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Social Responsibility in Microfinance. April 2009 BELSIF Prof. Marek Hudon Centre for European Research in Microfinance (CERMi) Solvay Brussels School of Economics and Management (ULB). A few words of presentation. Teaching: Microfinance; Ethics; Development
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Social Responsibilityin Microfinance April 2009 BELSIF Prof. Marek Hudon Centre for European Research in Microfinance (CERMi) Solvay Brussels School of Economics and Management (ULB)
A few words of presentation.. • Teaching: Microfinance; Ethics; Development • Research topics: Ethics (interest rate, economic rights, surplus repartition, Compartamos) & public policy • Regional experience: India (+ Morocco) • European Microfinance Programme (Master Complémentaire Conjoint en Microfinance) • CERMi
Microfinance Definition from CGAP MIV Reporting Guidelines • Provision of diverse financial services (credit, savings, payments, etc.) to low income individuals • Microcredit loan portfolios are characterised by: • Recipients: low income borrowers who are typically self-employed or employers of micro informal businesses • Small average loan size (< Eur 10,000 in ECA; < Eur 5,000 elsewhere) • Alternative lending techniques which do not rely on conventional collateral • Question of consumer lending and housing finance ? Source: CGAP (2007); Goodman (2007b)
Why Invest in Microfinance? • Social return • Financial exclusion • Women empowerment • Financial return • ROE: Average MF in Mexico > banks; example of ProFund • Risk diversification (% MSCI) • Environmental return (?) • Green MF (solar) • Environmental practices
Ethics & Microfinance – Current issues (last months) • Is the provision of financial services to the poor necessarilysocially responsible? • All investment funds in MF are CSR • Should microfinance invesments be tax deductible? • “If borrowers accept to pay 100% IR, it is because they need the loan, IR is therefore fair” (The Economist)
Ethical questions in MF • MF is full of ethical questions • Who should pay the cost of more expensive rural? Cross-subsidize (Meyer and Nagarajan)? • Even if all save, savings and credit clients can differ: better-off savers financed by very poor borrowers? • Role of donors (prepare competitive markets, economic impact, social impact?), how to manage the trade-offs?
Social Responsibility in Microfinance: Difficulties • Variety of actors: Cooperatives, Grameen, Compartamos • Yunus: “Compartamos is in the moneylending business” • One framework of “SR in MF” or many? • Equally “demanding” for MF banks & NGOs? • Historically no common social indicator • Price to get some good data while easier for FSS, ROE • Fear of commercialisation drawbacks
Ethical or SR Appraisal of Microfinance • Fair practices ? • MFIs (% stakeholders?) • Borrowers (use of funds?) Current trends: • Client protection (Accion); Declaration/ code of ethics (India or Pocantico) • Self-regulation • Sufficient? • Mission-related (Labie, 2007) – Managerial definition? • What if the mission does not benefit to the clients? • Imagine an institution charging very high IR, methodology decreasing the social capital
Theoretical foundation for a classification of SR • Ethical values suggest two main ideas (Pogge, 2002): • Good character - admirable aims and ambitions • Ethical achievements • ethical quality of the person’s deeds • historical impact on the world
Social Responsibility in Microfinance: 3 approaches • Microfinance sector is intrinsically SR 1st of Pogge: • Population (poor entrepreneur) • Impact on the poor or their children • MIVs: Exclude some MFIs (reputation risk) • Microfinance is intrinsically not-SR: • Overindebtedness; recovery practices (Fernando, 2007) • Price: high interest rates
Interest rates in MC • High interest rates in microfinance (20 to 60%), very high to fund growth • Vary within regions (Asia, LA), cultural IR? • Many conceptions of fair price (deontological, demand-driven, procedural etc.) • New challenge because of outsiders: • Political use of MC: e.g. Indian Andra Pradesh (fifty branches of two major MFIs), Benin or Nicaragua • Civil Society (Jubilee 2000, canceling Third World debt) • « Recognize that we hold diverse views about the appropriate levels and usage of profit » (Pocantico, 2008)
Social Responsibility in Microfinance: 3 approaches (2) • “Best of the class” 2nd in Pogge (2002) • Social performance management (CERISE) • Related to the measures of poverty (Zeller; van Batselaer) • Trade-off between social and financial performance (Mosley and Hulme, 1996; Lensink et al., 2008)? But depends on the social indicators used & their weight!
Compartamos social mission • Most controversial (IR, IPO) case • Schreiner’s (2002) indicator of outreach: • Clients • Depth • How long (sustainable) • Scope (type of products) • Costs of the products • Benefits + % Women (98%)
Conclusion • Vast majority of the poor still unserved • At a crossroad (role of NGOs, donors, commercialisation) • Risk of reputation SR criteria • Make microfinance “understandable” for SR investors • Belgian players are involved!