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News tagged as "responsible finance"
February 21, 2013

Do not miss out on microfinance´s opportunity

Tags: microfinance, social performance, responsible finance | by Mª Jesús Pérez, Deputy Director. Department of Research, Social Innovation and Services. Codespa Foundation

Over the last few decades, we have witnessed the impressive expansion of microfinance. This is primarily the result of two main guiding principles: the creation of entities and institutions specialized in providing microfinance services and the creation of sustainable entities.

In just a few years, this has led to a consolidated industry in which thousands of sustainable institutions provide services to more than 150 million people. In practice, among these entities providing microfinance services, two different approaches can be found, depending on their mission.

- A first approach would include those entities that conceive microfinance as a financial tool for development. Its ultimate goal is to eradicate poverty by promoting development and enabling financial inclusion of poor people. Hence, its success stems from the improvement of their client´s socio-economic situation.

- A second approach would include entities for which microfinance represents a means for entering into new markets and expanding the conventional financial sector, according to the same principles that govern conventional banking: profitability and efficiency. The key to its legitimate success lies in generating economic benefits from microfinance activities, which may be translated into social benefits.

Both approaches may have a common goal: create efficient and sustainable entities that provide access to financial services for people with no income or means. Moreover, both of them play a specific role in social development, even though their goals and results may differ from one to another. 

 

 

The main problem is that just a few microfinance entities, regardless of their approach, demonstrate social returns with reliable evidence. Moreover, the diversity of entities and approaches leads to confusion about the usefulness of microfinance as a powerful tool against poverty.

Some entities do generate social impact; nevertheless, they don’t know how to measure it. Others, concerned about obtaining large economic benefits, neglect the social dimension. In addition, the panorama gets more complicated when entities that are supposedly focused on assisting poor people  adopt abusive and irresponsible practices, being even more outrageous when those lead to a disproportionate profit for the entity. As a result of this, the whole sector is damaged by a series of bad practices that may be used as an argument against it as a whole; even against entities that do an exceptional work.

Lack of reliable information and evidence about social returns makes it harder to discern between some and others. This causes a terrible damage to the reputation of the whole sector, jeopardizing the usefulness of microfinance as a potential tool for socio-economic inclusion of millions of low-income families. Something must be done.  

Given this scenario, microfinance entities have, however, the opportunity to objectively report on their real social impacts. And this one represents a main aspect to ensure sustainability within the whole sector. There have been —and there still are— many international efforts in order to define universal standards for social performance management, which will allow to compare institutions’ social objectives with their actual results. These standards, together with social performance indicators, may help to ensure transparency regarding true social achievements within the microfinance sector. Because of its social background and closeness to poverty, microfinance has a large potential for becoming a model of financial industry capable of generating an inclusive and socially responsible development.

Whilst many banks seek to promote Corporate Social Responsibility (CSR) to demonstrate their deep concern about financial exclusion, microfinance has the advantage that its core business is, indeed, that of inclusion. As long as microfinance entities are able to demonstrate social responsibility and extended social value creation, they will be, without any doubt, a model of industry to follow. However, we need to put more efforts into measuring and managing both social and economic returns if we do not want that microfinance misses out on its opportunity.

January 8, 2013

Behind the contracts: let your left hand know what your right hand is doing

Tags: microfinance, responsible finance, transparency, consumer protection | by Verónica López Sabater & Álvaro Martín Enríquez, Afi, Analistas Financieros Internacionales

Contract agreements signed between a financial institution and its clients are unilateral agreements designed by the former and – eventually – accepted by the latter. They are also called “contracts of adhesion”, meaning that one of the parties adheres to its contents. There is no room for further negotiation as it is common practice in other types of private contracts: you (client) either take it or leave it. Fair enough, those are the rules of the game, aren’t they?

Financial institutions designing a contract of adhesion are in charge of caring for the interest of one of the parties (their own). In the specific case of standard form agreements ruling financial relations among clients and institutions, the interest taken care of by the institution’s legal department is twofold: on the one hand, regulatory compliance; on the other, making sure that funds will be appropriately recovered.

The second objective is based on the establishment of sufficient guarantees to allow the lender to timely recover the funds lent to the debtor. Who defines “sufficient”? The authority should establish the minimum requirements that any binding contract should contain, in terms of transparency, fair treatment and client protection. However, there are jurisdictions where these parameters are non-existent, as it is the case of Guatemala, for instance. What happens then when there is no referee controlling for the proper compliance with the (oops! non-existent) rules of the game?

Many readers of this post will have often read standard form agreements regulating the relations between clients and financial providers. Fewer will have probably searched for abusive or inappropriate clauses. And a smaller set will have had the chance, as we had, of searching ugly wordings in those contracts: it is surprising that many of the apparently inappropriate clauses are not binding and have never been activated, even when the activation cause has taken place. Then, why are they “black on white” in many contracts? Our bet – based on empirical evidence – is that no one at the financial institution has ever carefully read the contracts that are being offered to clients. How could that be so? That is not an easy question to answer, unless you track the process behind the elaboration of contracts and reach the ultimate responsible: the legal department. And that is what we did.

-          [Afi] Good morning! Could you tell us what your utility function is? Do you ever take in mind the clients’ perspective?

-          [LD] Not really. I write contracts when asked to, usually when new products come out. And I usually build up on existing contracts, just updating the new product’s attributes.

-          [Afi] Does anyone control for the quality of the contracts?

-          [LD] Yes, that’s what I do! 

Unless contract designers are to follow specific guidelines that protect the client, contracts will always overemphasize protection of the financial institution’s interest, since that is the objective function of the legal department, which is fair enough. However, as in the human body, financial institutions are live organizations that require a properly working central nervous system that integrates the information that it receives from, and coordinates the activity of, all parts of the body, responsible for controlling behavior, alerting and helping react to both external and internal factors. In other words, the institution’s left hand should know what its right hand is doing, which is exactly what we suggested in a previous post: the key is to mainstream client protection principles, standards and practices throughout the whole organization, as a nervous system does. The question is: how can this be done?

A responsible finance / transparency department (name it as you wish) should provide the final OK to all new products, all new (and old) contracts, all new (and existing) advertisement materials, and so forth, to make sure that the clients’ perspective is considered in all dimensions.

The retail banking business – including microfinance – builds on trust, and clients should be looked at as partners, not as enemies. An easy first step towards applying the abovementioned suggestion would be the following: take a closer look into contracts, keeping the distance – put yourself in your client’s shoes. It is quite a unique experience that we highly recommend.

October 10, 2012

XV FOROMIC: Responsible Finance, Green Finance and Flexible Finance

Tags: foromic, Latin America, microfinance, responsible finance, green finance | by microfinance, Latin America and the Caribbean, FOROMIC, responsible finance

We would like to share with all of remEX members, observers and friends the main conclusions that

Initiative financed by: Initiative financed by AECID
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