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> Posted by Joshua Goldstein, Principal Director for Economic Citizenship & Disability Inclusion, CFI
The extent of the reciprocal relationship of trust between an employer and employee may be hard to measure, but it may be more indispensable to good governance than a variety of risk management tools. In fact, there are organizations that forego some traditional risk management mechanisms, instead emphasizing the power of trust. One example, according to Andrew Ross Sorkin, writing in DealBook, is Berkshire Hathaway, the American multinational conglomerate that’s currently the fifth-largest company in the United States.
The normative route to good governance encompasses a host of practices including risk management functions, internal auditing, and board committees. A MIX project examining the practices of over 150 MFIs across 57 countries found a positive correlation among institutional governance indicators, suggesting that good governance practices don’t exist in isolation. Putting such watch-dog measures into place, however costly, is increasingly standard practice at institutions both public and private around the world. Without these, who knows what some employees might be tempted to do. It is the price of doing business. Or at least that is the common school of thought.
> Posted by Alexandra Rizzi, Deputy Director, the Smart Campaign
As the market for the Smart Campaign’s recently launched Client Protection Certification Program kicks off, we’d like to acknowledge the important role that investors will play in the success of the program. What we mean by success is the creation of a viable, sustainable market for certification that encourages the industry’s standards of practice to improve. As suppliers of funds to retail financial providers who serve the poor, investors are in a key position to incentivize their portfolios to improve practices and work towards certification. And by encouraging their investees to get certified, they are helping them to meet public, industry-wide standards of practice that can be understood by everyone – including indirect investors, regulators, and ultimately even clients.
Certification can help investors distinguish among retail providers, particularly in complicated markets where the microfinance label is applied to actors with varying motivations. While it is not meant to replace the investigative rigors that funders conduct prior to an investment, certification conveys that an organization has met a concrete set of operational standards. “We see the Smart Campaign’s Certification Program as similar to a Fair Trade standard for microfinance. It weaves client protection into all aspects of the business relationship between a customer and a financial institution,” said Asad Mahmood, Managing Director of the Global Social Investment Fund at Deutsche Bank.
The Smart Campaign has long enjoyed support from the investor community, with over 200 investors and donors having endorsed the Campaign. Investors have also provided co-financing for activities like assessments and tool creation. But now that certification is available, there are additional ways that investors can support the program and build the market:
- Urge your investees to seek certification.
- Support organizations to become certification-ready through self-assessments, third-party assessments, and other tools available to diagnose and improve practices. Most providers will require improvements in practice to become certification-ready. Certification is achievable for most providers with time and effort, but each institution will have its own timeframe.
- Reward and highlight organizations that become certified in whatever ways are available. For example, it may be possible to offer margin reductions to organizations that have achieved the high standards set by the Campaign.
We’ve been excited by the enthusiasm from the investor community, particularly the examples of Oikocredit and Deutsche Bank, who are taking concrete steps to incorporate certification into their work .
> Posted by Jeffrey Riecke, Communications Assistant, CFI
Client protection needs to be at the core of the microfinance industry in order to maintain sustainable growth, a recent report from Deutsche Bank asserts. “Microfinance in Evolution: An Industry Between Crisis and Advancement” explores the current state of the industry—including its present challenges—and offers insight into how it can sustainably achieve its social and commercial goals.
The report is based primarily on individual MFI financial and social performance data from The MIX and concludes that a new balance between social development and a commercial approach is needed to “rehabilitate microfinance as a development tool.” A new approach is needed due to widespread MFI performance deterioration since 2008 (increases in client delinquency, declines in MFI profits, and decreases in asset growth), stemming largely from market growth, and changes in the MFI client base and lending methodology. To put the industry on the right track, the report’s authors call for an overhaul of practices that have proven to be unsuccessful and more specifically, instilling client needs as the focus of all MFI operations.
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