Responsible Finance Forum

Does good client protection impact financial performance?

B. Perez-rocha, A.G.F. Hoepner, L. Spaggiari, C. Lapenu and B. Brusky
01 May 2014
Source:  European Microfinance Platform

Serve clients well. Prevent over-indebtedness. Be transparent and price products reasonably. Treat clients respectfully, listen to their grievances and protect their privacy. It’s hard to argue against any one of these things. the seven client Protection Principles make undisputedly good sense. but do they make for good business? This is the question a multi-stakeholder group asked itself back in June 2011 during a meeting of the e-MFP Making Microfinance Investment Responsible (MIR) action Group. A big question indeed, and one that needs a lot of data to find some answers. It turns out, however, that access to data was not a problem. The MIR group members housed some of the largest social and financial performance databases in the sector–and were willing to consolidate them to try to answer the question.

Around the table were investors (Incofin, Oikocredit, Blue Orchard and Triple Jump, with data from their due diligence processes), rating agencies (Microfinanza Rating and Planet Rating, with social ratings results), a network specialized in social performance assessments (CERISE, with its Social Performance Indicators, SPI database), and a reporting platform (the MIX, with Social Performance (SP) data reported by MFIs). each came with a desire to coordinate, combine and create something greater than the sum of their individual parts.

The task of analyzing the relationship between client protection and financial performance was given to a team of four statisticians at University of St. Andrews (UK). a representative of the MIR action Group presented the results of a first analysis in June 2012, at the Social Performance Task Force meeting in Jordan. This brief presents the results of this second round of more robust analysis. The findings indicate that while the positive relationship between financial returns and some elements of client protection is clear, the relationship between client protection on the one hand and operating costs and credits risks on the other, is less straightforward. Clarifying the causal link will only be possible once the sector has sufficient historical data.