IFC to end global microfinance consumer protection, source says

Not Our Problem

The IFC is set to announce that it will stop accepting microfinance consumer protection cases globally, a World Bank source familiar with the matter said.

The board have “effectively suspended any environmental and social oversight for financial consumer protection in microfinance,” the person said, adding that an announcement will be made soon.

Those raising complaints about harms suffered as a result of microfinance loans “have to explore other remedies. The IFC ultimately has no responsibility for harms suffered from predatory lending.”

The IFC has been approached for confirmation.

The move comes after management decided in June that IFC investments in six Cambodian microfinance lenders alleged to have caused a range of harms to borrowers did not break policy.

The ruling prompted the resignation of Janine Ferretti as director general of the IFC’s Compliance Advisor Ombudsman (CAO).

Casework on microfinance complaints in Cambodia will now end, the source said. The IFC has already said that the cases will be referred back to local dispute resolution mechanisms.

A rapid build-up in microfinance lending in Cambodia, a country with just 17 million people, left the population with among the largest per head debts relative to incomes in the world.

The CAO was designed to independently assess whether the IFC abides by its own policies. It had found that the IFC “failed to comply with its Sustainability Framework during both pre-investment due diligence and project supervision of its microfinance investments in Cambodia, contributing to harm to vulnerable borrowers, including Indigenous Peoples.”

The IFC “failed to address harmful client practices, including reliance on land collateral, sometimes overlapping with Indigenous land, and aggressive lending and debt collection practices.”

“As a result, borrowers experienced harm, including loss of land and productive assets, reduced livelihoods, food insecurity, health impacts, disruption of education, and fear and instances of threats and reprisals.”

The argument that the IFC is not responsible for harms suffered by microfinance borrowers is the same as was used in 2022, when management initially rejected the Cambodian complaints, says W. Nathan Green, assistant professor at the National University of Singapore.

The IFC in the end agreed to allow the CAO to examine the cases. “Clearly, the IFC board did not change its position on this matter even after the CAO’s very thorough investigation,” Green says.

The stance shows that “even so-called responsible investors, such as large development finance institutions like the IFC, are no better than any commercial, for-profit investor,” he adds.

“Self-regulatory mechanisms are not sufficient to protect people from harm caused by predatory microfinance lending.”

The Cambodian decision, Green says, is also dangerous in terms of the precedent it sets. The IFC has a strong influence on international standards and so development finance institutions may be tempted to follow its example and claim that end-clients are not covered by their own policies, he says.

The end to the Cambodian investigations “provides a precedent for other funders of microfinance lending in Cambodia who are seeking to exit and to minimize their responsibility for their role in aggressive overlending,” says Mu Sochua, president of the US based Khmer Movement for Democracy.

“Microfinance lenders should pay greater attention to the institutional frameworks in the countries where they are allocating funds,” she says. “The lack of credible regulators and an independent judicial system leaves microcredit borrowers in Cambodia particularly exposed.”