Viewpoint: Standards for Microfinance Growth

by Elisabeth Rhyne

American Banker, December 17, 2008

As mainstream credit markets seize up, the world’s microfinance organizations (MFIs) have not yet felt much heat. If anything, the crisis in confidence has highlighted what a good credit risk most microfinance clients have proved to be. Isolated in most cases from their countries’ formal economies, the self-employed poor are also resilient during downturns. Indeed, microfinance may represent a bright spot in the banking industry’s future – a huge market of hundreds of millions, whom pioneering microfinance specialists are learning to serve in a sustainable way.

But the credit crisis does highlight a threat of another kind.  The subprime lending abuses that fueled the U.S. housing bubble demonstrate the dangers of financial services to the poor done wrongly. The subprime industry’s core failures in consumer protection – tempting low-knowledge customers into over-indebtedness, ignoring capacity to repay in making loan approval decisions, failing to clearly disclose and explain loan terms – are the fruits of intense competition and ineffectual regulation. Though these practices are not widespread in microfinance, competitive conditions in some markets could tempt providers to engage in some of them.

In some microfinance markets, client over-indebtedness is becoming a real danger as conventional banks and retailers pile in to offer consumer credit, alongside the business loans that are MFIs’ traditional staple. Transparency is a constant challenge with a client base that is often illiterate. Privacy and security are emerging issues as innovators press forward with new technologies, such as transactions via cell phone.

As microfinance has grown rapidly over the past two years, tensions have grown within the world community of providers, which range from tiny nonprofits to publicly traded financial institutions. At issue is how to balance two imperatives: the mission to widen access to financial services to all who need them, while at the same time maintaining vigilant focus on the welfare of poor, often illiterate clients. As microfinance “grows up” it is becoming an industry increasingly run on commercial principles, fueled by commercial investors. Investment in microfinance funds grew at a compound annual rate of 80% from 2004-2007, according to the Consultative Group to Assist the Poor (CGAP), and currently stands at $5.4 billion. The challenge is to ensconce a social mission and commitment to clients’ welfare within the fabric of microfinance organizations that are operating as profit-seeking financial institutions.

At the Clinton Global Initiative last month, a consortium of some of the world's leading microfinance organizations* announced a joint effort to focus the microfinance industry on securing fair treatment for clients. The Campaign for Client Protection in Microfinance aims to achieve industry-wide commitment to six core client protection principles, codified in a microbanker’s oath.

These principles include ensuring that microfinance institutions do not engage in reckless or predatory lending, that they are transparent with clients about prices, fees and terms, that they treat clients with dignity even during debt collection, and that they keep client data secure. The Campaign aims to engage at least half of the world’s 500 largest MFIs reporting to the MIX Market, an industry clearinghouse, within three years. The MIX 500 MFIs serve an estimated 65 million borrowers among the self-employed worldwide.

The Campaign envisions that tens of thousand of people working in the microfinance industry will personally sign the oath. As important, the Campaign will develop implementation guidelines and promote certification standards to ensure ongoing compliance with the core principles. The aim is to encode consumer protection practices and principles in the permanent DNA of the microfinance community.

The Campaign is not intended to be a substitute for government regulation. Indeed, in many developing countries, it may serve as a template for effective regulation.  At the same time, because the microfinance industry is rooted in efforts to help the world’s poor help themselves, we believe that the Campaign can pioneer strong norms and practices throughout the industry. By creating true benchmarks and assessment procedures for client service, the Campaign can serve as a means of branding verifiable excellence in responsible finance.

Microfinance has defied conventional wisdom by proving that the world’s poor are bankable – and that financial service outreach to the poor is scalable. The next wave of microfinance innovation must be to make the double bottom line a reality – to prove that social mission and profit can be fully compatible.
Elizabeth Rhyne is Managing Director of the Center for Financial Inclusion at ACCION International.

* The Campaign’s original endorsers include two research groups The Center for Financial Inclusion at ACCION International and the Consultative Group to Assist the Poor (CGAP); Deutsche Bank; microfinance organizations Opportunity International,  Freedom from Hunger, Pro Mujer and Women’s World Banking; and MFIs Al Amana and Compartamos Banco.  The number of endorsers is growing daily.


About the Center for Financial Inclusion

The Center for Financial Inclusion pursues the proposition that low-income people deserve high-quality financial services and that these services can best be provided through commercial models that incorporate social purpose. The Center works on behalf of the microfinance industry as a whole, serving as a bridge that leverages private sector interest in the provision of financial services for the poor.  With an emphasis on deep collaboration, the Center is outcomes-focused, setting specific goals and measures of accountability for real-world change through inclusive finance. For more information, please visit