1. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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)

2. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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

3. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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)

4. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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

5. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Ethics & Microfinance – Current issues (last months) Is the provision of financial services to the poor necessarily socially 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)

6. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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?

7. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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

8. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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

9. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Theoretical foundation for a classification of SR Ethical values suggest two main ideas (Pogge, 2002): 1. Good character - admirable aims and ambitions 2. Ethical achievements ethical quality of the person’s deeds historical impact on the world

10. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Social Responsibility in Microfinance: 3 approaches 1.Microfinance sector is intrinsically SR  1st of Pogge: Population (poor entrepreneur) Impact on the poor or their children MIVs: Exclude some MFIs (reputation risk) 2.Microfinance is intrinsically not-SR: Overindebtedness; recovery practices (Fernando, 2007) Price: high interest rates

11. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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)

12. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Social Responsibility in Microfinance: 3 approaches (2) 3.“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!

13. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Compartamos social mission Most controversial (IR, IPO) case Schreiner’s (2002) indicator of outreach: 1.  Clients 2.Depth 3.How long (sustainable) 4.Scope (type of products) 5.Costs of the products 6.Benefits + % Women (98%)

14. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons 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!

15. Centre Emile Bernheim; SBS-EM – ULB Centre de Recherche Warocqué; UMons Thank You!