microfinance, potentially positive or negative. No one seems to know the precise extent of child-labour (not all of which is detrimental, nor illegal – but some may be both) in the sector, but neither do we know the precise extent of over-indebtedness which is a CPP. Would it not make rather obvious sense to include within the CPPs a clause that urges MFIs to make reasonable efforts to ensure they are not financing activities which engage in detrimental child labour? If microfinance really is fuelling millions of small enterprises, these presumably need additional labour, and operating in competitive markets selling homogenous goods it would be naturally tempting for some (not all) micro-entrepreneurs to oblige their children to work. Presumably this would not be in the best interests of the child, particularly if such labour was at the expense of education.
Perhaps Smart only addresses the relationship between the clients and the banks, and that the actual underlying activity being financed does not matter? If a parent wishes to withdraw his or her child from school to stack shelves, this is not relevent for the bank or for Smart? Would cocaine dealing therefore be eligible? What about prostitution? These are potentially profitable activities which could conceivably support a loan.
It appears we have to make a decision as to whether the underlying activitiy should or should not be of interest to the banks, and to Smart. In developed countries it is illegal for financial institutions to finance illegal activities. Why not with microfinance also? Might it be wise to begin with urging institutions to not lend to activities which may deny children an education, or at least oblige them to lend to entrepreneurs that obey the existing national laws reagrding child labour. It seems the CPPs would be a potential place to start.
As many MFIs, MIVs and P2Ps adopt anti child-labour policies Smart seems to be falling behind in this regard. How can Smart claim to be an industry standard for good behaviour if some players are incorporating policies which far exceed those espoused by Smart? See for example Oikocredit’s excellent policy on preventing child labour:
http://www.oikocredit.org/rm/in/questions/383/what-is-oikocreditrsquos-policy-on-child-labour
Ms. Rhyne wrote on this very blog: “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 you look at almost any fair trade mark for any sector, prevention of harmful child labour tends to feature quite prominantly. Why not with Smart?