NB Financial Health
Defining ‘Good Practices’ in Microfinance: Smart Campaign Director Isabelle Barrès addresses the thorny issues of profits and pricing – and discusses its next steps
The Smart Campaign was launched to encourage the microfinance sector to prioritize customer protection – most notably through its efforts to improve the practices of microfinance institutions (MFIs) through “Smart Certification.” The certification process involves convincing MFIs to voluntarily submit to an assessment by independent evaluators, which aims to verify that they are doing everything possible to treat clients well and protect them from harm – and which points to areas where their practices need improvement.
But though these efforts have started to gain traction, with 39 MFIs certified so far and many more in the pipeline, some have taken issue with the campaign’s approach. According to critics, the number of certified MFIs is too small to make a difference in the broader sector – and it includes some highly profitable MFIs that some believe aren’t worthy of the campaign’s validation.
In part one of her recent interview with NextBillion, the Smart Campaign’s director, Isabelle Barrès, argued that its impact goes beyond the relatively small number of MFIs it has certified. In part two, below, she defends the campaign’s broader impact on the sector, explains its (evolving) approach to assessing the profits and interest rates of certified MFIs, and discusses its next steps. (Note: Accion is a NextBillion Content Partner.)
James Militzer: Are you able to isolate and measure the impact the campaign has had? For instance, could you say how things would be different in specific markets, if the campaign hadn’t existed, or are there too many other factors tied up in these changes?
Isabelle Barrès (left): It’s very tied up. The model of influence of the campaign itself is definitely tied with working with others, and getting the support of others. Because even when we talk about the campaign, it’s not just about the people who work at the secretariat itself, but about the individuals and organizations that have endorsed its principles, the MFIs that are working hard to improve their practices, and the donors, funders and other types of support organizations that are trying to influence or support MFIs to improve their practices. And all of the work we do is done in a very collaborative manner, from developing tools – which come directly from collaboration with MFIs and others in the industry – to developing the certification programs, to working on research programs and on the evolution of the standards. We’re working on improving the standards so that they stay relevant to the microfinance industry, and all of that work is done by consultation with various experts and MFIs.
So it is hard to attribute the success in one market or another just to the campaign. A focus of ours this year is to find better ways of measuring how client protection is improving. To reach the ultimate goal of having clients that are protected, a lot of things need to happen, including appropriate regulation and clients who are financially capable. Then there’s also the industry side: The microfinance institutions themselves doing everything in their power to protect their clients. The campaign has focused from the start on that third pillar, at the market level: encouraging and supporting MFIs to improve their practices. And as I’ve said, we’ve seen a lot of examples in improvements. More than 100 assessments have enabled us to identify key strengths and weaknesses in MFI practices, and provide a roadmap for improvement. Our capacity building has developed a cadre of client protection experts who can provide the retail-level support to MFIs that the campaign is not best positioned to do. We have a very small staff, and we need to work in a leveraged model. In any case, there’s a lot of evidence showing how MFIs have improved their practices, and we need to find a better way of tracking this and making it visible. Then the attribution, and to what extent it’s linked directly to the campaign, will be less important than knowing that it’s happening, that change is really happening and clients are being protected.
JM: Are criticisms about the certification of very profitable MFIs with high interest rates a concern, and is the campaign planning to address those issues?
IB: The campaign can, of course, always improve. And we’re definitely open to criticism, and to the extent that it can help improve the way that clients are treated, we’re absolutely interested in hearing it and working on it. But profits are a tricky thing, because while they are one of the elements of pricing, they are not the only element. From our perspective, and from the clients’ perspective, we feel that what’s important is the price rather than the level of profit. So that’s how we look at it: Whether the price is market-based, whether it is in line with what peers are offering, adjusting for certain variables, and taking into account that the loan size definitely influences to a large degree the price that clients are going to have to pay. You could have two MFIs with exactly the same price and exactly the same impact on clients, but one has big profits and is very efficient, while the other has small profits because it’s totally inefficient. And yes, it’s going to maybe raise eyebrows from some because of the big profits, but ultimately clients have to pay the same price. So we really try to keep that in mind, to really keep an approach that is client-oriented.
JM: Do you see it as your role to tell an MFI that their interest rates are too high, or is that the role of market forces, which determine appropriate rates in different regions? Or does that give too much influence to the MFI community in different markets, which might all be charging excessive rates, making it hard to describe the “market rate” as appropriate?
IB: We don’t see it as our role to set any limits on interest or profits. As I said, we’re trying to stick to the perspective that looks at the impact on clients, and also what is reasonable given the products that the MFI is offering, and the cost structure of the market. There are a lot of factors that can explain why some rates are higher than others. We participate in the industry discussions and dialogue around these issues, and are open to continuing to improve our standards. But some of these issues are more complex than just saying that high profits are bad for clients. It is not only about the level of profit but also what is done with these profits, and the extent to which clients benefit. It is also about identifying what is in the control of the MFIs, and what role everyone in the value chain is playing (including investors). It’s a complex issue, and we’re trying to keep a client perspective on that.
The question that we are working on for Certification 2.0 is whether there are alternatives to a market-based approach, given that markets are not always efficient. We are testing our assumptions and looking at whether prices do go down over time with increased competition. We are exploring the role of market leaders, and are also looking at alternative benchmarks for pricing and its various components.
JM: What’s next for the campaign?
IB: We’ve been talking a lot about the future direction of the campaign, about how it can evolve to be relevant to a more complex industry, with new financial providers, products and business models. We will likely expand our focus, in light of the fact that the client protection environment has changed in the time since the campaign was launched. There are now more countries that are working on client protection, there are stronger client protection regulations, there’s more differentiation between countries which have good regulations, or very weak regulations. And that will force us to think about different approaches for countries, depending on their market environment. There are many interesting upcoming developments, including exploring the role of the campaign in the digital finance space, working more closely with regulators and investors, expanding the research on building the evidence for client protection, and bringing the client voice more prominently and permanently into the campaign’s work.
JM: Would that possibly mean different kinds of standards for different countries?
IB: Not different kinds of standards, but the recognition of the need for a different approach, and understanding where the campaign can be most effective given the local constraints and opportunities. For example, that would mean recognizing what we’d need to do in a market with credit bureaus and very strong client protection regulations, and how that may be different from what we need to do in a country at the other extreme, that has no regulatory framework, no credit bureaus and a lack of credit culture. So not different standards, just a recognition of where MFIs are starting from, what gaps we’re going to have to work with, and what is the overall supporting environment for client protection when we start working in these markets. Differentiating better will let us have a greater impact.
James Militzer is the editor of NextBillion Financial Innovation.
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