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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 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 regulatory frameworks.

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. 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 countries."

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."

She 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 the results."

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.

Asked 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."

"It's not 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."

James 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 by 2015.


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