What is responsible finance ?

MicroWorld presents you how responsible finance works and what are the actions taken towards this direction.

Is it responsible when a financial co-operative tells its clients that their loan’s interest rates are “only 3%” (without mentioning that this price is per month, is calculated on a flat basis, and excludes the fees)? What if a microfinance institution’s (MFI) brochure claims that it serves the poor but it fails to analyze the poverty status of its actual clients ?

Of course the answer is "no" ! A sector built on the idea that benefiting underserved clients through access to quality financial services, needs to pay attention to its responsibilities to clients, especially because those clients are potentially vulnerable.

Many microfinance institutions and other industry stakeholders are focusing more on the need to provide safe services, which offer a good price / quality ratio and generate benefits for poor clients. Thus, three main strategies have been developed to help the development of responsible finance.

The first strategy is the protection of the consumer. It is provided by the financial authorities which establish and enforce rules to ensure that services are provided in a transparent way. This strategy seeks suppliers to treat their customers fairly and do not put them at risk from arm such as over-indebtedness and that effective mechanisms exist to address customer complaints.

The second strategy in the context of responsible finance is the action by which the provider improve his own behavior and its services by using standards or codes of conduct.

The final strategy includes interventions to inform and raise customer's awareness and strengthen their financial capacity and help them behave responsibly.

For providers whose mission is to serve the poor, responsible finance has two dimensions: customer protection and management of social performance.

The do-no-arm mandate of client protection extends to all providers of financial services to lower-income and vulnerable customers. However for purely profit-motivated providers, this regulation may be the most practical solution to protect customers.

The second dimension, social performance management, applies to institutions claiming to have a "double bottom line", a tool which measure the performance of the company in terms of positive social impact. This therefore includes the great majority of microfinance institutions, donors and support organizations. The missions of these may vary : the awareness of poor people, poverty reduction, empowerment of women, etc.

This responsible finance movement in the microfinance sector consists of a serie of well-coordinated initiatives to protect customers, strengthen social performance management and to define a code of conduct for microfinance investors and donors. The most important : the Smart Campaign ( which mobilized almost 1,000 suppliers , dozens of networks and associations and more than 100 donors to improve products and practices) and the " Social Performance Task Force " ( which recently launched a consensus on standards for social performance management).

Funders of microfinance play a critical role in creating incentives and supporting responsible practices among MFI. Thus, initiatives have emerged to engage donors to become more responsible in the way they deal with their partners.

More than 50 investors have recently signed the "Principles for Investors in Inclusive Finance" to express their commitment to the cause.

Tags : microfinance, microworld, finance, solidarity, responsible, MFI, microfinance institution

Source : CGAP

This article is part of the special report: