> Posted by James Militzer, Editor, NextBillion Financial Innovation

The following post was originally published on NextBillion, in two parts, here and here

The Smart Campaign was born in the midst of extraordinary upheaval in the microfinance sector. Its launch in 2009 was sandwiched between the 2008 global financial crisis, repayment crises in several microfinance markets, and the 2010 debtor suicides in Andhra Pradesh. Yet the turmoil served to amplify the campaign’s main point: that microfinance needs to focus on customer protection. In the succeeding years, it has labored to unite microfinance leaders and practitioners around this goal – most notably through its efforts to convince microfinance institutions (MFIs) to undergo the process of Smart Certification, in which independent evaluators verify that they are “doing everything [they] can to treat [their] clients well and protect them from harm.”

Over time, these efforts have started to gain traction. The campaign – which is steered by a group of prominent leaders in the industry and housed at Accion’s Center for Financial Inclusion – has certified 39 microfinance institutions. (Note: Accion is a NextBillion Content Partner.) Certified institutions include a number of leading MFIs in markets around the world, from Equitas in India to Kompanion in Kyrgyzstan. And the campaign calculates that certified MFIs now serve slightly more than 20 million clients. In a recent interview with NextBillion, its director, Isabelle Barrès, called the 20 million client mark “an exciting milestone, recognition of the fact that there is momentum growing in the industry for client protection –  not just paying lip service to it, but actually working hard to improve practices.”

But achieving this momentum hasn’t been an easy task for the campaign – or for the industry whose practices it’s trying to improve. Barrès discusses the challenges it has faced – and the controversy it has sparked – in this two-part Q&A.

James Militzer: Do you have any data on which markets have the highest percentage of Smart Campaign-certified MFIs?

Isabelle Barrès: I think Kyrgyzstan probably is the one where we currently have the most right now – 60 percent of microfinance clients are served by organizations that have been certified. This shows that when there are some substantial efforts that are put towards improving client protection – whether it’s at the market level or at the regulatory level, or through market infrastructure, such as supporting a good credit bureau – it can make a difference for the entire industry.

Take Cambodia: We’re working currently with 10 of the biggest microfinance institutions in the country, with funding from the Agence Française de Développement and the Cambodian Microfinance Association. Collectively, these MFIs cover more than 80 percent of the market in terms of number of clients. The first Cambodian MFI was certified in June and momentum is growing fast. So that’s another country where we should see a substantial number of clients covered by certified MFIs.

We feel this is important because often clients don’t have just one loan, they have multiple loans. So even if they bank with an organization that is certified, it’s important for all institutions in the market to be certified, or the main institutions to be certified, because it really reduces the risk of clients being over-indebted and mistreated.

JM: Have there been any countries or regions where certification just hasn’t taken off?

IB: I think every country has its own dynamic and challenges. In sub-Saharan Africa, only one institution has been certified. There’s a need there for more awareness-raising, but what we see is that the MFIs that are certified really cover a broad range of countries, and we have many more that are in our certification pipeline, meaning that they are working on improving their practices so that they can meet the campaign’s standards.

JM: What do you think accounts for the lack of traction in sub-Saharan Africa? Does that say something about the state of the industry there, or are there other factors?

IB: I think it’s a combination. There’s a cautiousness also. We see a number of organizations in the region that prefer to have the assurance that they will pass certification, with a guarantee before they undergo the certification process. So there are a number of MFIs that are working on improving their practices so that when they go to get certification, they are confident that they will be certified.

Organizations have a formal period when they go through certification, before they get the final results. After the certification mission, they get preliminary results, and if they don’t pass right away, they have a four-month window, which gives them some time to fix some of the issues as needed – especially if they almost meet the standard with their practices. So some MFIs are preparing for certification so that they will either pass right away, or have enough time in the four-month window to correct gaps. That’s part of what’s happening in Africa.

And there are also other issues that make it more difficult for organizations to be the first ones to undergo certification. Some have to do with regulation. In countries with interest rates caps, for example, it makes it more difficult for one organization to lead the way in terms of full transparency. When there is no common standard that’s mandated for organizations to report their pricing, we’ve seen that that also limits organizations’ levels of comfort in leading the way.

JM: You mentioned that MFIs want to have some kind of confidence that they’re going to pass certification before they undergo it. Is that stopping many more MFIs from being willing to try? What do they have to lose if they start the process and fail to get certified?

IB: I’m sure it would be better to ask them. The way that I would answer is by looking at the pipeline: 39 MFIs have been certified, and there is huge momentum for certification in the pipeline, in the number of organizations that are preparing for it or are at various stages of being certified. It’s partially probably human nature, just wanting to make sure you’ll pass the test before you take it. But the campaign has opted for an approach of celebrating success, rather than shaming organizations that are not yet passing. We feel that’s a more powerful incentive, and definitely more appropriate for where the industry is. So I don’t thinks that’s an impediment.

