When we use the word sustainability in financial inclusion terms, what does it mean? Does it stand for profit or a long-term perspective that looks beyond the next reporting deadline? Is it a code word for triple bottom line accounting – people, planet, profit? Or maybe sustaining financial services in the face of natural disaster or armed conflict? What about crisis avoidance – cooling overheating markets and preventing over-indebtedness?
At this year’s European Microfinance Week (EMW) in Luxembourg, sustainability meant all those things and more. Titled Financial Inclusion for Sustainable Development, the conference featured multiple workshop streams reflecting the breadth and importance of the topic - with sessions on green microfinance; MIV governance; long-term risk planning; and new tools, such as MIMOSA, to assess market saturation.
As e-MFP Chairwoman Anne Contreras stated: “it means financial sustainability – identifying overheated and underserved markets. It means encouraging funding for the sector with a long-term outlook, not short-term returns. It means new approaches to managing risk and expanding outreach through better understanding of client needs and developing tools to reach them effectively and affordably. It means driving social sustainability - protecting clients from shocks in difficult contexts and providing them with a suite of financial services for sustainable livelihoods. And of course it means environmental sustainability – through finance for clean energy products and improved agricultural practices. What they have in common is an emergent long-term thinking about the future of the Financial Inclusion sector, and of its clients.”
The opening plenary showcased two initiatives to support long-term sustainability and prevent over-indebtedness: The microcredit crisis prevention dashboard aims to offer a holistic analysis of the warning signs of potential repayment crisis. Co-creator Isabelle Guerin explained the dashboard is based on a three-pronged analysis: client (for example, if absorbing capacity is exceeded, or voluntary non-payment and a contamination effect); MFI (poor credit assessment processes, portfolio deterioration or HR challenges); or country level crisis (natural disaster, civil conflict, climate change, currency volatility or other macroeconomic downturn). This three-level taxonomy of risk is also a common theme in the CSFI’s Microfinance Banana Skins surveys, and reflects the industry zeitgeist towards sustainability as a bulwark against crisis.
At the market level, identifying overheated markets or unsustainable growth before it happens is the reason for the MIMOSA Index, presented by the project co-founder Daniel Rozas. Extending the Crisis Prevention Dashboard, MIMOSA is a standardized benchmark for measuring market outreach and saturation using a range of factors and leverages the growing wealth of quality data on financial access and inclusion.
In some markets which are flashing warning signs, sustainability will mandate preventing overheating or saturation – perhaps through regulation, practitioner prudence, and as Klaus Tischhauser from responsAbility pointed out, action from investors who “are long-term oriented, with a strong interest in serving this industry in a sustainable way”.
Environmental sustainability, the theme of last year’s European Microfinance Award, remains high on the financial inclusion agenda. The Green Index, put together by the e-MFP Microfinance and Environment Action Group is creating a standardized framework for measuring MFIs’ environmental performance. Organizations such as Arc Finance and MicroEnergy International are testing and promoting best practice in end-user energy finance business models and products, respectively. Quantitative measures for green performance indicators are emerging, such as a joint publication between the Action Group and the MIX Market on green performance tracking, and a directory of organizations providing funding or TA in green microfinance is in the pipeline.
Agricultural credit and insurance remain arguably the highest-hanging fruit within financial inclusion. Sustainability for farmers in the face of commodity price volatility and climate change will require further innovation in products to protect them from shocks, and do so affordably. This may mean that NGOs are the appropriate partners to introduce a large number of farmers to a new product, but MFIs are appropriate actors to distribute the product combination of credit and insurance.
Despite these challenges: “agricultural insurance is one tool with the potential to reduce smallholder vulnerability, enhance food security and support productivity”, said one panelist. But there are few stakeholders in this sub-sector. Educating MFIs and addressing their concerns about agricultural loans and insurance is crucial to generate understanding, trust, and demand.
Social Performance Management has dominated discussion within microfinance for years as a range of standards have evolved. CERISE’s SPI4 is a social audit tool designed to assess MFI practices according to the Universal Standards of SPM. The ALINUS working group is composed of 12 investors and fund managers committed to using SPI4 in their investments.
The recurring theme of sustainability at EMW applies to industry structure and collaboration too. How does the microfinance ‘industry’ sustain itself? How does it grow without compromising the key social objectives that many within it value? A workshop on network approaches and collaborative efforts to implement innovations in Inclusive Finance & Sustainable Development, presented several examples from the Philippines, Peru and Pakistan demonstrating how products, services and delivery mechanisms evolved in order to improve the quality and outreach of their member MFIs.
This year, the conference ended on a different note. Presenter Blaine Stephens from the MIX Market looked back at predictions made in 2012 on what the future of microfinance would be.
Many forecasts were wrong – ubiquitous digital channels for clients giving feedback and grievance mechanisms, and the ‘democratization of expert advice’, for example. Some were a bit ambitious – “Yelp for Microfinance” was a semi-serious prediction that the future client would be able to browse financial products and institutions based on reputations and reviews.
The enduring concern of financial inclusion in 2015, at least at European Microfinance Week, is of sustainability. For the sake of clients, institutions, and the environment, the challenge must be to sustain that concern in the future. More details of conference workshops can be found in the European Microfinance Platform’s annual EMW Conference Report which is due out in early 2016.