Microfinance Groups Put Focus on Industry Standards
by Jillian Mincer

Dow Jones Newswires, September 24, 2008

 

NEW YORK (Dow Jones)--Some of the most influential members of the microfinance sector launched Wednesday a three-year campaign to broaden adherence to industry standards.

Organizers hope the campaign will keep the industry focused on its original mission of helping the poor and will prevent some of the abusive practices that occurred in the subprime industry.

The announcement was made at a Clinton Global Initiative meeting. Campaign organizers are asking microfinance institutions to voluntarily commit to an oath that includes fair pricing, client privacy, appropriate collection practices, ethical standards for employees and not overlending to clients.

"We have watched as the financial sector has melted down, and the trigger that set it off was a failure to comply with consumer protection," said Elisabeth Rhyne, managing director at the Center for Financial Inclusion at Accion International. "We wouldn't want it to happen to microfinance."

Founding members of the campaign include Accion International, the Consultative Group to Assist the Poor, the Grameen Foundation, Deutsche Bank and Women's World Banking.

"It's not that we're seeing huge problems, but there's a greater awareness of client protection," said Kate McKee, a senior advisor at the Consultative Group to Assist the Poor, a microfinance think tank housed in the World Bank.

It's particularly important to be proactive, she said, because microfinance clients "are lower income and more vulnerable." She said they tend to be less informed about borrowing practices and would suffer more "severe consequences" if they failed.

Microfinance started as an effort to provide small loans, typically less than $200, to some of the world's poorest entrepreneurs. The borrowers typically are women, who would otherwise not get credit. The industrywide default rate is low at less than 3%.

In recent years, some lenders, in an effort to maximize profits, have charged excessive fees. They also have allowed clients to get too indebted, which leaves them unable to repay their loans.

"It has become more and more urgent as the sector became more commercial," said Mary Ellen Iskenderian, president and chief executive at Women's World Banking, a network of microfinance institutions and banks.

The campaign organizers hope that by working proactively, they can prevent some of the mistakes made in the subprime industry. They said that while most of the efforts would be voluntary, some regulation of the industry may be necessary in the long term.

"We believe that there are times when 'light-touch' regulation can be helpful to set and enforce minimum standards," said McKee of the CGAP. "This not only helps protect clients from unscrupulous or abusive practices or poorly designed products, it protects legitimate providers from unfair competition."

-By Jilian Mincer, Dow Jones Newswires; jilian.mincer@dowjones.com