DRAFT Case Statement: Developing a Seal of Excellence (or Trustmark) for Microfinance Days after the April 2010 Africa – Middle East Regional Microcredit Summit in Kenya, Microcredit Summit Campaign Director Sam Daley-Harris delivered a speech in Spain outlining a vision for the field focused on bringing the transformational dimension of microfinance back to its center. The speech1 echoed aspirations and concerns that have been voiced with increasing urgency by microfinance stakeholders over the last several years, and supported the idea of reinventing microfinance that has been gaining momentum and was articulated in the 2008 article “Reimagining Microfinance”2 published in the Stanford Social Innovation Review, among other places. Coincidentally, the speech was delivered at the same time as an article by Neil MacFarquhar titled “Banks Making Big Profits from Tiny Loans” was published on the front page of the New York Times. Key questions raised in the article included “….how much interest and profit is acceptable, and what constitutes exploitation” and whether microfinance institutions were staying true to their poverty-fighting missions or drifting off course. Daley-Harris shared his speech delivered in Spain with a small group of U.S.-based leaders in the microfinance field: Susy Cheston, Senior Director at World Vision; Alex Counts, President of Grameen Foundation; Chris Dunford, President of Freedom from Hunger; Matt Flannery and Premal Shah, CEO and President respectively of KIVA; and Chuck Waterfield, CEO of MicroFinance Transparency. Meeting by conference call every several weeks beginning at the end of April 2010, this nascent “Steering Committee” (henceforth referred to as “the Committee”) has been exploring the possibility of developing a “seal of excellence” for microfinance that recognizes achievement in terms of benefitting poor clients and achieving pro-poor missions, as distinct from being simply “transparent” or “doing no harm” in the sense of adhering to client protection measures (as important as these two initiatives are). Initial discussions have revolved around a certification or seal of excellence that takes into account an institution’s social and financial performance, their pricing (including interest rates on loans), their client protection efforts, their success in targeting and reaching the very poor, their ownership and governance structures (including the degree of client involvement), limitations on private benefit, and other areas which, taken together, point to an institution that is making concrete and recognizable efforts to have microfinance aspire to be about more than transactions but about transforming the lives of low-income individuals, families and communities. Some of the concepts discussed include: Why a high-bar seal of excellence and why now? The Committee realizes that while the motivation of microfinance leaders is on the whole well-intended, even those with good intentions can push the field off-course and 1
http://www.microcreditsummit.org/news/. See Stanford Social Innovation Review, Summer 2008, p. 46. Access online at http://www.ssireview.org/articles/entry/reimagining_microfinance/ 2
end up harming the reputation of other institutions. For example, while a large number of microfinance leaders believe that commercialization is the only way to reach the massive number of those living in poverty, a smaller group has taken this to mean that profit maximization that primarily benefits investors and staff is an acceptable strategy. The Committee discussed the distinction between these institutions and a microfinance institution (MFI) whose profits benefit the clients in the form of lower interest rates, additional services, or dividends that accrue to clients. We understand that there are microfinance leaders with good intentions but highly inefficient methodologies who end up charging exorbitant interest rates to cover their inefficiency. We also underscored the difference between an MFI that has transparent interest rates that are unacceptably high and an MFI that has transparent interest rates that fall within some acceptable range (recognizing that “acceptable rates” may vary to some degree based on the local context). In other words, while transparent pricing is important, it is not enough if the interest rates are still exorbitant by some objective standard. And while strong financial performance is essential to an organization’s sustainability, if profits don’t translate into material benefits to clients such as dividends or improved services, a significant opportunity will be missed to have microfinance be the strongest force it can be to achieve the Millennium Development Goals related to poverty reduction. Some on the Committee expressed concern that the microfinance field could someday face its own televised Congressional hearings with questions on ethics and competence reminiscent of those addressed to officials from Enron, the financial industry, and BP. Partnering with existing initiatives The Committee is in complete agreement on the need to partner with and reinforce existing initiatives which, taken together, could represent all or part of the components that would allow an MFI to receive a high-bar seal of excellence. Examples of the partnerships already being developed or to be developed include ones with the Social Performance Task Force (SPTF) and the ImpAct Consortium on social performance; institutions that perform social