Towards “Fair Trade Microfinance”
Microfinance Gateway Staff
Creating a standard to recognize MFIs that serve the poor
The Microcredit Summit Campaign recently proposed a new Seal of Excellence for Poverty Outreach and Transformation in Microfinance. Intended as a sort of “fair trade designation” for microfinance institutions, the Seal of Excellence would recognize superior performance by microfinance institutions (MFIs) which combine financial sustainability with both significant outreach among poor clients and a strategic approach to poverty reduction and transformation.
The concept note Beyond ‘Ethical’ Financial Services describes the Seal of Excellence (Seal) as an effort aimed "to set a vision for the sector" that emphasizes poverty alleviation and to recognize MFIs whose work advances that vision.
The proposed Seal was developed by a steering committee1 consisting of leaders from many of the existing initiatives already focused on social performance and poverty alleviation. The committee produced the current concept note in consultation with more than 100 other industry stakeholders over the course of the past 11 months.
Initial Reactions
Larry Reed serves on the Seal steering committee and was also the author of the Microcredit Summit State of the Campaign Report in which the idea for the Seal was formally announced. Reed says that while the comments to date have been largely supportive of the SOE conceptually, there is concern about imposing additional reporting burdens on already-stretched MFIs.
Other concerns have also been raised on clarifying the demand for the Seal (and its value as distinct from other initiatives), the role of raters, and a host of implementation challenges. Steering Committee member Laura Foose believes that the main challenge may simply be one of timing. Foose, who also coordinates the Social Performance Task Force, noted during an interview with the Microfinance Gateway that the industry only recently began the process of collecting poverty data in a systematic way.
It is high time for the launch of “Fair Trade Microfinance.” The broader world, including international media, investors, and donors, will only have confidence in microfinance if the industry can in turn provide confidence that its members are genuinely working on behalf of their clients.
Elisabeth Rhyne, Centre for Financial Inclusion
“For most of its history, microfinance relied on anecdotal evidence about poverty issues, partly because the tools to measure poverty had not been standardized. Instruments like the PPI, PAT, and FCAT are relatively recent developments. So Step One of social performance reporting is to baseline your clientele – who are you reaching, and are they poor? But Step Two is to track them across three years – is their poverty status improving? We have more institutions all the time who can answer the first question. But then there’s that three-year lag time. At the moment, only a handful can answer both questions, as they will have to be able to do in order even to be eligible for the Seal. It may be several years before we have a meaningful number of institutions in a position to qualify.”
Integration with Existing Initiatives
The concept note describes the Seal as intended to be an adjunct rather than an alternative to existing industry initiatives around social performance and consumer protection. Foose describes the Seal as the third stepping stone in a continuum. “The SMART campaign is essentially: ‘First, do no harm.’ Then the Social Performance Task Force work is to set standards in social performance, a big piece of which is transparency: you have to demonstrate effort to measure and track whether you are fulfilling your mission, whatever that mission may be. Then the Seal of Excellence focuses on financial service providers with a specific social mission - to reach poor clients and improve their lives. For these institutions to obtain the Seal, they have to demonstrate they can achieve this objective.”
What the Seal of Excellence is Intended to Be
The overall goal of the proposed Seal, according to the concept note, is a microfinance sector that is responsible, genuinely inclusive (including the poor, the bottom 30-40% of the population), and that contributes to positive change. Larry Reed also says there will be no ceiling on the number of Seals awarded. It will be given to as many institutions as meet the criteria eventually defined.
The note stresses that the judgment criteria remain to be finalized – indeed, that is what the public commentary period is intended to help shape. But it sets out a broad framework of “Defining What We Would Like to See” (e.g., responsible and transparent pricing, targeting and outreach to under-developed regions, gender equity, commitment to poverty reduction, evidence of positive change over time in clients’ lives) and “Addressing What We Do Not Want to See” (e.g., an approach to growth by any means necessary, institutional claims of poverty focus without evidence of an actual strategy, excessive executive compensation or shareholder dividends).
Why Now?
Part of the problem, however, is that all kinds of institutions making loans plaster them with the “microfinance” label because of its do-good reputation.
