On 17 August 2011 the Microcredit Summit Campaign (the “Campaign”) published the State of the Microcredit Summit Campaign Report 2012 (the “Report”). The Report discusses the threats facing the microfinance sector around the world after a period of unprecedented growth and competition, particularly in India, and looks at some of the initiatives addressing these challenges.

The Report provides an update on the Campaign’s progress towards achieving its goals of 175 million of the world’s poorest families receiving credit for self-employment and other financial and business services and 100 million families rising above the US$1.25 a day threshold (adjusted for purchasing power parity), each by the end of 2015.

The Campaign reports that it is on track for achieving its first goal by the 2015 deadline but acknowledges that with setbacks in places like Southern India the second goal will almost certainly not be reached by 2015. The Report considers why the achievement of this goal seems to be out of reach, and what role microfinance can play in making progress toward it.

This summary of the Report presents an abridgement of the seven step framework as originally drafted by the Campaign.

The Case of Andhra Pradesh

The Report looks in detail at the crisis in Andhra Pradesh in India and the impact of the ordinance the state subsequently passed which placed substantial restrictions on the operations of microfinance institutions (“MFIs”). The ordinance has been widely criticized for its debilitating effects on the sector . It has led to the loan recovery rate in the area falling to less than 10 per cent. and to some institutions facing the prospect of insolvency. The Report goes on to consider the response of the government of India to develop a microfinance bill that would put MFIs under the regulatory authority of the Central Bank.

Citibank’s Director of Microfinance, Robert Annibale, and Managing Director of Global Social Investment Funds, Asad Mahmood, at Deutsche Bank provide their views on the impact of the crisis on the sector. Annibale stresses the need for clarity in regulation and the need for a structure that supports the sector, including credit bureaus, payment systems, and the like. Mahmood calls on the sector to look honestly at the role that MFIs, donors, and investors played in the crisis and says we must pay greater attention to basic building blocks, such as client protection, interest rate transparency, and social performance.

Leaders from Women’s World Banking (WWB), Vision Fund, Opportunity International, FINCA, and ACCION also discuss how their global operations have been affected by all that has happened in Andhra Pradesh and changes in their donors’ perceptions about microfinance.

Recovering the Soul of Microfinance

Following the controversies, the Report sets out a seven step framework for addressing the challenges the microfinance sector faces.

Step 1: Do No Harm. The Smart Campaign, a global initiative to promote client protection in the microfinance industry, recently revised its principles to better make sure they applied to the full range of financial services provided to clients. Over 2,000 individuals and organizations have endorsed these principles, including more than 500 MFIs and more than 100 donors and investors, making them the most commonly accepted guidelines for practitioners in microfinance. The principles focus on appropriate product design, prevention of over indebtedness, transparency, responsible pricing, fair treatment of clients, privacy of client data and mechanisms for complaint resolution.

Step 2: Know Your Client. A message that permeates the entire Report is the need for the microfinance sector to invest in getting to know its clients and understanding the impact that access to different kinds of financial services can have on different people. The Report recognizes that clients do not view their lives based on an income continuum and suggests that MFIs that develop systems for listening to and learning from their clients are able to devise products and support systems that can both help meet their clients’ immediate needs and their plans for the future. This will help build a loyal customer base that helps them attract new clients.

Step 3: Encourage Savings. Developing the theme of the importance of MFIs knowing and understanding their clients is knowing they need good, safe places to save as much or more than they need access to credit. The Report examines the key role savings play in helping people with low and irregular incomes hold on to the surpluses they acquire, so that funds are available when they need them - whether through regulated banks, informal savings groups, or some arrangement that links the two.

Step 4: Promote Financial Literacy. The Report identifies financial literacy as the next step in bringing about client-centered services. Financial education aims to help clients learn how to make appropriate, responsible financial decisions and evaluate the value and suitability of products offered by financial service providers. It helps to redress the knowledge imbalance between clients and financial service providers, helping clients to understand what they should expect from their financial institution and what to do if they are not getting it.

Step 5: Monitor and Reward Social Performance. The Report examines the perception by some that microfinance, which started as a social movement, has become too fixated on financial returns and scale and suggests the remedy may be the realignment of institutions in favor of social returns on investment. According to the Report, social performance goes beyond client protection measures and even client focused microfinance and requires microfinance practitioners not just to commit to positive change for their clients but to develop clearly defined client outcomes and to measure the clients’ progress toward achieving those outcomes.

Step 6: Be Transformative. This step discusses leveraging microfinance services with improved access for poor clients to health and health financing services. The Report quotes Sheila Leatherman, research professor at the University of North Carolina, and Christopher Dunford, president of Freedom from Hunger who suggest that collaboration with microfinance providers could tap into existing, mostly self-financing distribution channels to reach millions of unserved and underserved households. Microfinance service-delivery systems offer unique opportunities for distribution of health education and services, as well as provision of healthcare financing options to millions of the hard-to-reach poor worldwide.

Step 7: Recognise excellence. In order for microfinance to eradicate extreme poverty and hunger the sector needs to be able to identify and lift up those institutions that are reaching the very poor and are having success in helping their clients move out of poverty. Through the “Seal of Excellence”, the Campaign will recognize MFIs that combine financial sustainability and responsible practices with significant poverty outreach and a strategic approach to poverty reduction and transformation for clients. Ultimately, the Seal of Excellence will help the Campaign to identify and learn from those microfinance institutions that help clients achieve their dreams: education for their children, health for their family, decent housing that keeps the rain and cold out, and regular, nutritious meals.

The Report supports the work of the Smart Campaign, MicroFinance Transparency, and the Social Performance Task Force in establishing standards and practices for the industry to follow and recognizes the need for client protection, transparency, and social performance. However, it views the Seal of Excellence for Poverty Outreach and Transformation in Microfinance, as a tool in identifying and learning from those organizations and individuals that are taking on the challenging task of supporting clients living in poverty attain their dreams.

The foregoing is taken directly and condensed from the State of the Microcredit Summit Campaign Report 2012, which you may read here in full:  www.microcreditsummit.org/state_of_the_campaign_report.