Responsible Finance: Full Steam Ahead

April 6, 2010    

Responsible finance is emerging as a hot topic of debate and discussion in some circles of the microfinance industry. But it’s still a new idea, and “responsible finance” can mean substantially different things to different people. Is it the incarnation of microfinance’s social goals? Or is it just the lowest common denominator in decent and ethical treatment of clients? And if so does responsible finance need to be refined according to the social goals of individual organizations?

More discussion is needed to gain clarity about what we mean by responsible finance and to translate good ideas into good practice on a large scale. Fortunately, there are already pioneers in the developing world whose innovations make for good examples.

The players
“Everyone involved in delivery of financial services for the poor plays a role in making sure those services are provided responsibly, and this includes not just providers, but investors, governments, and consumers as well,” says CGAP’s Kate McKee. Banks and other financial institutions need to take a fresh look at their products, practices, and policies, and make sure they stack up to emerging responsible finance standards. Similarly, funders can help encourage responsible practices by monitoring the financial institutions they support. Governments can put in place regulations that promote transparency, fair treatment, and effective recourse. These regulations need to be practical for low-income consumers, and they should encourage expanded access and further innovation by responsible providers. Finally, consumers need to play a role in informing themselves about their options, making good choices, and demanding responsible behavior. To date this “consumer voice” for responsibility and reform has been limited.

Getting it done
“Implementing responsible finance goals will take sustained effort over time,” says McKee. Financial service providers need to reflect on how doing right by consumers can benefit their business over time by attracting more, and the right kind of, clients. Several industry networks are taking the lead by working together to identify good practices and standards for the industry. Industry standards can be an effective complement to government regulation and supervision, so that the burden of promoting responsible finance does not fall on the shoulders of one sector. For low-income consumers to do their part, investments in improved awareness, financial capability, and advocacy are needed. Consumer protection rules from government are likely to be most effective when there is a clear mandate to act, the rules of the game are tailored to local market conditions and regulatory capacity, and regulators have adequate independence, resources, and enforcement power.

It’s already happening
Despite the challenges, proponents of more responsible finance are already getting down to business. The industry-wide Smart Campaign for client protection is gaining momentum and new members. Microfinance associations and networks are accelerating their work in this area through industry-wide efforts in countries such as Pakistan. Governments in countries ranging from Ghana to the Philippines to Armenia are moving forward with consumer protection regulation.

“Responsible finance is a topic so big, and so important, that we need all key stakeholders to have a role as responsible finance watchdogs. It’s still too early to have all the answers, but if we can bring together broad perspectives on responsible finance we can make sure we are asking the right questions,” says McKee. “Everyone stands to gain by learning from our collective experiences.”