Neil MacFarquhar, New York Times
The concept note describes the current state of affairs as “a time for reflection and reassessment of the sector.” Events in markets as diverse as India, Nicaragua, Bosnia, and Morocco suggest that what microfinance expert Beth Rhyne has called “the hypnotic mantra of ‘scale, scale, scale’ can have catastrophic consequences for end clients, institutions, and the sector as a whole. The sector also faces increasing criticism in both the industry and the mainstream press, especially about perceived profiteering (e.g., the April 2010 New York Times article Banks Making Big Profits From Tiny Loans).
Next Steps
The steering committee will meet in early June to review feedback from the public and discuss broad categories and criteria. Assuming the proposal goes forward, implementation will include establishment of a technical committee, alpha testing, piloting and beta testing, establishment of processes for verification and certification, and development of a business model.
Larry Reed envisions the Seal as a point of pride for recipient institutions, an award whose significance they will go out of their way to ensure that actual and potential clients understand.
Laura Foose notes that not every microfinance provider has – or needs to have -- poverty outreach and poverty reduction as its mission. “We need the full spectrum of providers. Those who are focused purely on access to finance as an end unto itself have their place, and it’s important to remember that not every MFI needs to go for this Seal. But for that specific subset of providers who claim poverty alleviation as their mission, the Seal is a call to be truthful.”
1Interim Steering Committee Members: Susy Cheston, World Vision; Alex Counts (Steve Wright), Grameen Foundation; Sam Daley-Harris, Microcredit Summit Campaign; Susan Davis, BRAC USA;*Frank DeGiovanni, The Ford Foundation;*John de Wit, Small Enterprise Foundation; Chris Dunford, Freedom from Hunger; *Laura Foose, Social Performance Task Force; *David Gibbons, CASHPOR Financial and Technical Services; Tim Hassett (JD Bergeron), Kiva; *Antonique Koning, CGAP; Larry Reed, Consultant; *Ben Simmes, Oikocredit; *Carmen Velasco, Pro Mujer; Chuck Waterfield, MicroFinance Transparency; *Special Technical Advisor: Scott Gaul, MIX. *Joined the Interim Steering Committee in January 2011.
The idea will help the microfinance industry to compete for better achievements and it would be also easier for financial service providers to install self assessment as social performance measures are to be standardized. Microfinance stakeholder would able make informed decision on their bid to work with the sector. However, I strongly suggest: n1. the standardization and evaluation be country specific and easily accessible. n2. Financial performance to be included in the evaluation as this is basic factor for provision of sustainable financial services to those who demand. n3. the regulatory environment in which the service providers are operating and their governance should be considered as well.
gebeyaw Aychile Terefe National Bank of Ethiopia Ethiopia
19 Jul 2011
Seal of Excellence in what?
I think that the concept of creating an external sets of checks and balances to determine how well MFI's who preach poverty alleviation are actually doing, is a good idea but do think, as the first commenter said, it needs to be clear who the target audience is for this seal. Also, as Ms. Fosse stated, not all MFI's have poverty alleviation as their primary purpose. I might suggest that the Seal indicated that it is a seal of excellence in poverty alleviation; otherwise you may have excellent MFI's who do not focus on poverty alleviation being viewed as less than excellent for not carrying a Seal that does not relate to their primary business purposes. Finally, IFAT now WFTO just developed a new set of standards for evaluation and certification of handicraft and service delivery (tourism, etc.) Fair Trade organizations that the committee may want to look at.
Danielle Ring Saint Vincent and the Grenadines
22 Jun 2011
Who needs a seal? Retail investors?
