NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, January 15, 2015

Four years have passed since the launch of thePrinciples for Investors in Inclusive Finance, a compact signed by 40 global investors in the Netherlands. The introduction to these principles states:

Inclusive finance carries with it the responsibility for all actors in the value chain – investors, retail financial service providers and other relevant stakeholders – to understand, acknowledge and act in accordance with the interests of the ultimate client.

Microfinance clients are typically poor, often semi-literate and unable to advocate for quality financial services or seek redress when their rights are abused. A responsible investor in the industry must ensure that the end-users of microfinance are treated fairly and provided with financial services appropriate to their needs.

The importance of informed, responsible investors is critical given the frequent failure of other stakeholders to protect borrowers from abusive practices by microfinance institutions (MFIs). The multiple microfinance debacles over the years are indicators of widespread regulatory failure.

Microfinance has caused crises in Bolivia, Nicaragua, Morocco, Bosnia, Pakistan and Andhra Pradesh, India where there were hundreds of suicides in 2010 related to over-indebtedness and inappropriate collection practices. In these and other developing countries, regulators have demonstrated a lack of will to protect poor borrowers from predatory practices and harm by financial institutions.

Last year I wrote a report for Accion’s Center for Financial Inclusion calledWhat Happens to Clients who Default? which analyzed the microfinance markets of Peru, India and Uganda.