First, do no harm. But don’t stop here.
On 2 May 2022, Bloomberg Storylines published a video feature story, The Dark Side of Microfinance, which highlighted abusive collection practices and other forms of client exploitation among microfinance providers. In response, Cerise+SPTF wrote an open letter to the reporters of that story, setting forth the ways the Universal Standards safeguard against such practices, and have been doing for 10 years.
We at the Social Performance Task Force (SPTF) were saddened but not surprised by your recent story (“The Dark Side of Microfinance,” Bloomberg Storylines, May 2 2022). The abuses highlighted in the report—over-indebting vulnerable borrowers, non-transparent or exorbitant interest rates, outrageous collection practices—are among the issues that SPTF exists to combat. We would, however, like to provide an important correction, one which we hope will deliver a bright ray of light to “the dark side of microfinance.” At the 14:06 mark, Am Sam Ath of the Cambodian human rights organization Licadho says (through a translator): “We haven’t set up policies to standardize and protect borrowers’ rights.”
Those standardized policies do actually exist—and have for 10 years—under the straightforward name “The Universal Standards for Social and Environmental Performance Management.” As the name implies, the Universal Standards are used all over the world by microfinance providers whose collective loan portfolio represents about $40 billion and 62 million borrowers from 99 different countries, including Cambodia.
Cambodia in fact provides a timely example of SPTF’s work. A member-based organization with more than 1,000 member investors, microfinance institutions, national associations, and support organizations from all over the world, SPTF is currently in the process of setting up a code of conduct with the National Bank of Cambodia and Cambodian Microfinance Association to address client abuses in that country. In our work in Cambodia and elsewhere, we stress the importance of governance (the oft-overlooked “g” in “ESG”) in client protection principles. Without awareness and champions at the board and executive level, client protection (and social performance more broadly) will be “delegated” while leadership’s attention focuses on what really matters: maximizing profit. The Universal Standards, two-thirds of which focus on client protection, are the roadmap for genuine institutional transformation.
The Universal Standards are voluntary but that is not to suggest that they are toothless. SPTF hosts an influential working group of prominent social investor organizations, both public and private, whose collective assets under management exceed USD 50 billion in microfinance alone. These investors mandate that their microfinance investees adhere, at a minimum, to the Universal Standards’ provisions around client protection. Although we do not doubt your reporting that some self-styled “impact investors” shovel money at unscrupulous microfinance lenders and then profess themselves “shocked, shocked” by those lenders’ abuses, we want to stress that that is not the whole story. There are impact investors who are serious about social performance, and who undertake correspondingly serious due diligence around it. The Universal Standards are their tool of choice for that purpose.
Finally, your reporting correctly highlighted the role that weak regulation plays in driving abusive finance in some markets. We are proud that beyond uptake by investors and by individual institutions all over the world, the Universal Standards have also played a market-making role. Policymakers in countries including Mexico, Nicaragua, and Philippines, to name a few, have explicitly adopted the Universal Standards as the blueprint for crafting their formal regulatory frameworks—thus giving the spirit of the Standards the force of law in those markets.
Like Nobel laureate Muhammad Yunus (an early proponent of the Social Performance Task Force), we deplore the actions of those who abuse and exploit the poor while marketing themselves as their saviors. Our work exists to make it clear who is serious about social performance—and to help them build world-class, client-centric institutions that walk the talk.
Laura Foose and Jurgen Hammer