The Paris Appeal: A Call for Microfinance Reform

3969971855_4f1003a243_b"You need different regulation for microfinance; sometimes that's hard to get." -- Lars Thunell, Executive Vice President and CEO, International Finance Corporation

What do actress Natalie Portman, former Senegalese president Abdou Diouf and deputy mayor of Paris Anne Hidalgo have in common? They are all signatories of the Paris Appeal for Responsible Microfinance, an international petition to clean up the microfinance sector.

Sometimes a good idea turns sour -- especially when unethical forces enter into the picture and particularly when that good idea is unregulated. To a large extent, that is what has happened to microfinance. The industry, hailed at the outset some 30 years ago as a brilliant idea for solving global poverty, has been increasingly beset by unscrupulous and usurious lenders, some of whom charge their impoverished clients interest rates up to 100 percent. Some debtors, driven to desperation, have committed suicide.

STABILIZING MICROFINANCE AMID MISSION DRIFT

Now with the Paris Appeal, the sector is making a concerted effort to regain control of the global microcredit industry and stamp out illegal and unethical practices. This week, the secretariat of the Microcredit Summit Campaign, a project of the RESULTS Education Fund, a poverty alleviation non-profit based in Washington, DC, sent out an email asking for more signatories to the appeal, which was written by Convergences 2015, a non-profit discussion forum launched in 2008 that, according to its website, is the "first permanent platform in Europe dedicated to international cooperation, microfinance, social business...sustainable development...social entrepreneurship and to a social and solidarity-based economy aimed at reducing poverty and promoting the MDGs."

"To answer the excessive commercialization of microfinance and other drifts brought about by such commercialization, the Paris Appeal brings back fundamental values to the sector and offers a series of actions aimed at improving practices and impact," according to European-Microfinance.org.

DOUBLE-OBJECTIVE: FINANCIAL VIABILITY AND SOCIAL IMPACT

According to the Paris Appeal, the signatories believe that microfinance institutions (MFIs) "must pursue a long-term double objective of financial viability and social impact...by leading a policy of moderate interest rates, and by complying to the highest standards of information and client protection." The appeal also calls for governance, efficient reporting and control systems, a system of supervision, a prevention of mission drifts and a code of conduct to which microfinance investors must subscribe.

"To breathe life into this fundamental basis of rules and regulations," the appeal states, "in the respect of the diversity of microfinance, the signatories are launching an appeal for Responsible Microfinance General Assemblies, to be organized in each greater region of the world and for each large category of stakeholders, under the aegis of an Organization Committee mandated by the G-20."

A GROWING INDUSTRY NEEDS REFORM

Overall, microfinance has played a positive role in the campaign to eradicate poverty. According to the State of the Microcredit Summit Campaign Report 2012, over 137 million of the world's poorest received a microloan last year. While that is an impressive number -- especially considering that a decade ago, that number was 19 million -- it is dwarfed by the over 3 billion people living on less than a dollar a day, almost half the world's population.

But while the sector needs to grow -- particularly in the areas of insurance, savings and money transfer -- it is also clear that reform is needed before it gets too big to control. The Paris Appeal is necessary step in the right direction.

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NOTES

http://www.euromoney.com/Article/2942414/World-BankIFC-Thunells-vision-for-microfinance.html
http://www.convergences2015.org/en/About
http://www.european-microfinance.org/news_en.php?piId=9618
http://www.appeldeparis.com/
Ibid.
http://www.microcreditsummit.org/pubs/reports/socr/2012/WEB_SOCR-2012_English.pdf

image: Kipkemei Arap Lagat, a 69-year-old father of seven, standing with bricks he produced on his land near Eldoret, Kenya on August 13, 2009. Kipkemei used his first microloan from Kiva partner KADET to buy wood and straw to fire the bricks, and to pay workers to help him form and fire the bricks. Kipkemei is a member of the Banda'Ptai Tpok microfinance borrowers' group, which means "The Way Forward" in the Kalenjin language. (credit: hodag, Flickr Creative Commons)

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