Basically, if an organization goes through certification and does not pass all the standards, and fails certification – and we have a few of them that have failed – we don’t make those results public. Because, again, while we value that they pass certification and meet all the standards (demonstrating that they’re doing what’s in their control to protect their clients), even if they don’t meet certification, just the process that they went through in preparing for certification has led in all cases to huge improvements in their practices. So we definitely value the process as well, and want to encourage them to continue to improve even if they don’t meet certification. And once they’ve met certification, we want them to continue to pay attention to client protection and not just say, ‘Well, we’ve met certification, now we can check the box and not have to monitor our practices anymore.’ This is also why certification is not valid forever. When an organization is certified, it’s valid for four years (with a two-year check-in). They then have to re-apply for certification and have their results validated again, in recognition of the fact that practices can change.

JM: Do you have a rough idea of how many MFIs start the certification process but don’t pass it?

IB: It’s about 30 percent.

JM: And do you know how many MFIs successfully recertify?

IB: We will know soon whether MFIs maintain their certification status after the two-year check-in, because we are in that process for the first MFIs that were certified. But my assumption is that they will likely maintain their certification status unless there have been real material changes in their operations, such as very quick growth fueled by aggressive sales practices. There is a chance that their practices have changed to the point where they would no longer meet certification, and that’s why the check-ins and recertification processes are there, to confirm that. So we’ll see.

JM: Are you satisfied with the progress of the campaign to date? It’s hard to gauge whether 39 is a lot or a little  can you put the numbers in context for us?

IB: Yes, I’m very excited and slightly frustrated by the fact that some people might think that 39 MFIs is not a lot. Thirty-nine is considerable when you look at the number of clients that are served by these MFIs – over 20 million – and when you look at the momentum around client protection that we see in the industry.

When the campaign started, there were weak client protection regulations globally. Client protection was already on many MFIs’ radar, but not in a structured way, and definitely not quantified in a way that enabled measurement of progress. We’ve just recently done an evaluation of the campaign and our theory of change, to assess the impact the campaign has had on the betterment of client protection, and things have changed significantly for the better. Of course, the campaign isn’t the only project or force that has influenced that change, but it is very heartening to see that an increasing number of countries have client protection regulations in place.

The Microfinance CEO Working Group has recently developed a model legal framework, based on our seven Client Protection Principles, that regulators can use to assess and improve their client protection regulations. There is a lot of interest among regulators in understanding better what’s happening at the market level, and much more interest from the financial institutions themselves in actively improving their practices to better protect their clients. So while the pace at which things are moving may seem slow, from inside the campaign we have the ability to see more than the number of organizations that are certified. We have an inside view of the deep work that organizations are doing to improve their practices. And we definitely see a lot of positive change happening.

One thing that we’ve been thinking about, in terms of how we communicate progress, is that it is important for us to be able to publicly communicate those improvements in client protection that are happening on the ground even before MFIs are certified, so that success isn’t just summarized by the number of certified organizations. There are 95 indicators in the client protection standards, and there is a lot of great work that’s taking place, and a lot of improvements that are directly benefiting clients that just aren’t visible enough.

The above concludes part one of the interview. Part two is as follows. 

The Smart Campaign was launched to encourage the microfinance sector to prioritize customer protection – most notably through its efforts to improve the practices of microfinance institutions (MFIs) through Smart Certification. The certification process involves convincing MFIs to voluntarily submit to an assessment by independent evaluators, which aims to verify that they are doing everything possible to treat clients well and protect them from harm – and which points to areas where their practices need improvement.

But though these efforts have started to gain traction, with 39 MFIs certified so far and many more in the pipeline, some have taken issue with the campaign’s approach. According to critics, the number of certified MFIs is too small to make a difference in the broader sector – and it includes some highly profitable MFIs that some believe aren’t worthy of the campaign’s validation.

In part one of her recent interview with NextBillion, the Smart Campaign’s director, Isabelle Barrès, argued that its impact goes beyond the relatively small number of MFIs it has certified. In part two, below, she defends the campaign’s broader impact on the sector, explains its (evolving) approach to assessing the profits and interest rates of certified MFIs, and discusses its next steps. (Note: Accion is a NextBillion Content Partner.)

James Militzer: Are you able to isolate and measure the impact the campaign has had? For instance, could you say how things would be different in specific markets, if the campaign hadn’t existed, or are there too many other factors tied up in these changes?

Isabelle Barrès: It’s very tied up. The model of influence of the campaign itself is definitely tied with working with others, and getting the support of others. Because even when we talk about the campaign, it’s not just about the people who work at the secretariat itself, but about the individuals and organizations that have endorsed its principles, the MFIs that are working hard to improve their practices, and the donors, funders and other types of support organizations that are trying to influence or support MFIs to improve their practices. And all of the work we do is done in a very collaborative manner, from developing tools – which come directly from collaboration with MFIs and others in the industry – to developing the certification programs, to working on research programs and on the evolution of the standards. We’re working on improving the standards so that they stay relevant to the microfinance industry, and all of that work is done by consultation with various experts and MFIs.

