February 03, 2011
PRI Launches Inclusive Finance Initiative
by Robert Kropp
Forty global investors have signed the Principles for Investors in Inclusive Finance, which seek to
encourage sustainable institutions and improve client protection.
As the rapidly growing microfinance industry has moved beyond its core of socially motivated
capital to include more commercial considerations, it has encountered a number of widely publicized
challenges that have led to questions about its effectiveness at present. In India, for example,
where microfinance is now a $5 billion industry serving 25 million of the nation's unbanked poor,
charges of unsustainable interest rates and overly aggressive collections practices have led to a
decrease in loan payments to a fraction of what they had been.
Even in Bangladesh,
where Muhammad Yunus founded the Grameen
Bank and received the Nobel Peace Prize for his efforts, the national government has ordered an
inquiry into the bank's practices.
Acknowledging that "poorer clients are often
disadvantaged by asymmetries in financial knowledge, power, and influence," the United Nations' Principles for Responsible Investment (PRI) has
launched a new work stream called Principles
for Investors in Inclusive Finance (PIIF). The 40 initial signatories to the Principles have agreed to the
"fair treatment and protection of the interests of the ultimate client in inclusive
finance—low-income households and small and medium-enterprises."
Signatories to the PIIF
agree to provide low-income people with an expanded range of financial services, including savings
accounts. In December, when SocialFunds.com spoke with Elisabeth Rhyne, Managing Director of the Center for Financial
Inclusion, she said of the crisis facing microfinance institutions (MFIs) in India, "The ideal
outcome would be a regulatory framework for MFIs that would allow them to begin taking deposits and
have stronger supervision by the regulatory authorities."
Stating that "client protection
is crucial for low income clients," the Principles recommend adoption by investors in microfinance
of the Client
Protection Principles, developed in conjunction with the Smart campaign by the Center for Financial Inclusion.
Signatories also agree to fair treatment of investees, inclusion of environmental, social,
and corporate governance (ESG) criteria in investment policies and reporting, transparency,
balanced returns, and collaboration with other actors in the development of benchmarks and
While the launch took place in the Netherlands, and most of the 40
signatories are based in Europe, US-based signatories include Accion Investments and the Calvert Foundation. SocialFunds.com spoke with Eliza
Erikson, Chief Lending Officer at the Calvert Foundation, about the organization and how its
mission relates to the PIIF.
"Our policy is to help end poverty through investment, not
through grantmaking or charities," Erikson said. "Our commitment to signing on to the Principles is
to implement them throughout our portfolio."
"Thirty-five to forty percent of our
portfolio is invested overseas," Erikson continued, "Primarily in microfinance in developing
Asked about the problems now plaguing microfinance in developing countries,
Erikson said, "To some degree, I think we've deluded ourselves that microfinance and all the actors
in microfinance are purely socially motivated. As the industry become more complex and starts
tapping capital markets, the need for both self and government regulation grows."
continued, "Given the fast-paced development of the industry over time—and I defend that
development, because there's such a pressing need for financial services around the world, and we
haven't even scratched the surface—purely socially motivated capital is not enough, and it will
never be enough. We have to find a way to attract more commercially motivated capital and regulate
Acknowledging the need for improved regulatory frameworks governing the
industry, Erikson pointed out, "Regulatory frameworks take a long time to be put into place, so
there is a need for self-regulation by the industry."
"A reason for the genesis of the
Principles is for investors to be part of that self-regulation of the industry," she continued. "I
see investors and other stakeholders getting together with MFIs to determine a regulatory framework
that would protect both consumers and the MFIs themselves."
Erikson also pointed out that
efforts at such self-regulation already exist, and gave as one example the Center for Financial
Inclusion's Smart campaign. The Foundation is an endorser of the Smart campaign.
about the changes in the Foundation's approach to microfinance that might occur as a result of
signing the PIIF, Erikson said. "As a signatory, we'll be looking at our due diligence process, and
the contracts governing the relationship between the Foundation and investees."
just putting principles down on paper," she continued. 'It's the hard work of how to implement
them, how to keep them reflecting market realities on the ground, and ultimately integrate them
into a regulatory framework."
According to a press release, "The Principles
will go into effect at the moment of signing. The signatories commit themselves to promoting them
in the market and among peer networks in order to build global awareness, gain additional
signatories and create a culture where adherence to the Principles is the norm."
Gifford, Executive Director of PRI, stated, "Micro investments are one of the most important
mechanisms to help us achieve the UN Millennium Development Goals. Principles for
Investors in Inclusive Finance make an important first step to mainstream microfinance in a way
that safeguards all stakeholder interests."
The first Millennium Development Goal (MDG)
includes the goal of reducing by half the proportion of people whose income is less than $1 a day