UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 17 / October 2005

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By Marilou van Golstein Brouwers, Managing Director International Funds at Triodos Bank NV, and Advisor to the International Year of Microcredit

As one of Europe's leading ethical banks, Triodos Bank has been active as a private investor in the microfinance sector since 1994. At that time, together with our partners DOEN Foundation and Hivos Foundation, we established the Triodos-Doen and Hivos-Triodos Funds, through which we have financed well over 100 microfinance institutions worldwide. In 2002, we launched a retail investment fund, Triodos Fair Share Fund, which allows private individuals in the Netherlands to invest in microfinance with amounts as small as EUR 25.

All three funds under Triodos' management have similar objectives but different risk profiles that enable finance to be provided to microfinance institutions in different stages of development. As of June 30, 2005, we had invested EUR 60 million in 25 countries. The funds provide both debt and equity. Currently we are a shareholder in eleven microfinance banks worldwide, expecting to increase to thirteen before the end of this year. When we invest in equity in microfinance banks, senior co-workers of Triodos Bank are represented on the Board of Directors and contribute to the governance of these banks.

Our Vision as Investors

Our vision is much in line with the vision of the International Year of Microcredit: we believe microfinance should be part of an inclusive and sustainable financial sector. This is the only way that access to finance will be firmly rooted in society, providing a stable base for a balanced social and economic development in which all people can participate. With our funds we aim to play a catalytic role in the process of financial sector development as active financiers, shareholders and directors, contributing to the development of sound MFIs. Our ultimate goal is to be replaced by local capital as we believe that in order to make inclusive financial sectors truly sustainable, it will be essential to mobilize local commercial funding and create solid well-governed local financial institutions. We recognize this is a long-term process, which needs support from various, often transitory and external, sources of funding and banking expertise.

Challenges for Microfinance Banks: The Next Steps

Ten years ago, microcredit was mainly provided by NGOs. Banks were hardly involved. Microcredit was seen by donors as an instrument to fight poverty, and not as a financial service that could be part of the financial sector. A great deal has changed in that respect. It is not only about microcredit now, but about a full set of financial services that can help poor people to build assets and generate income. Developments vary enormously by region and by country, depending on regulation and supervision, political stability, density of population, level of poverty and also cultural differences.

In general, three different stages of integration of microfinance into the financial sector can be distinguished:

1. The financial sector as such is not well developed and (small) specialized MFIs play an important role in providing microcredit to poor people. They have no possibility to attract savings or link up with domestic capital markets, as these markets simply do not function well enough.
2. The financial sector is reasonably well developed but for different reasons the offer of microfinance is limited. MFIs are not well developed and mainly operate outside the domestic financial system.
3. The financial sector is (reasonably) well developed and microfinance is increasingly integrated into the formal financial sector. The number of countries where this is the case is increasing.

In stage three countries, pioneer microfinance banks have often proved that microfinance can be profitable. They are now facing competition from (larger) commercial banks. For the (potential) clients this is a good development: it offers them more access at increasingly better rates. But sometimes the question is whether there will still be a role for specialized microfinance banks when "ordinary" commercial banks get heavily involved in microfinance. We think there is. Among the microfinance banks where Triodos is a shareholder, we see a growing interest in retaining the role of pioneer in the sustainable development of the financial sector in their respective countries. They don't want to turn into "ordinary commercial banks" themselves, focusing mainly on profits, but want to maintain their broader objectives and become leaders in 'socially responsible business', based on the triple bottom line: "people, planet, profit", often a new concept in their countries.

The GRI Project: Transparency and Sustainability in Finance

In October 2004, Triodos International Fund Management BV organized a workshop for investee partners of its funds under management, Triodos-Doen, Hivos-Triodos Fund and Triodos Fair Share Fund, on sustainability reporting. Representatives of nine of the leading microfinance banks/institutions worldwide participated in this workshop as well as representatives of the Global Reporting Initiative (GRI).[1]

From this initial group, six banks decided to participate in a pilot project aiming at implementing sustainability reporting within their institutions. Based in Asia, Africa and Latin America, the six financial institutions involved are:

• Acleda Bank in Cambodia;
• K-Rep Bank in Kenya;
• Centenary Rural Development Bank in Uganda;
• FFP FIE in Bolivia;
• Banco Solidario in Ecuador; and
• Findesa in Nicaragua.

In their respective countries, these banks are frontrunners in the field of microfinance: they specialize in providing financial services to low income groups.

Triodos Bank and GRI initiated this project with the purpose of providing assistance in the implementation process of the GRI Guidelines. In November 2004, GRI produced a beginner's guide for GRI reporting, the so-called 'High 5!' handbook. This handbook served as a hands-on tool, and was used by the MFIs in this project. In addition, the experience of Triodos Bank with the implementation of the GRI Guidelines was an important backbone of the project.

The six MFIs formulated their own mission statements, but they all focus on providing banking/financial services that:

• Reach low-income groups;
• Reduce poverty;
• Improve quality of life;
• Respect society and environment; and
• Focus on sustainability.

In March and April 2005, two coaches from Triodos Bank and GRI made individual visits to each of their assigned banks. The main conclusion from these meetings and discussions is that GRI reporting seems to be a very useful tool for improving the goal-setting, self-evaluation, strategic management and decision-making capacity of the organizations, as well as for the bank's ability to communicate performance results and impact with regard to the Triple Bottom Line and financial aspects of their agenda.

The project has resulted in:

• Raised awareness on the topic of sustainability, sharing views of managers, employees and clients of the MFIs.
• Strong commitments to incorporate GRI reporting guidelines into 2005 annual reports. A forward-looking statement was included in the 2004 annual reports of the participating organizations, and Findesa even managed to produce a full GRI annual report for 2004.
• Implementation of a sustainability taskforce or team in all participating MFIs, dedicated to developing indicators, collecting data and preparing relevant information for the sustainability report.
• Ongoing dialogue within the banks and among the participating banks, GRI and Triodos on how to define and systematically measure environmental and social aspects of MFI performance.
• New approaches to developing sustainability indicators, by using existing (client) databases for monitoring the environmental, social and economic impacts of the banks.
• Initial implementation of management systems in order to structure and organize the environmental and social programs of the participating MFIs.

This GRI project was a first step that will be continued, and hopefully expanded to more MFIs. Triodos believes it has the potential to help create socially responsible banks in developing countries and provide the basis for an integrated and continuous process of innovation so that local financial systems become inclusive in every sense of the word.