ratings; The MIX on financial performance; MicroFinance Transparency on interest rate transparency; the SMART Campaign on client protection; SEEP with its Poverty Outreach Working Group and other initiatives. What does a seal of excellence bring that existing initiatives can’t yet bring? The key industry initiatives mentioned above are, of necessity, “big tent initiatives.” They cannot set the bar too high for fear of getting insufficient buy-in from the field and losing participation. The Committee believes that a high-bar seal of excellence would provide a vision for microfinance that goes beyond discerning behavior that is “ethical” or “unethical” and sets a higher standard, calling microfinance practitioners to adopt approaches that reinforce and advance the transformational dimension of microfinance, spur pro-client innovation, and more rationally allocate socially motivated investment capital. Importance of articulating a “theory of change” in which a seal of excellence shifts the microfinance industry towards being truly “pro-poor”:
The Committee has been clear that a high bar seal of excellence should be developed in a way that inspires and draws MFIs to aspire to act in their clients’ interests, accelerate their progress out of poverty, and spur related transformations. This might include key recognition for institutions that receive the high-bar seal and perhaps one or two lower bar seals for groups that are striving toward the top level. This might include gold, silver and bronze seals. Adoption of emerging client protection standards would be a necessary but insufficient condition to receive this additional, and hopefully much sought-after, certification. Why would the Microcredit Summit Campaign be an appropriate vehicle? The Committee agreed that the Campaign’s high-visibility events and activities might provide part of the recognition needed for such an initiative to succeed. For example, the Global Microcredit Summit to be held November 14-17, 2011 in Valladolid, Spain will attract more than 2,000 delegates from over 100 countries, including heads of state and government. Presenting the seal at such an event and announcing the first round of certified MFIs might provide the momentum this kind of initiative needs to succeed. Similarly, the State of the Microcredit Summit Campaign Report is another vehicle that could highlight those who receive the seal, the components that make up the seal, and the latest innovations in those areas. The global and regional summits might morph into gatherings with a greater emphasis on one- and two-day courses focused on different aspects of the seal for those MFIs seeking improvement in specific areas of the seal. If the Microcredit Summit Campaign is the vehicle, what are the potential down sides for the Campaign? While the high-bar seal of excellence is intended to be inspirational, Committee members understand that several large MFIs who do not receive the seal might discontinue reporting to the Campaign, making the Campaign’s counting and goal-setting activities moot. Early thinking from Campaign leadership sees this potential risk as acceptable given the opportunity that a well executed seal might provide to the future of the field. The importance of going beyond looking at data and interviewing clients: The Committee is clear that in order to provide a reputable high-bar seal of excellence it is important to go beyond the analysis of written policies and data, and include visits to the MFIs and meaningful interface with clients to determine whether the policies and data are reflected in the lives of the clients. Commissioning a Concept Note as a next step: Members of the Committee have agreed to commission a “concept note” as a next step. Four institutions have committed $5,000 each toward commissioning the note. The draft terms of reference for the concept note on developing a high-bar seal of excellence state that it will: 1) Describe how "seals of excellence" have been developed in several other fields; 2) Review the indicators that are available in the microfinance field (e.g., social indicators from the Social Performance Task Force, financial indicators from The MIX,
evolving approaches to social ratings, interest rate indicators from Microfinance Transparency, client protection indicators from the SMART Campaign, poverty outreach indicators from the SEEP Network) and those that are not available, and outline which indicators are most available, most reliable, and which might be used for a "high bar" seal of excellence that points toward programs which are more likely to unleash the transformative dimensions of microfinance and which indicators might be used for a lower bar seals of excellence; and 3) Discuss possible governance issues including: a) what entity should grant the seal, b) how the seal is exhibited and its tenor, c) whether there are arbitration procedures, d) how to broaden and internationalize this nascent “steering committee� and e) how modifications of the criteria would be managed. 4) Discuss the options for implementation around assessment of MFIs and verification of indicators to be used for a high bar seal of excellence. An interactive process for developing the Concept Note: There is agreement that the concept note should first be reviewed by leading thinkers on change theory and seals of excellence who are outside the field of microfinance followed by a period of webbased open feedback from around the world.