Responsible Finance: The “New Normal”?

A soon-to-be-published CGAP Focus Note asserts that “responsible finance” should become the new standard for delivery of financial services to poor people. Simply extending more access within the “white space” of underserved people and places is not enough. Microfinance clients should be able to count on products and practices that are transparent, fair and take reasonable care to avoid harm such as over-indebtedness. And likewise, we should expect the great majority of microfinance providers, funders and others that are double bottom line institutions to be able to measure the extent to which they’re benefiting their clients and to use this information to improve services.

So the definition we use for responsible finance has two main dimensions. The first — client protection — is an essential standard for all retail providers, no matter their legal type, profit orientation or mission. The second — social performance management – is relevant for all players with a social or development mission. And unless you are protecting your clients against potential harm, it’s hard to assert that you are doing good.

This can be achieved with three strategies. The first is work by our industry around improved practices and standards, like the Smart Campaign. The second is consumer protection regulation and supervision that is designed to balance the interests of low-income consumers with the need for inclusion, innovation and institutional sustainability. Countries like Peru, for example, have found that requiring financial service providers to disclose the price and terms of loans in a more complete and user-friendly way helps consumers make better choices while improving competition as well.

The third strategy focuses on the clients themselves – without effective efforts to raise consumer awareness of their rights and responsibilities and to strengthen their “financial capability,” neither industry initiatives nor policy can reach their full potential. Governments across the developing world are taking steps to tackle this challenge, and many MFIs are working to improve their communications with clients and increase clients’ understanding of their obligations and how to complain when things go wrong.

Among the three strategies, the most important and immediate step is for retail providers to reflect on their client protection and social performance, develop priorities for action, and get down to work on improvements.

Fortunately, there is a very good business case in the long run for providers to treat clients right.

Client retention, word-of-mouth marketing, loyalty, cross-selling of multiple services, growing market share and enhancement of reputation and brand are a few of the long-run advantages that come to mind. But in the short run, tensions can arise, especially in markets where there is either too little or too cut-throat competition. Our collective task is to argue the long-run business case, acknowledge the trade-offs that may exist in the short run, and increase the incentives and support for retail providers to improve their products and practices.

Funders can play an important role in improving the incentives for responsible finance, and the blog series will feature their efforts to do so.

So far over 600 MFIs have endorsed the global Smart Campaign, which is organized around seven core principles and was launched to support this work by retail providers and industry bodies. Smart has developed guidance and assessment tools for MFIs to size up their strengths and weaknesses, identified emerging good practices, and joined with 30 national and regional associations to help with awareness-raising, diagnostics, and technical assistance. Microfinance Transparency is another important global initiative that focuses specifically on improving price transparency across the industry. On the social performance front, the Social Performance Task Force (SPTF) is the “go-to” place for indicators, tools, and good practice guidance. SPTF unites hundreds of practitioners, funders and researchers and its most important initiative now is development of universal standards for social performance.

This new blog series will run through this month and will focus particularly on what is happening across our industry, approaching responsible finance from various angles and viewpoints. Among our guest bloggers will be leading voices in client protection and social performance including microfinance providers, funders and representatives of flagship initiatives such as the Smart Campaign and Social Performance Task Force.

So here’s the question: will this flurry of activity around responsible finance lead to tangible improvements in products and practices? And will these improved practices become “the new normal” in our field, in the way that financial sustainability and transparency did a decade or so ago? And if so, will all this result in better client outcomes in the end? Please tune in to the new blog series, read what our guest bloggers have to say, and weigh in with your own experience and perspectives. We look forward to your participation through comments.