By Larry Reed, Director, Microcredit Summit Campaign
What can we say about a book that exposes a huge vulnerability in the microfinance industry, but does so by exposing only those facts which make its case and excluding those which give more context to the story? It seems that the microfinance industry has grown to the point that it can sustain a “tell all” book, and like most books of this genre, Confessions of a Microfinance Heretic by Hugh Sinclair tells only selective truths to build the case for an important pre-conceived point.
The important point that Hugh makes very well is this: the funding system for microfinance, which still depends in part on donors and investors located far from the clients who receive financial services, carries a large incentive to tell only good stories and hide negative results from those who are contributing the funds. Hugh describes this as a “principal-agent” problem. Those making the investments and donations (the “principals”), on their own, do not know how the end user, the client, is faring as a result of their support. Investors and donors rely on agents (the microfinance funds and MFIs) to vet the options for them. And when the financial success of those agents depends on raising more and more money, agents tend to hide or ignore information from the principals that might make that fundraising more difficult.
As an industry, I think the most important response we can give to Hugh’s book is to address this problem directly, to come up with systems and solutions that give investors and donors independent information on not only the financial performance of a microfinance institution, but also the degree to which the practices of the MFI match the ethical values and desired outcomes of those who support it.
What Hugh fails to acknowledge in his book, however, is that the industry has recognized (if belatedly) this issue and has taken steps to address it. Hugh criticizes the Client Protection Principles of the Smart Campaign because an MFI can be listed as an endorser without actually following the principles. This is a challenge that the Smart Campaign has addressed from the beginning by developing training tools for applying the principles and assessment methods for evaluating whether an MFI is in compliance with them. The Smart Campaign is in the process of developing a certification that will involve rating agencies doing assessments that make public an MIF’s performance against the Client Protection Principles.
The Social Performance Task Force (SPTF) is another industry-wide initiative that has been bringing together practitioners, raters, donors, and investors since 2005 to establish standards of practice for double bottom line microfinance institutions. In June this group adopted the Universal Standards for Social Performance Management, which includes standards for many of the issues that Hugh addresses, including executive compensation and board oversight. These standards will be incorporated in the social ratings carried out by the major microfinance rating agencies.
Investment institutions have also developed standards to make sure that their investments match their messages to the people and institutions providing the funds. Oikocredit, one of the largest microfinance investment funds, is not mentioned in Hugh’s book, but it is an exemplary investor to whom we could look for guidance on due diligence. Oikocredit often bases its investment decisions on analysis that includes social ratings of MFIs and measurement of poverty levels using the Progress out of Poverty Index developed by the Grameen Foundation.
Finally, the Seal of Excellence for Poverty Outreach and Transformation, an industry initiative under development since 2010 and housed at the Microcredit Summit Campaign, is an initiative aimed at recognizing those institutions doing the most to create positive and lasting change for poor clients and creating a learning environment for improved practices in serving these clients. This Seal will be awarded to those MFIs that have been formally assessed and have been found to:
- Exhibit commitment and progress toward the Client Protection Principles
- Show effective operations and progress within the Universal Standards for Social Performance Management
- Demonstrate that they are reaching poor clients, and
- Demonstrate that those clients are benefitting from those services and, ultimately, are showing progress over time.
In this way, those who want to invest in MFIs with a poverty mission will know which MFIs are meeting or exceeding expectations.
Ultimately, for those of us who have been working in microfinance a long time and who find ourselves getting angry when we read a book that seems to slant all its facts in one direction, we should ask ourselves to what degree we are guilty of doing the same thing when we have promoted microfinance. Have we reported only the good stories and positive results, afraid that the general public would not be able to understand all the complexities of our work? Have we relied too heavily on happy anecdotes of client success without sufficiently probing their challenges?
It is time for us to set high standards, hold ourselves accountable for meeting them, and be utterly transparent about who does and who does not stand up to scrutiny. And we can thank our heretical friend Hugh for providing further motivation for finishing the work that will make this happen.
Also read: “What a Microfinance Heretic Has to Say to US Microlenders” on huffingtonpost.com by Elaine Edgcomb, Director of the Aspen Institute Microenterprise Fund for Innovation, Effectiveness, Learning and Dissemination (FIELD).