Responsible finance is not something that you can check off a list. It is not a practice that you can hope to implement before the 4th quarter ends. Responsible finance is a way of doing business – a never-ending process of adapting your products, processes and policies to keep your clients at the center. If responsible finance is a marathon and not a race, how then, can we make it the new “normal” for the microfinance industry? And more importantly, how can we make the practice of responsible finance withstand the tests of time?
Make it part of your institutional DNA.
This year marks the fifteenth anniversary of Banco Solidario´s founding. In 1996, long before the term “responsible finance” was part of the lexicon of the microfinance industry, Banco Solidario opened its doors with the slogan, “Los primeros con misión social” (The First [bank] With a Social Mission). In the 15 years since, we have remained committed to this idea through a client-centered approach to our business. We would even venture to say that responsible finance has always been part of our DNA.
In the beginning, the institutional philosophy reflected in our slogan was the driver behind our commitment to responsible finance. Doing right by our clients was an imperative, it set us apart. Our core philosophy played a key role in helping to attract a pool of founding investors and paved the way for Banco Solidario to become one of the pioneers of the local microfinance industry.
Fifteen years hence, what drives our commitment to responsible finance today?
It´s simple. Responsible finance is good for business. The practice of responsible finance is in fact critical to our survival in an increasingly competitive landscape. Here´s how we make sure that it remains part of our DNA over the long haul:
Strategy 1: Ground the practice of responsible finance in your business model
Banco Solidario's business model is grounded in three core institutional values: integrity, customer service and results, that each plays a role in guiding our practice of responsible finance:
Integrity – Unethical behaviors are a threat to the practice of responsible finance. Fraud, lack of transparency, and/or unfair, unjust pricing only further expose our clients to potential economic shocks and belie their trust in the formal financial system. Trust is absolutely critical in our business – we depend on it to build lasting relationships with our clients. It is only through these lasting relationships that we can recoup the investment that we make by issuing our first small loan to a microentrepreneur. A lack of integrity is too costly and puts our long term goals at risk. To stamp out unethical behaviors we have issued a code of ethics with a specific guide for our loan officers; conduct monthly credit methodology audits and have integrated ethics in our annual performance evaluations. A zero tolerance policy for unethical behaviors sends an important message to Bank employees about our commitment to responsible finance.
Customer service – Our business strategy is based on service. Excellent service, by definition, requires a client-centered approach. To remain client-centered, we continually adapt our products, processes and policies to respond to the ever-changing realities of our clientele. For example: There is a disturbing trend towards over-indebtedness among Ecuadorian microentrepreneurs. To adapt to this new reality we have made the guidelines for the liquidity calculation in our credit analysis more strict for clients with multiple outstanding loans. We proactively monitor payment patterns and trends to make any necessary adjustments to our product terms and conditions, and have recently implemented a financial education program with a goal to better prepare clients to manage excessive debt.
Results – Our commitment to integrity and service drives results. Contrary to popular belief, results are not at odds with responsible finance. We were named the #1 sustainable finance organization in Ecuador by the New Economy magazine in 2010. Banco Solidario is proof positive that responsible finance IS good for business.
These three components are the outward expression of our practice of responsible finance.
Strategy 2: Measure your responsible finance chromosomes
Since our early days we have always placed an emphasis on measuring beyond the numbers. Impact studies, surveys, focus groups gave us important indications about the impact of our work. But how did we know how well we were doing in our practice of responsible finance? Until recently there were no set standards or benchmarks to evaluate whether or not responsible finance was truly part of our DNA.
Today, there are a series of tools including the Progress out of Poverty Index (PPI), the Social Performance Indicators Audit Tool (SPI), the Smart Campaign principles, and Social Performance Ratings (with Planet Rating and Microfinanza Rating) to help MFIs to measure and evaluate the effectiveness of our responsible finance practice. We have participated in all of these processes during the past three years. Each one has served us well to better understand our strengths and areas for improvement.
These two over-arching strategies have helped Banco Solidario to maintain responsible finance as part of our institutional DNA during the past 15 years. As the needs of our clients change over time, so does our practice.
How is our practice changing now? In July, we completed a national market study to inform the design of our financial education program. The study provided critical insight into client behaviors that we are now using as a baseline for the development of our program. We also recently completed our first Smart evaluation – an evaluation process conducted in situ at the Bank by a certified evaluator from the Smart Campaign. The evaluation process was an invaluable exercise and has helped us to develop a road map for further improving our practice of the Smart Campaign´s seven client protection principles. We will be implementing these two key projects over the next several months.
If responsible finance becomes the new “normal” in the microfinance industry, it will surely take on many forms. We look forward to learning from the new approaches that emerge ahead.