Responsible Finance Forum

Codes of Conduct and the Role of Microfinance Associations in Client Protection

Cara S. Forster
01 November 2012
Source:  The SEEP Network
 Citi Foundation

Codes of conduct are fundamentally an effort at self-regulation, whether they apply to one organization, such as a microfinance institution (MFI), or an association and its members. Th is Technical Note explores the variety of reasons why and how microfinance associations may choose to adopt and promote self-regulation through a code of ethics or code of conduct. In this Note, three case examples are presented that illustrate three different approaches to this task:

  1. Adopting self-regulation as a response to crisis, the case of the MFIN Code of Conduct in India
  2. Proactively managing political risk through a voluntary Code of Conduct, the case of PMN in Pakistan; and
  3. Industry building through a Code of Ethics, the case of ProDesarrollo in Mexico.

This Note attempts to build on the foundation of SEEP’s previous work on consumer protection, extending the thesis that self-regulation can contribute significantly to promoting effective client protection practices. The Note adds to previous work the idea that microfinance associations are the most effective and appropriate level for this kind of self-regulation. A code of conduct administered at the microfinance association level has greater impact than codes implemented by individual MFIs. Association-level codes can have greater visibility among international and government stakeholders and also broader results, as many microfinance associations are able to unite the majority of MFIs in their national market under one code. Self-regulation through a code of conduct can also have a positive impact in terms of the reputation of the local microfinance industry, characterizing it as one guided by responsible financial principles. It also has an impact on operations, since codes of conduct specify minimum practices to which members must adhere. Other potential benefits of self-regulation include:

  • A cost-effective mechanism to engage large numbers of MFIs;
  • More effective management of differing cultural, legal, and economic contexts through greater flexibility than that permitted by more general global standards;
  • A feasible non-regulatory alternative in environments where a government’s supervisory capacity is limited;
  • The inclusion of unregulated service providers that may not be subject to local laws pertaining to consumer protection. In many markets these entities represent a significant percentage of microfinance providers; and
  • An impact on the industry that goes beyond the members the association seeks to influence.

The following case studies highlight three microfinance associations facing similar challenges in promoting both self regulation and good practices among their members, yet with different contexts and motivations for launching a code of conduct. Th e Note also explores the actions through which associations can promote positive outcomes from this type of self-regulation, as well as those that limit the effectiveness of such efforts.