Responsible Finance: A Leitmotif for KfW Financial Sector ...

Responsible Finance
a Leitmotif for KfW financial sector promotion

In a globalised world with a high degree of trans- Frankfurt, February 2008
parency and information flows, socially and mor-
ally appropriate behaviour is becoming increas- What does Responsible Finance mean for
ingly important for all market participants. Re- the stakeholders in the financial sector?
sponsible Finance has become a catchword in
development finance and, in particular, in financial Responsible Finance is a topic that affects all
system development. Along with financial sustain- market players and cannot be reduced merely to
ability goals, the “social return” is a factor of grow- the relationship between a finance institution and
ing importance for the decision-making of many its customers. The following four dimensions of
finance institutions (double bottom line). Responsible Finance can be outlined:

Over the past years the financial and micro- • Customers. Customers are in a weaker
finance sectors in developing and transition coun- position particularly when their level of edu-
tries have experienced enormous growth rates. cation is insufficient for them to overlook the
Enterprises and the population in many develop- consequences of their borrowing (“financial
ing countries now have significantly better access literacy”). Customers therefore should be
to financial services. This has contributed to eco- capable of understanding the fundamental
nomic growth and greater prosperity, including aspects of financial services, particularly a
among poorer groups of the population. Yet de- debt relationship. Giving them certain basic
spite these positive impacts, the upward trend has knowledge (“financial education”) is there-
also shown its downside - intransparent and, ulti- fore indispensable. Likewise, strengthening
mately, prohibitive lending practices have put clients’ confidence into the whole financial
many customers at the risk of overindebtedness, sector is vital, e.g. by promoting deposit in-
particularly through uncontrolled and sometimes surance schemes.
aggressive marketing of consumer lending.
• Financial institutions. Amid growing com-
Even if there are no internationally acknowledged petition, finance institutions today face the
definitions or standards of Responsible Finance, it challenge of matching necessary growth
can be summarized as practices that are de- with a sound lending practice and, most of
signed to create a fair balance of interests
between a finance institution and its customers,
employees and business partners on the one
hand and with their shareholders and refinanciers
on the other hand. Responsible Finance is ulti-
mately a precondition for increasing the well-being
of all stakeholders involved.

KfW Entwicklungsbank • Palmengartenstraße 5-9 • 60325 Frankfurt • Tel. 069 7431-4260 • Fax: 069 7431-3363
[email protected] • www.kfw-entwicklungsbank.de

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all, avoiding intransparent lending practices. helping to develop new products, by promot-
Transparency in a customer relationship in- ing good corporate governance, and by
cludes comprehensible information about using their instruments (funding, guarantees,
the products and conditions, particularly the participations, subordinate debt capital) in
disclosure of all costs associated with the line with the needs of the finance institutions
lending operation ("truth-in-lending“), re- they support. This would help to achieve a
structuring instalments and periods in line significant impact to strengthen local finan-
with the customer's repayment capacities cial markets so as to respond to the needs
and cash flow, credible management of of enterprises and private households. In the
complaints, a clearly defined and communi- area of micro-finance this also means, for
cated corporate philosophy, the setting and example, refraining from undermining the
monitoring of developmentally relevant ob- potential to mobilise savings.
jectives such as promoting employment
creation, and compliance with adequate en- What role does KfW Entwicklungsbank
vironmental and social standards ("social play in the area of Responsible Finance?
performance").
Responsible Finance is not a new issue for KfW
• Regulatory authorities. The protection of but has been consistent with its own vission be-
consumer interests should include not only fore it became a topic of international debate. With
responsible banking practices (through vol- its financial sector operations in developing and
untary undertakings) but should be based on transitional countries, KfW contributes to dissemi-
a legal and regulatory framework that cre- nating responsible practices in all of the four di-
ates proper incentives for banks and their mensions described above; and this is not limited
clients. Ultimately, regulatory requirements to its microfinance operations. KfW thus contri-
(proscribing certain collection practices, re- butes to the principles established by the German
quiring disclosure of effective annual interest Federal Ministry for Economic Cooperation and
rates, and others) have proven to be more Development for a social and ecological market
efficient than interest ceilings still being ap- economy, and it contributes above all to achieving
plied in some countries which often impact broad-based growth for poverty alleviation, pro-
negatively on the poor (credit rationing). moting gender equality, strengthening the private
sector, improving the conditions for a market
• Donors and investors. Donors and inves- economy, strengthening social partnerships,
tors can behave responsibly, for example, by making the economy ecologically sustainable and
engaging in long-term commitments, by creating equal opportunities for disadvantaged
groups of the population.

