Microfinance Meltdown?

The microcredit industry has grown in size and scale thanks in most part to the success of Mohammed Yunus’ Grameen Bank, which now serves over 7 million poor Bangladeshi women. It is in India that a number of problems have been surfacing in the last year or so. And it’s a sizeable problem that could get bigger when you consider the size of the industry in Africa - 427 microfinance institutions in Africa, lending more than $4.8 billion to over 8 million people (Mix Market (Microfinance Information Exchange).

The New York Times today reports that Indian banks have about $4 billion tied up in loans – about 80% of all microfinance in India. They’re increasingly worried about their returns in the state of Andhra Pradesh, where politicians, angry at how microfinance institutions are profiting from the poor, have encouraged borrowers to stop repaying their loans.

It’s a slippery slope as banks stop lending to protect from the increasing risk of defaults, and action spreads from state to state and country to country. Despite new legislation to regulate how and when lenders collect, there is an increasing feeling that what started out as a social development movement has become more capitalist and cut-throat than Wall Street.

That’s true in Africa too. Microcapital.org reported in January 2009 that the Malawian government had decided to stop guaranteeing loans from MFIs, given the “exorbitant” interest rates, naming two institutions that did not report to the Mix Market and did not publish lending rates.

The Central Bank of Nigeria and the Nigerian Deposit Insurance Corporation (NDIC), in an attempt to audit and regulate the microfinance industry, simply shut down 224 out of 800 mcirofinance banks. Microfinance Africa makes the point that while regulation is needed, the reputation of the industry now needs work.

About 10,000 organisations around the world have lent about $25bn to about 20 million people. An article by the BBC cites demand could be as much as $250bn. In the same article, Kate McKee, senior policy advisor at the World Bank's Consultative Group makes a now-oft-heard comparison to the financial crisis - that strong investor interest in the US sub-prime mortgage market created incentives for unsustainable growth and aggressive lending and the microfinance industry must guard against repeating the same pattern.

The Centre for Global Prosperity has an interesting article looking at the two mindsets in the approach to microfinance – profit and altruism. While this is in the context of the controversial IPO of SKS Microfinance in India it is a global issue. Like shareholder activism, if borrowers start to feel they are being taken advantage of – whether through NGO, government or civilian intervention – those dream rates of 95% repayment might be on the way down.

But then so will the opportunity to get out of poverty for the millions of people who have so far benefitted from microfinance. Philanthrocapitalism is one thing – many corporates, banks and private individuals want to see some financial return in the work they are doing to create good. But in Africa, as in India, there has to be more weight on philanthropy. The WSJ quotes an interview with Mr Yunus: "Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people's lives”.

The relationship between CSR and policy

I’m not going to get into the specifics of South Africa’s mining policy environment, but I read Frans Cronje’s opinion piece in Business Day, “Engaging the State” with interest – and found a surprising take on CSR – not something I’d expected to come across within the topic.

Bank of America Merrill Lynch has produced a report that looks at some of the challenges facing the metals and mining industry in SA, and how the policy environment made it difficult to try and split Anglo American into international and South African assets to unlock value.

Without getting into the ins and outs of mining rights and politics, Cronje, deputy CEO of the South African Institute of Race Relations, is making the point that the government should not be afraid to enter into dialogue with the private sector in these circumstances. So not to ignore or challenge reports that critique the system, but to welcome the views of an engaged private sector, given the common goal of setting South Africa onto a path of further, better socio-economic development.

What made me sit up was Cronje’s point that “The government would be wise to see the report as a refreshing example of true corporate social responsibility — so different from the cliched vegetable gardens or soup kitchens that have come to pass as corporate social responsibility for many companies.”

I don’t think that most company CSR policies come down to soup kitchens and vegetable gardens, there’s incredible work being done on a large scale, but his point that a business’ engagement with government on hard issues could be seen as CSR is an interesting one. For all the definitions of CSR, self-regulation, giving back and creating a positive impact, managing the impact of a business on society, policy is rarely included.

Should corporate social responsibility directly address and take actions to support or work towards policies that also aim to create a positive impact on the economy, as well as the community?

In many large organisations the CSR departments don’t even sit in the same building as the policy people. There are, however, businesses that have aligned the work they do within community to highlight problems and try to force governments to recognise where policy needs to change. The danger is extrapolating Cronje’s point too far, when business feels it can criticise and pressurise governments in the name of ‘Corporate Social Responsibility’ without fulfilling the actual social impact part.

Where there is a connection between CSR intentions and policy requirements, there is more impact and an opportunity for aligning economic and social agendas – if governments listen, of course.

Why CSR in Africa can be a unique force for good

In the poorest slum district of Addis Ababa, Ethiopia, some 50,000 people receive fresh drinking water and sanitation facilities through a project run by an NGO called AMREF. I was lucky enough to visit this community in Kechene and talk directly with the beneficiaries to understand the impact of this project, a corporate social responsibility (CSR) project funded by the Diageo Foundation, a premium drinks company.

What my colleague and I unearthed was a project well planned, thoroughly implemented and carried out by passionate people who genuinely wanted to improve the standard of living for those living in Kechene. Although we catalogued numerous benefits, the real impact on the community was evident to me when I met Meselu Abreham. Meselu is a local resident in charge of one of the water and sanitation committees who look after the new facilities. Before I could thank her for telling us about her new role, she ushered us into her one-roomed house and headed directly for the only ornament in the room, an earthen vase made by her cousin. She was adamant that we take it and keep it as a gift from the people of Kechene, as a thank you for changing their lives through the project. After some persuading, we were obliged to accept her kind offer which now resides within my own house as a symbol and reminder of the powerful force good CSR can be in Africa.

