There are many different objectives for microfinance. Let’s acknowledge the dominance of poverty alleviation in the public understanding of microfinance. The association of the microfinance brand with poverty alleviation is extremely strong in the minds of most donors, lenders and investors. If microfinance is not explicitly and demonstrably alleviating poverty, isn’t it failing the prevailing public expectation?
I share with most of my peers in microfinance a common commitment to the Smart Campaign, which sets standards for consumer protection in microfinance. ACCION’s Center for Financial Inclusion, led by long-time microfinance thought leader, Beth Rhyne, has provided the institutional home and much of the intellectual leadership for the Smart Campaign. When I was President of Freedom from Hunger, it was one of the handful of founding supporters of the Smart Campaign. My former colleague, Beth Porter, was there with Beth Rhyne almost from the start, steering the conceptual development and growth of the campaign.
The impetus for setting universal standards for client protection was the Compartamos IPO in Mexico in 2007. The controversy over the policies and practices of Compartamos that allowed it to do a highly successful IPO sensitized the industry and the press to the possibility of “bad actors” in the industry – primarily consumer-lenders with little, if any, regard for the welfare of their clients.
While I didn’t share this view, some commentators put Compartamos in the “bad actor” category. One of their main complaints was the very high interest rates charged to poor Mexicans, which generated profits high enough to attract profit-seeking investors (rather than lowering interest rates for the benefit of clients). This controversy, and the public relations crisis that followed, led to a high-level meeting of industry leaders at the Rockefellers’ Pocantico estate north of New York City in April 2008. This group decided that the “bad actors” needed to be dissociated from the brand of true microfinance, and from this decision there emerged the Pocantico Declaration. Its major impact on the industry was launching the Smart Campaign for client protection.
According to the Pocantico participants, true microfinance would have to distinguish itself by setting and adhering to basic operating standards for client protection. At minimum, the microfinance industry would have to “do no harm.” Evidence of this would separate the true microfinance practitioners from other actors.
Two years later, in April 2010, Sam Daley-Harris, the legendary co-founder and leader of the Microcredit Summit Campaign, asked Alex Counts, CEO of Grameen Foundation, and me and a few others to join him in a phone call that gave rise to the initiative to create a Seal of Excellence for Poverty Outreach and Transformation in Microfinance. The concept was to award the equivalent of the Good Housekeeping Seal to microfinance institutions that demonstrate both the will and performance in reaching substantial numbers of the very poor (more or less the same as the chronically hungry) and in making measurable progress in transforming the lives of these very poor clients. The idea of this Seal of Excellence was to provide guidance on how to reach and transform lives of the very poor by drawing attention to institutions that are doing “excellent” work in this regard.
Those who want to be recognized for their focus on alleviating poverty would have to demonstrate their will and performance in doing so. Evidence of this would divide the true poverty alleviators from the other microfinance practitioners who have different objectives.
Some of my peers in microfinance object to the Seal of Excellence on the grounds that it would be “divisive” of the industry. I agree that it would do just that – divide the industry into poverty alleviators and those who are not. That is the intent, but more important is the intent to provide guidance and standards for those who aspire to be poverty alleviators. The Seal simply recognizes those who have succeeded in meeting the standards and holds them up as examples for the other aspirants. The real issue seems to be that the term “excellence” very strongly suggests that poverty alleviators are “excellent” and others are not. It’s a good point!
Microfinance practitioners (and those who support them) have a variety of social objectives, ranging from financial inclusion (yes, this is a social objective) to poverty alleviation (many would say “reduction” or “elimination,” rather than tepid “alleviation” of the burdens of poverty), to women’s empowerment, to enterprise development, to employment generation for the very poor, and so on. As often as microfinance practitioners are motivated by a single objective, others have multiple objectives. In my view, there ought to be a “seal of excellence” for each of these objectives, to provide guidance to those who aspire to each.
If there were only one “seal of excellence” for only this one objective, broadscale collection of evidence of poverty alleviation could be very divisive of the industry.
Does this mean we should not collect evidence of poverty alleviation? I invite you to comment. Given the controversial nature of this topic, I feel compelled to point out that I moderate the comments; if yours is on point and respectful, I will upload it as you have written it.
More on this Theme One in the next post (Post 3).