Various facets show the role of KfW in the area of
Responsible Finance:

• Systemic approach. KfW's activities focus
on different levels of intervention (micro,
meso and macro level) and pursue a com-
prehensive and systemic approach to finan-
cial system development in transition in
developing countries ("building inclusive fi-
nancial systems"). In this approach we make

KfW Entwicklungsbank • Palmengartenstraße 5-9 • 60325 Frankfurt • Tel. 069 7431-4260 • Fax: 069 7431-3363
[email protected] • www.kfw-entwicklungsbank.de

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use of long-standing, close contacts with • “Additionality” for socially motivated
ministries, central banks, commercial banks investors. Socially motivated investors
and micro-finance institutions in our partner (such as private foundations) are developing
countries which are characterised by a part- an increasing interest in investing, for in-
nership based on mutual trust. The devel- stance in microfinance, and they rely on
opment and application of best practice mini- KfW's country, sector and target-group ex-
mum standards and individual projects helps pertise to ensure that their funds are em-
to develop the financial sector framework ployed in institutions acting responsibly and
conditions. KfW regards itself as a partner that their investment is consistent with their
who contributes to development at the vari- risk preferences. Examples include struc-
ous levels of intervention with a long-term tured finance operations in the micro-finance
perspective. sector.

• Selecting the "right" partners. KfW • Contributing to international discussions.
Entwicklungsbank provides funding and KfW is acknowledged as one of the leading
equity to financial institutions which, for their development finance institutions in the area
part, regard responsible banking as an inte- of financial sector development, particularly
gral element of their business model and microfinance. By hosting and participating in
have appropriate strategies to achieve this. international conferences and in an intensive
Banks that make their lending terms trans- and continuous dialogue with relevant
parent and customer-friendly are among the stakeholders, KfW helps to set the standards
preferred partners of KfW Entwicklungsbank. for the development and trends in financial
sector development. Its main focus is on the
• Focusing on suitable products. Financial promotional and developmental aspect.
sector projects have a focus on successful
intermediaries whose business activity is not Overall, Responsible Finance is an important
primarily geared to short-term financial overarching topic for financial systems develop-
returns (for example by focusing on con- ment at KfW Entwicklungsbank. The bank can
sumer credit), but to responding to the draw on many years of cooperation with financial
needs of relevant target groups for devel- intermediaries in developing and transition coun-
opment, such as by focusing on MSME tries in which it has gathered vast experience with
loans in the area of micro-finance, housing regard to Responsible Finance. It feeds this ex-
finance and savings products for small and perience into the international debate. By KfW’s
micro-savers. Through the creation of way of working, its operations contribute to dis-
deposit guarantee funds, for example, micro- seminating good – responsible – practice.
savers can be encouraged to place more
trust in the financial sector. For further questions please contact:

• Long-term commitment as an investor in Matthias Adler
microfinance funds and MFIs. KfW plays +49-69-7431-2941
an import role in setting up and promoting [email protected]
funds which it accompanies over many
years as an investor with a seat and vote in
the supervisory board, thus contributing to
disseminating standards applicable to
Responsible Finance.

KfW Entwicklungsbank • Palmengartenstraße 5-9 • 60325 Frankfurt • Tel. 069 7431-4260 • Fax: 069 7431-3363
[email protected] • www.kfw-entwicklungsbank.de