When I look at fair trade labels and their success (or lack of), a large part comes from basic consumers who buy goods with the seal. These consumers do not have the time to read rating reports and, instead, use the seal as a trust factor that unknown competent people who have perhaps verified and rated everything. Institutional consumers, as opposed to retail consumers, have the professional competence to take the time to read detailed rating reports or conduct the due diligence themselves. The question in the microfinance context is whether poor, often illiterate borrowers, care about the seal of excellence? I think not. The question then is who would care? Institutional investors would have access to rating reports as well as data from the MiX, besides their own due diligence investors. To my mind, the only people who could be interested in a seal of excellence are retail investors and retail donors. To the extent that these investors donate through Babyloan, Rang De, Kiva, Wokai, etc, they don't need the seal of excellence because they presume that these websites are doing their bit in selecting the MFIs. What is left is the retail donors who go directly to the MFI site and press the "donate now" button. It would be useful for these investors to bypass all the big donor funds and intermediate lending operators and donate directly to MFIs with the seal of excellence. The same could be true for "Lend now" and "invest now" buttons on MFI websites. Perhaps one day, with mobile phones linking the donors directly with the poor, even MFIs will be unnecessary and we would have credit bureaus giving their own seals of excellence to all the poor borrowers.... and go to a real peer to peer lending model. Would love to hear about more possible uses of this seal.
Arvind Ashta Burgundy School of Business (Groupe ESC Dijon-Bourgogne) France
23 May 2011
Pass\/Fail or Grades?
Dear colleagues, Two thoughts occur to me as I read about the initiative. n1. I agree with another author on the page who suggested that we include more practitioners. I would recommend including colleagues from the rating industry or several practitioners directly. n2. It seems to me that more than a "Seal of Excellence" (it appears to me that this could look like a Pass/Fail system), we perhaps need to have a grading on a scale in some shape. I think that a grading would let the institutions (and most importantly their clients as well as investors) know more about the areas they need to work on and how far they are from being considered customer friendly.
Natasa Goronja IFC Bosnia and Herzegovina
10 May 2011
Growth and Social Performance
Hi all, This is a very interesting initiative, and related discussions are happening inside the Social Performance Task Force. As part of that process, MIX will published some pieces discussing our current state of knowledge about the relationship between key financial and social performance indicators, including efficiency, growth and profits. You can read the first posting here: http: www.themix.org/publications/microbanking-bulletin/2011/05/defining-responsible-financial-performance-how-think-abou Thanks
Adrian Gonzalez Microfinance Information Exchange (MIX) United States
10 May 2011
Interim committee - is it skewed?
This seems to be a grand initiative and some of the raw edges would be smoothed over time. This is going to be expensive and cost a bit of serious donor money. This should not only certify the MFIs by also keep them on the fair trade path on an ongoing basis, in order to be worth the effort. Who will monitor the continued good conduct and who will pay those that monitor? The process is bound to be complex as it tries to be all encompassing - integrating several initiatives in social performance, customer protection and responsible finance. Let us pause to wonder whether we are building a super global brand where a simple and fair local brand is required? It might be better to localise such hallmarking operations to each country's local context rather than standardise on several global benchmarkes and then struggle with application of standards in diverse contexts. Since the practice of microfinance is mostly in the third world, I would have expected a significant number of interim committee members to be from countries where microfinance is a significant initiative. But this committee comprises mostly of well intentioned donors, service organisations, network managers, etc. Can we identify some practitioners from the countries where Microfinance is commonplace. Otherwise it would look like a group of wise people trying to impose their standards on those who are 'beneficiaries'. Let this be more collaborative, inclusive and owned by the sector.
Narasimhan Srinivasan India
03 May 2011
Mutual Trust and Human Relation is more effective than Collateral!!!
