Dr Pål Vik on how Salford research is improving European microfinance governance
Although microfinance is recognised as a tool to promote self-employment and inclusion among disadvantaged groups in Europe, its impact is limited by a lack of scale and low financial self-sufficiency for microfinance institutions (MFIs).
To address this, the European Commission contracted Professor Karl Dayson and Dr Pål Vik to develop a microfinance code of conduct based on their research into appropriate standards and self-regulatory frameworks for microfinance in the developed world. The Code, developed by independent research and development unit Community Finance Solutions (CFS), has been adopted by 53 MFIs across 19 countries, and the European Union now requires compliance with it in order for non-bank MFIs to access microfinance funding.
In addition to influencing national legislation and trade body recommendations, adoption of the Code has resulted in larger and better funded MFIs with stronger reputations, greater accountability and improved oversight. Services are now provided in a more consistent and transparent manner to customers whose rights are unevenly covered by existing regulation within different European countries.
We spoke to Pål to hear more about this code of conduct and its international impact.
Tell us more about the research centre Community Finance Solutions (CFS).
Dr Bob Paterson and Professor Karl Dayson founded Community Finance Solutions (CFS) in 1999 to empower communities to solve problems relating to land and financial exclusion. The research dates back to 1997, when Bob, then head of Portsmouth Housing Association, joined the University to conduct research into how community-based financial institutions could help regenerate deprived communities in the UK.
This research supported the development of more than a dozen community finance institutions and community-led housing projects across the UK. Since then, CFS has conducted research into community finance and financial exclusion, informing policy and practice among national and local government, community finance institutions and trade bodies.
Your research led to the development of a European code of good conduct for microcredit provision. Why do you feel this was essential?
In 2007, the European Commission identified the need for a code of practice to stimulate the growth and development of the fledgling European microfinance sector. This culminated into the publication of the European Code of Good Conduct for Microcredit Provision in 2011 and the adoption of the Code as a precondition for accessing European funding by the European Parliament in 2014.
Developing self-regulatory standards was important because they provided the sector with a model of good practice it could benchmark itself against and supported greater harmonisation in the customer experience of end-beneficiaries of European funding.
What were your main approaches for carrying out the study?
We used two main approaches. First, we conducted an extensive desk-based review of international microfinance manuals and frameworks. Based on this we drafted proposed standards. Our second stage was to sense test the proposed standards in a series of stakeholder and practitioner workshops, examining feasibility and applicability to the European context.
Do you think the research has made the microfinance sector more transparent overall?
It has resulted in greater transparency on two levels. First, there is greater transparency about the microfinance institutions themselves, as they are required to disclose financial and operational information to comply with the Code.
Secondly, the standards in the Code demand a high level of transparency vis-à-vis customers, especially regarding pricing, terms and complaints procedures. Survey research suggests that many institutions did not disclose this information prior to signing up to the Code.
Do you mean how far-reaching the impact of the research has been?
The reach of the impact on practice across the microfinance sector has been significant. Over 50 institutions with thousands of customers from 19 European countries, including some of the largest microfinance markets, have adopted the Code. The standards have also been adopted by regulators and national trade bodies.
Who have benefitted most from research?
Microfinance institutions have benefitted from having a detailed set of standards they can use a benchmark for their own development or for start-up microfinance institutions to adopt. The customers of many microfinance institutions receive more information about the loans they receive enabling them to make more informed decisions. Regulators and trade bodies have also benefitted, because there are a set of standards developed specifically for the European microfinance sector they can encourage or require institutions to adopt.
Click here to read more about Community Finance Solutions.
Watch Pål in conversation with Professor Andy Miah on the Research Podcast.
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