Microfinance Institutions and their necessity to incorporate CSR

Written by: Luis Maceda

 

The traditional financial system fails in terms of accessibility and their services were placed out of reach of the poor. The rich have always received high access to financial services compared to the poor. Microfinance was born in the 70’s as a mechanism of poverty alleviation and financial inclusion. The intent was to provide small loans to poor people who did not have access to big financial institutions. This financing was initially intended to help low-income households to develop their economic activities until they could achieve sustainability and get out of poverty. However, over time, its evolution has shown that Microfinance Institutions cannot be just a sustainable business having a significant social impact in reducing poverty, it could also be profitable. This opened an immense space of controversy. Are Microfinance Institutions (MIFs) still aiming to reduce poverty or are they now designed to be profitable at the expense of the poor? Can they be profitable and help the poor at the same time?

MFIs are facing complex challenges. Many stakeholders believe that For-Profit MFIs have lost the focus of its original essence of Microfinance. Different studies have shown that some For-Profit MFIs operate under practices that take advantage or their clients. They charge excessive interests rates penalties, contracts lack clarity regarding the conditions o, or reclaiming some of the clients’ property to repay their loans, among other unfair treatment. Moreover, it has become harder for MIFs over time to obtain funding in order to keep their regular operations; hence, the access to investment vehicles of capitalization has become essential. Investors need to be drawn into the industry and they need to be compensated for their investments. Therefore, high profits must be earned.

With that said, Corporate Social Responsibility (CSR) plays an important role for MFIs to meet their stakeholder’s needs, maintain a balance between profitability and help the poor. MFIs needs to incorporate a CSR strategy linked with national priorities such as poverty alleviation, financial inclusion, hunger alleviation, education, skills and community development and health. The foregoing could generate multiple benefits for the Institutions, including attracting more investors who currently seek to invest in entities with social responsibility concerns.

While CSR practices still maintain a subjective focus, and there is not much literature related to Microfinance, it opens a space for those interested in this field. This situation lend itself to creative minds who seek a challenge. How can one design and implement a program that allows them to allow MFIs to reach a sustainable balance between profitability and poverty alleviation?

 

References

Basargekar, P. (2099). Economic Empowerment Through Microfinance: An Assessment of CSR Activity run by Forbes Marshall Ltd. International Journal of Business Insights & Transformation.

Goldberg, M., & Palladini, E. (2010). Managing Risk and Creating Value With Microfinance. Washington, D.C: The World Bank.

Yunus, M. (2003). Banker To The Poor: Micro-Lending and the Battle Against World Poverty (2003. Corr. 2nd Printing ed. edition). New York: PublicAffairs.

Yunus, M. (2007). Creating a World Without Poverty: Social Business and the Future of Capitalism by Muhammad Yunus. PublicAffairs

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