Mutual trust and human relations is more effective than collateral. It is great to know that world level microcredit and microfinance leaders have taken this initiative to introduce the seal of excellence and are concerned about the transformation of this industry, even though it is too late. I had the opportunity to read this article with a lot of interest and concentration. And I am so delighted to share some of my following opinions and comments. To me it is a significant revolution for the microcredit and microfinance industry to see that we are talking about microcredit and microfinance without focusing on sustainability and delinquency. I sincerely appreciate this initiative. Sustainability and high repayment rates should not be the prime criteria for excellent or ethical microcredit and microfinance, because high repayment rates and sustainability cannot ensure that the organization is meeting the mission of microcredit and microfinance. All over the world, money lending businesses always maintain 100 percent repayment and rapid sustainability but it doesn't mean that money lending is a holistic business. But I think, some other basic issues should be considered for seal of excellence. For instance, nowhere in the paper is anything mentioned about collateral. To me collateral is a very important issue for microcredit and microfinance and it should be considered as a prime criteria. Many microcredit organizations around the world ask for collateral - sometimes material collateral, sometimes direct collateral and sometimes indirect collateral. Generally vulnerable poor are not able to provide collateral, so they are excluded from access to credit. If we want to reach the poor, credit should be collateral free. Still some microcredit organizations believe the poor and collateral- less clients are not their customers. The poor are risky and not credit worthy. Small loans are expensive to administer, so it is not profit-worthy, etc. Because of that still many poor are excluded from microcredit services. In order to give them access to credit, MFIs should be flexible about collateral. If some organization found it difficult, they should introduce at least one exclusive product for the poorest of the poor and that would be absolutely collateral free. It has been demonstrated that mutual trust and human relations is more effective than collateral and legal instruments. Considering this reality, microcredit and microfinance organizations should design their own strategy (country to country may vary this strategy) to develop mutual trust and human relations between them and their customer in order to serve the poor. For instance, many microcredit and microfinance organizations follow group mechanisms to develop mutual trust and human relations, even though the concept of group is different in different organizations. In many organizations groups also work as collateral, if one member does not pay another member of the group, they have to pay and it is an obligation, which is also a kind of collateral. In this mechanism generally group members look for pro-poor or better off people, those who are considered as less risky and finally the poorest do not have the opportunity to get access to the group. Considering this reality and in order to give priority to the poor, to me the concept of group should be like this: A group is a number of individual people who are like minded, are in similar economic and social condition, develop and enjoy mutual trust and confidence before or after (in western context after and remaining places before) joining the program. In this system, the group creates social capital, self-esteem and dignity among its members. It creates a sense of discipline, responsibility, solidarity, cooperation and above all a strong mutual trust and human relations that allows its members to take advantage from each other and from the services (credit and non-credit) provided by the program. But among the group, loans will be individual, no member has to take a loan or default responsibility for other members. In such way only mutual trust and close human relation will be the tools to maintain credit discipline. Hence, every individual from any part of the world will have access to credit. Thank you so much and Good Luck with your great initiatives!!
Nazrul Chowdhury Microcredit Consultant, Foundation ICO Spain
27 Apr 2011
sounds familiar...
In principle this is very similar to the attempt by Catholic Relief Services (CRS) to create a system to recognise partner MFIs not only for core operational and financial performance excellence, but also their dedication to serving the poorest of the economically active poor. Centred on a comprehensive appraisal tool and subsequent institutional strengthening plan, it effectively certified the MFI as meeting CRS' philosophical and operational commitment to the poor.
Greg Pirie New Zealand
15 Apr 2011
Looking for feedback and dialogue
It would be great to have reactions - or questions - from readers. Do you think that serving the poor - and serving the poor effectively - is a core vision and goal for microfinance? If it is, do have a look at the concept paper (the summary is just 5 pages). A large part of the main concept paper reviews other initiatives, including the important work of the Smart Campaign (for client protection) and the Social Performance Task Force (currently drafting 'universal standards for social performance' including issues of responsible governance, quality of services). These are important elements of excellence in microfinance. Beyond this, does it makes sense to you to go a step further and recognise MFIs who operate in poorer regions, who serve signficant numbers of poor people, and have strategies to add value to financial services to support 'transformation' - or positive change?
Frances Sinha EDA Rural Systems\\\/M-CRIL India
09 Apr 2011
Fair trade in True sense
Fair Trade usually the term really protects the interests of small producers and ensures their welfare on a sustainable basis.In microfinance the same term is mostly take care of the MFIs rather than the target group particularly grassroot level beneficiaries.
Joseph Antony Jeevankiran India
07 Apr 2011
good initiative
A new seal of approval is a great initiative to promote further transaparency in the sector. However it must be put together with the other existing initiatives such as the Mix market ratings or those provided by Microfinance Transparency initiative. Too many "seals of approval" may lose their real meaning so this needs to be carefully thought out before implementation.
