Code of Ethics to be Established in Microfinance

Code of Ethics to be Established in Microfinance

At the initiative of Deutsche Bank, The Boulder Institute, and CGAP, leaders of microfinance institutions, investors, banks and development agencies gathered in New York to develop a common ground and set of principles that would help microfinance navigate between commercialization and its social mission. The Pocantico Declaration is the first step toward a code of conduct that could distinguish microfinance from other providers of financial services who lack the social motivation that drives the microfinance industry.

"Microfinance is facing a moment of reckoning," said Larry Reed, Academic Vice President of the Boulder Institute. "This meeting brought together leaders from all around the world and all ends of the spectrum in terms of commercial and non-commercial approaches to microfinance, to grapple with the realities we face today."

The microfinance industry has seen remarkable growth in the last three decades with an array of financial service providers, investors, and other market players. Today CGAP estimates that cross-border investment in microfinance is nearing $6 billion (on top of donor grants and loans). High repayment rates - 98% on average, well above bank rates - have been central to this success.

The rapid growth and high profile of microfinance is now leading to accusations of aggressive collection or excessive profits and other practices that challenge principles of good practice in microfinance. "In this context, a "gentleman's agreement" may not be enough", said Asad Mahmood, General Manager of Social Investment Funds at Deutsche Bank "The microfinance industry needs to recognize the potential reputational risk and act accordingly."

"Without firm commercial foundations, microfinance cannot become the profitable business that it needs to be in order to survive," said Elizabeth Littlefield, CGAP CEO. "But without firm ethical principles and a commitment to benefit poor people's lives first and foremost, it will no longer be microfinance."