MICROFINANCE PAPER WRAP-UP: Microfinance Industry - Microfinance Reporting Standards Initiative: Business Models Review (Draft), by Drew Tulchin

Compiled by project facilitator, Drew Tulchin of Social Enterprise Associates, and Ayani Consulting, this report outlines the Microfinance Industry Financial Reporting Standards Initiative (MRSI) – an initiative to promote standardized financial reporting in the global microfinance industry. The initiative is supported by the Small Enterprise and Education Program (SEEP) Network, a membership association connecting organizations from around the world that support micro- and small enterprise development programs. It is currently housed as a subcommittee of the Financial Services Working Group (FSWG). The paper is a draft and welcomes additional comments and suggestions. Full text of the document is twelve pages and is available here.

As the microfinance sector begins to attract more commercial capital, it is becoming increasingly important for financial reporting standards to promote consistency, transparency, comparability and full disclosure. The paper provides recommendations on how an initiative promoting such financial reporting standards might be organized in regards to organizational structure, legal entity, membership, products, compliance, strategies and adoption.

The author recommends (p1) that the body be modeled on, and draw from the histories of the two organizations that set standards in the fields of accounting: the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). IASB is a board made up of independent experts on accounting and finance who establish the International Financial Reporting Standards to which over 100 countries comply. FASB is the board that sets private sector accounting standards for all non-governmental public, private and not-for-profit enterprises. Both boards remain independent of government control and work closely with their users to inform and advise them on standards. Both are legally structured as foundations, and have U.S. non-profit registration status, which allows them to raise funds through donations, endowments, government support, and/or member fees. The two organizations also raise funds by selling products, including publications, trainings, and conferences.

The author suggests that a parallel board for the microfinance industry (p2) should be funded initially by philanthropic support, but then aim to be self sufficient drawing on income from subscriptions, membership fees and products.

He proposes 4 different models (p4):

1. Volunteer committee of experts setting standards – A possibility in the beginning, but sets limitations for standards dissemination, authority, and efficiency.

2. Housing within an existing microfinance support structure – Rather than create a new organization from scratch, the nascent body can exist within an existing MFI service institution such as the SEEP Network, The Microfinance Information Exchange Inc (The MIX), and the Consulting Group to Assist the Poor (CGAP). Each has advantages and could provide expertise and initial grant support.

3. Stand-alone two-tiered structure – The body should emulate IASB and FASB by operating on a two-tier structure effectively separating the administrative processes, fundraising and market, from the body that establishes the standardized rules in order to increase its legitimacy. In the beginning the division may not be worthwhile as it would increase overhead.

4. Housing within an existing accounting standards board such as IASB – The author argues that this is the most optimal scenario (p5) as it would offer considerable funding sources and clout to the organization. However, at first the initiative will likely have to take place within the microfinance industry until it becomes more reputable.

The paper stresses the importance of the body having “critical mass” (p3) of confidence and acceptance among stakeholders, though it concedes that universal participation is not necessary. To ensure this confidence, the organization must be accepted by ‘the establishment’ as an authoritative body (p3) and maintain a reputation of transparency, industry-wide coverage, and independence from governments and companies. However, the paper suggests that the body should have an open line of communication with national governments (p4) in regards to national level regulatory requirements, which are often impeding to the microfinance industry. It must have regular capital flow to fund its operations. It should involve standards bodies outside of microfinance, such as the FASB and IASB, and ensure that microfinance efforts are inline with mainstream efforts. Finally, the organization should have a feedback mechanism (p3) that allows information to flow up and down the model.

In conclusion the author addresses the challenge of promoting standards adoption (p9). He discusses two mechanisms that have been used to establish accounting boards in the past: 1) adoption by accounting bodies for certification and 2) legal mandates (p9). Other possible incentives for adoption are “exclusivity”, if only a select group of MFIs are accepted due to rigorous standards and “sales promotion” (p9) in which the branded seal of approval suggests a level of quality. For instance, MFIs might adopt standards that lead to certification, if it leads to increased capital as investors and donors realize that certified MFIs are a quality investment.

By Ryan Hogarth, Research Assistant

Additional Resources:

Consultative Group to Assist the Poor (CGAP): Home

FASB: Home

IASB: Home

“Microfinance Industry – Microfinance Reporting Standards Initiative: Business Models Review (Draft)”, by Drew Tulchin, SEEP Network and Ayani Consulting

Microfinance Information Exchange Inc (The MIX): Home

Small Enterprise and Education Program (SEEP) Network: Home

SEEP Network: Microfinance Reporting Standards Initiative