Credit where credit's due
07-03-2011 | Microfinance offers a lifeline to millions of people across the developing world, providing basic financial services to help them work their way out of poverty. But recently, microfinance has been making the headlines for all the wrong reasons. A new initiative from UN Special Advocate HRH Princess Máxima of the Netherlands, the UNPRI and spearheaded by Triodos and a core group of international investors, is set to ensure that microfinance can remain inclusive, responsible and true to its principles.
Small change, big difference
Two and a half billion people across the developing world lack access to the basic financial products and services most of us take for granted. Microfinance fills this gap, offering services including savings, credit, payment facilities and insurance to low-income people in developing countries. It is recognised as an effective way to help poorer people to help themselves out of poverty and, by empowering poorer communities and offering new opportunities, helps improve lives for millions of families.
While the services and products vary, microfinance institutions (MFIs) typically make small loans to low-income people for short periods of time. The original premise of microfinance was that people who were traditionally excluded from the banking sector because of lack of income or security could borrow to meet their credit needs, or save money securely. These needs either go unmet or are met at the exorbitant terms set by money-lenders or loan sharks. Access to microfinance helps local economies to thrive by supporting enterprise and creating jobs. And its wider impact can go much further, leading to improvements in everything from public health and education to the status of women in the community.
Pioneering inclusive finance
Triodos has been active in microfinance since 1994. Rather than providing microfinance services in developing countries itself, Triodos established its role pioneering investment in local microfinance banks and institutions across the world. These institutions have the local knowledge and expertise understand their markets, lending to local people with the ideas and drive to build small, sustainable businesses. Our vision is to develop microfinance into a fully-fledged part of the financial sector in developing countries.
Triodos now runs four Netherlands based microfinance investment funds, with combined assets under management of £200million. Through these funds, Triodos’ influence is truly global, with investments in more than 85 MFIs in 43 countries. Together they reach 7.2 million loan customers and over 5 million savings customers across Africa, Latin America, Asia and Eastern Europe. When Triodos makes an equity investment in a MFI, it takes a place on the institution’s board of directors, allowing us to share our knowledge and banking expertise.
Since its early days, the industry has come into its own. The microfinance industry has shown that poor people are bankable and can be offered financial services in a sustainable manner. On the back of the industry's success, some commercial banks in developing countries have followed MFIs' lead and partnered with them to reach out to lower income customers. In other markets, microfinance institutions have transformed into banks with a full licence, allowing them to further expand their services to include, for example small and medium-sized enterprises, a sector that creates employment.
Recently, however, microfinance has been hitting the headlines for all the wrong reasons. The microfinance sector in India has been the subject of extremely critical comments from local politicians and the media, with reports about MFIs providing loans on the basis of unclear procedures, high interest rates and unethical collection practices. Rapid and turbulent growth has put strain on the MFIs themselves and exerted severe pressure on the market, producing a vast array of similar products all aims at the same people. This, combined with a lack of reliable information about individuals’ existing loans, means that some take out loans with several institutions, borrowing more than they can hope to afford.
Marilou van Golstein Brouwers, Managing Director of Triodos Investment Management and head of our microfinance funds commented, “The global microfinance industry is still in its adolescence and as it matures we must address its challenges in a balanced manner. As microfinance becomes integrated into mainstream financial systems, it also faces problems found in the finance industry in general. In some countries strong, even aggressive growth and increased competition has led to overheating and to over-indebtedness of clients. Sometimes it seems that the focus on clients has been lost. Personally, this is painful to witness.”
Putting people first
Triodos is one of a core group of investors in microfinance who, together with HRH Princess Máxima of the Netherlands, the UN Special Advocate for Inclusive Finance for Development, have set out a new framework for responsible investments in microfinance. Launched in January and signed by a group of 41 global investors, the Principles for Investors in Inclusive Finance (PIIF) provide practical guidance to help keep the interest of microfinance’s low income customers at its core.
“By signing these Principles we show our commitment to make a difference. Serving the clients should always come first. Products and services should add real value and be provided in a transparent and fair way, so that they do improve lives and not cause harm,” says Van Golstein Brouwers.
Signatories to the Principles make a commitment to the fair treatment and protection of the customers’ interests, with clear and balanced contracts and a fair process for resolving disputes. They will actively support the microfinance banks they invest in to innovate and expand the range of financial services they provide, ensuring these are transparent and meet sustainability standards. They’ve also pledged to balance long-term social and financial returns that recognise the interests of the customers, the MFIs and their investors.
As part of the United Nations Principles for Responsible Investment (UNPRI), the Principles are aligned with a larger body of international frameworks guiding the actions of financial institutions worldwide. “As founding signatories we share a long term view and commitment to the sound development of this sector. And we believe that focusing on the interests of clients is the only way to achieve long-term sustainable financial results,” says Van Golstein Brouwers.
While the Principles don’t claim to offer a panacea to the problems emerging in the burgeoning microfinance market, they do offer a roadmap that draws us back to the very heart of microfinance: offering financial services responsibly and transparently to people on low incomes, to help enable them to improve their living conditions. This has always been – and will remain – the focal point for our operations as a values-driven investor.