So it is hard to attribute the success in one market or another just to the campaign. A focus of ours this year is to find better ways of measuring how client protection is improving. To reach the ultimate goal of having clients that are protected, a lot of things need to happen, including appropriate regulation and clients who are financially capable. Then there’s also the industry side: the microfinance institutions themselves doing everything in their power to protect their clients. The campaign has focused from the start on that third pillar, at the market level: encouraging and supporting MFIs to improve their practices. And as I’ve said, we’ve seen a lot of examples in improvements. More than 100 assessments have enabled us to identify key strengths and weaknesses in MFI practices, and provide a roadmap for improvement. Our capacity building has developed a cadre of client protection experts who can provide the retail-level support to MFIs that the campaign is not best positioned to do. We have a very small staff, and we need to work in a leveraged model. In any case, there’s a lot of evidence showing how MFIs have improved their practices, and we need to find a better way of tracking this and making it visible. Then the attribution, and to what extent it’s linked directly to the campaign, will be less important than knowing that it’s happening, that change is really happening and clients are being protected.

JM: Are criticisms about the certification of very profitable MFIs with high interest rates a concern, and is the campaign planning to address those issues?

IB: The campaign can, of course, always improve. And we’re definitely open to criticism, and to the extent that it can help improve the way that clients are treated, we’re absolutely interested in hearing it and working on it. But profits are a tricky thing, because while they are one of the elements of pricing, they are not the only element. From our perspective, and from the clients’ perspective, we feel that what’s important is the price rather than the level of profit. So that’s how we look at it: Whether the price is market-based, whether it is in line with what peers are offering, adjusting for certain variables, and taking into account that the loan size definitely influences to a large degree the price that clients are going to have to pay. You could have two MFIs with exactly the same price and exactly the same impact on clients, but one has big profits and is very efficient, while the other has small profits because it’s totally inefficient. And yes, it’s going to maybe raise eyebrows from some because of the big profits, but ultimately clients have to pay the same price. So we really try to keep that in mind, to really keep an approach that is client-oriented.

JM: Do you see it as your role to tell an MFI that their interest rates are too high, or is that the role of market forces, which determine appropriate rates in different regions? Or does that give too much influence to the MFI community in different markets, which might all be charging excessive rates, making it hard to describe the “market rate” as appropriate?

IB: We don’t see it as our role to set any limits on interest or profits. As I said, we’re trying to stick to the perspective that looks at the impact on clients, and also what is reasonable given the products that the MFI is offering, and the cost structure of the market. There are a lot of factors that can explain why some rates are higher than others. We participate in the industry discussions and dialogue around these issues, and are open to continuing to improve our standards. But some of these issues are more complex than just saying that high profits are bad for clients. It is not only about the level of profit but also what is done with these profits, and the extent to which clients benefit. It is also about identifying what is in the control of the MFIs, and what role everyone in the value chain is playing (including investors). It’s a complex issue, and we’re trying to keep a client perspective on that.

The question that we are working on for Certification 2.0 is whether there are alternatives to a market-based approach, given that markets are not always efficient. We are testing our assumptions and looking at whether prices do go down over time with increased competition. We are exploring the role of market leaders, and are also looking at alternative benchmarks for pricing and its various components.

JM: What’s next for the campaign?

IB: We’ve been talking a lot about the future direction of the campaign, about how it can evolve to be relevant to a more complex industry, with new financial providers, products and business models. We will likely expand our focus, in light of the fact that the client protection environment has changed in the time since the campaign was launched. There are now more countries that are working on client protection, there are stronger client protection regulations, there’s more differentiation between countries which have good regulations, or very weak regulations. And that will force us to think about different approaches for countries, depending on their market environment. There are many interesting upcoming developments, including exploring the role of the campaign in the digital finance space, working more closely with regulators and investors, expanding the research on building the evidence for client protection, and bringing the client voice more prominently and permanently into the campaign’s work.

JM: Would that possibly mean different kinds of standards for different countries?

IB: Not different kinds of standards, but the recognition of the need for a different approach, and understanding where the campaign can be most effective given the local constraints and opportunities. For example, that would mean recognizing what we’d need to do in a market with credit bureaus and very strong client protection regulations, and how that may be different from what we need to do in a country at the other extreme, that has no regulatory framework, no credit bureaus and a lack of credit culture. So not different standards, just a recognition of where MFIs are starting from, what gaps we’re going to have to work with, and what is the overall supporting environment for client protection when we start working in these markets. Differentiating better will let us have a greater impact.

James Militzer is the editor of NextBillion Financial Innovation.

Have you read?

Smart Certification: Kashf Foundation Takes the Lead in Pakistan

Smart Certification Announces Enhancements to Client Protection Certification Program

Three Cheers for the Smart Campaign’s Certification Summit