European Microfinance Week 2015

PRESENTATIONS

Christian HERTZ started this session by introducing the panellists. He mentioned that there are different motivations for organisations to comply with social standards. Some organisations comply because standards are imposed by law or by investors. Other organisations comply because they want to follow market trends, and others commit to comply with self-imposed standards. 

Beatrice GITHINJI explained that Chase Bank implemented the Environment and Social Risk Management System (ESMS) as a result of investors’ and legislative requirements and self-motivation. The bank also adopted the International Finance Corporation performance standards to ensure environmental and social sustainability. They assigned a consultant who together with ILO, acting as the Africa Agriculture Trade & Investment Fund (AATIF) compliance advisor, assisted the Bank in implementing the ESMS. Together they created the ESMS policy, resulting in: 1) an exclusion list defining which projects the bank should not finance due to non-compliance issues; 2) a categorisation tool which categorises the environmental social risk for each of the project the bank is financing; and 3) an evaluation checklist.

According to Githinji, the main challenge Chase Bank faced during the implementation of the ESMS was the lack of awareness and understanding by staff on the need to carry out environmental and social due diligence on the borrowers. She explained that Chase conducts continuous training and has incorporated the ES trainings in the induction training of new staff. The bank has also created a budget for external trainings on environmental and social risk identification, management, mitigation and monitoring. Moreover, managers are being trained on how to effectively communicate the benefits of proper ES management to clients. Finally, the policy is being revised to include the criteria of risk identification, categorisation and management. According to Githinji, the main benefits of the ESMS implementation is compliance with current and potential investor’s requirements, compliance with legal requirements, the mitigation of credit and reputational risk, improved loan book quality, new lending opportunities such as renewable energy, and improved internal capacity due to staff training. 

Karl DAYSON presented on the European ‘code of good conduct’ which was initiated by the European Commission (EC) in 2007. The Commission identified four priority areas: improve legal and institutional environment for microcredit; improve climate for employment and entrepreneurship; promote best practice in the sector; provide financial capital for non-bank MFIs. Dayson explained the strategic and intrinsic motivations for developing the code. He talked about the global microcredit crisis during the late 2000s and how European microcredit had to be differentiated and gain access to private capital as public money available for microcredits was decreasing. Moreover, there was no consistency on accounting measures due to the different national legal frameworks, and no agreement on what is considered sustainable. He stressed that the involvement of the EC was a powerful centrifugal force. Even though the Code was a voluntary act, the EC supported those involved and facilitated its development. He added that there was a desire for high performing actors in the microfinance industry to capture the market and its resources. Furthermore, the code was a vehicle to drive internal change within organisations. 

In order to develop the code, they reviewed existing international codes to identify the best practices globally which in turn formed the base of discussions with the EC. There were six stakeholders’ workshops including regulators, investors and practitioners, and constant discussion with the main European MFI trade bodies.

When the code was finalised, they tested its implementation with several organisations. Dayson mentioned that motivations are usually less about altruism and more about limiting the market. He stressed that the role of the EC was catalytic as diverse and competing FSPs needed something to hold them together during the process. The EC was also verifying whether the objectives included transparency, external credibility, performance improvement, standardisation, and addressing non-compliance.

Hertz explained that FSPs need to comply with the code if they want to access EU financial capital. The Code includes a core part of fundamental clauses that all organisations need to comply with. The rest of the clauses vary depending on the type of organisation. Dayson remarked that organisations that want to comply with the Code are given 18 months to prepare for the implementation. The Code was designed this way to encourage participation.

Craig CHURCHILL presented ‘Microfinance for Decent Work’, ILO’s action research program that aims to measure the impact of MFIs on the improvement of working conditions, namely occupational safety and health, reduction of child labour, informality, over-indebtedness and vulnerability to shocks. Partner MFIs had to initially identify which of the aforementioned challenges their clients are facing, and then find ways and solutions to tackle them. Churchill provided examples of various innovations the MFIs introduced in order to tackle the problem identified. For example, MFIs that identified poor working conditions as an issue, offered their client trainings on work safety and loans aimed to improve the working environment. All innovations implemented aimed to improve clients’ social and economic performance. ILO’s partners showed that having more empowered and better performing clients will lead to their own economic and social empowerment. 

DISCUSSION

A question from the audience related to the impact of the ESMS on credit risk for Chase Bank. Githinji mentioned that the impact was twofold. Firstly, Chase Bank was able to revise the loan review process for loans that did not meet environmental standards. Secondly, the ESMS assisted them in factoring in future values of property used as collateral in a more efficient way factoring in the current use of land. She added that having the ESMS has assisted in improving the reputational risk through financing sustainable projects. 

Hertz closed the session by providing the main conclusions. Social standards can make a difference not only on a social level but also on a business level. Initial motivation for developing and following various social standards may differ for different actors in the sector, but in the end, the measures taken and what we do to achieve them is very similar. Social standards may be initially self-imposed decisions by institutions wanting to do more than what’s necessary but when many key players align their positions, these self-imposed standards can end up being industry standards and those not complying may lose part of the market.