CSR in Africa is different from CSR in Europe or America. It has different driving forces. The strength of regulation in Europe and America encourages improved environmental performance and ethical business practices. Institutional investors and shareholders play less of a role in how the companies they invest in behave. The level of environmental and social awareness from consumers and employees is not at the same intensity and expectations about how businesses should operate are different. Interestingly in Africa, because companies are so embedded in the fabric of society, businesses are expected-and eager- to play more of a role in developing the communities in which they operate.

Consequently, there is a large difference in the potential for impact of CSR in Africa compared to more developed countries. Because of these differences, there has been an encouraging debate about what exactly is CSR in Africa? Is it just window dressing to improve corporate reputation or does it really add value to the company’s financial bottom line and the community at large?

It was this debate that I frequently found myself in during conversations whilst travelling across the continent . This is what sparked the idea of the East African CSR Awards. It was clear that many companies were investing in community development programmes and improving their operations to reduce environmental impacts and increase employee health and safety. The awards therefore aim to showcase initiatives which have truly benefitted the society, environment and businesses in order to clarify what good CSR in Africa looks like.

A recent seminar in Monrovia, Liberia this year hosted by the Brenthurst Foundation looked at developing guidelines for CSR in Africa. This demonstrates that there is a need for clarity. An initiative like the East African CSR Awards can help develop an understanding of how the private sector can create sustainable development and alleviate poverty in Africa.

On the judging call to decide the winners and highly commended projects for the Awards, some common themes began to appear:

· A commitment to investing in time and resources to assess what the project should be, what benefit it would bring to the business and community / employees and how it should be implemented. This commitment creates innovative and context-relevant projects such as Unilever Tea Tanzania and Kenya’s ‘Lightning Detection Programme’.

· An integration of business incentives with environmental and social good, as illustrated by Sandali Woods and their strong ethos for sustainability.

· Comprehensive monitoring and evaluation systems to record not just outputs but actual development impact. Eastern Produce Kenya’s Environmental Programme and Mabati Rolling Mills’ project clearly demonstrated that ‘what gets measured gets managed’.

· Community-driven activities in order to foster community ownership and sustainability as Tullow Uganda’s project demonstrated.

· Strong partnerships with credible NGOs and local authorities to ensure an element of sustainability and alignment with government policies, as was characterised by Safaricom’s ‘A World of Difference’ secondment programme and Unilever Tea Tanzania’s Forest Conservation programme.

· A multi-faceted approach to the project, ensuring different elements such as awareness raising and management mechanisms were put in place, as demonstrated by Nile Breweries Supply Chain project.

Over the course of the year, the Awards secretariat hopes to work with its partners and judges to develop these guidelines and criteria with the hope of stimulating more successful CSR projects in East Africa and assisting the government in creating an enabling operating environment for businesses to implement excellent CSR. Ultimately, with everyone playing their part, the private sector can drive an inclusive model of economic growth for Africa, providing equitity and sustainability.

I would like to thank all those involved in making the first East African CSR Awards a success – the Honourable Tanzanian Minister of Trade, Industry and Marketing, the sponsors – Bank M Tanzania and Dow Chemical East Africa, the partners – the East African Business Council and the East African Magazine (Nation Media Group), the distinguished panel of judges and the chairman of the Awards secretariat, Mr Elvis Musiba, and last but not least, all the companies who entered.

First East African CSR Awards to be held during World Economic Forum Africa

In one month, the first East African CSR Awards, in partnership with the East African Business Council (EABC), will be launched and open for entries on 15 February 2010. The awards will take place on the evening of 5^th May 2010 during the World Economic Forum Africa in Dar es Salaam, Tanzania.

For the first time, East African companies will be honoured for their corporate social responsibility (CSR) activities and awarded for outstanding, innovative and high-class initiatives and programmes that create a high social and environmental benefit for the community and the business.

Entries will be accepted from any East African (Burundi, Kenya, Tanzania, Rwanda, Uganda) registered company, or from external individuals who are recommending a CSR initiative of any East African registered company.

East African businesses are encouraged to enter into the following categories:

(i) Best workplace practice;

(ii) Environmental excellence;

(iii) Most ethical & responsible business practice for supply chains; and

(iv) Most sustainable & scalable community investment.

As a preliminary entry criteria, the company must be able to demonstrate to high levels of corporate governance in their business operations and board decisions.

Entries will be judged by an independent panel of international and regional CSR, corporate governance and ethical business experts, and chaired by Elvis Musiba, former President, Tanzania Chamber of Commerce, Industry and Agriculture. The panel includes:

· Dr William Kalema (Managing Director DCDM Uganda and former Uganda Manufacturers Association)

· Ms Jane Nelson (Director of CSR Initiatives, Harvard Business School)

· Dr Judy Muthuri (CSR Lecturer, Nottingham University)

· Mr Steve Kenzie (Programme Manager for Responsible Business, International Business Leaders Forum and UK Focal Point for UN Global Compact)

‘These Awards mark a positive and promising trend in East Africa’s private sector toward a more responsible and ethical business pathway, leading the region’s sustainable economic growth’, Alhaji Bamanga Tukur, Chairman of africapractice (East African CSR Awards secretariat).