Making sustainability work for developing and emerging markets’ financial institutions
25 augustus 2008
Working with domestic FI’s in emerging markets tells us to follow at least four simple rules* for integrating an ESMS in an effective way.
1. Think big, but start small
It is important to agree on the aspirations and benefits of setting up an ESMS. How will it help the domestic FI, how does it improve the quality of its credit portfolio, what are the other benefits in terms of added value for its clients? These opportunities should be clear for all involved. Moreover, it is equally important to agree on a step by step implementation. Domestic FI’s are typically low on staff. Thus, allocating sufficient time to such a complex transition is challenging. A crucial success factor therefore is to systematically analyse the FI’s portfolio and prioritise the areas that should be covered. Start with the high impact high risk areas and expand your efforts from there. Agree upon a realistic time frame for this process to cover the entire organisation. Too often one can notice that enthusiastic DFI’s and domestic FI’s try to cover the entire portfolio all at once. But being long on enthusiasm and short on priorities and immediate results is likely to result in disappointment.
2. Keep it simple
DFI’s have a long track record of working with environmental and social dilemmas. They have learnt by doing and still experience many challenges every day. Despite their history, they feel themselves that there is still room for improvement. The development of their own experience can be qualified as an evolution. Yet when they work with domestic FI’s they seem to promote revolution! If the highest international standards are being presented as the benchmarks for domestic FI’s right from the start, these feel overwhelmed by the broadness and depth of the procedural infrastructure. The challenge for DFI’s here is to “unlearn”. Take state of the art standards as final focus, but rather start with a realistic and tailored set of guidelines that allow for application in the specific market place. Keeping it simple is the best guarantee for making concrete progress.
3. Don’t impose but collaborate
Sometimes the impression arises that bureaucratic demands of the DFI defines what they want the domestic FI ESMS to look like. After an initial co-operation and learning process they increasingly write the “book of law” that the domestic FI is to adopt. At one point this imposing of the system may seem to result in acceptance by the domestic FI. However, the stack of documents may never see the daylight again after having landed in a bottom drawer. It is better to take care of closely linking or even better integrating the elements of an ESMS into the existing organisation and procedures. Such “appropriate institutional technology” is very likely to result in an ESMS which is a real integral part of the credit process of the domestic FI.
4. Take care of ownership
We promote a well designed co-operation in which the domestic FI itself is responsible for a lot of the work. They can interact with the DFI for advice and support, but the board of the domestic FI, and officers across the organisation should take their own responsibilities. This is not always a smooth process but results in two outputs. Firstly, an ESMS for which the domestic FI has a high sense of ownership. The other output is the learning process in the domestic FI of developing its own ESMS, which may even have a higher value than the formal ESMS. In any case the combined outputs lead to a high degree of acceptance and a better level of implementation.
Conclusion
Financial institutions can play a vital role in making economies more sustainable. But making sustainability work for emerging markets’ financial institutions is not a bureaucratic “ticking the box” process. Setting up an effective ESMS is a tailor made and joint effort of the DFI and the domestic FI. It is not a revolutionary, but an evolutionary process.
* These lessons follow from a project that we have done in cooperation with KfW Bankengruppe* – a German state owned promotional bank engaged i.a. in development cooperation. This blog is a reproduction of an article co-written with Dr Karl Ludwig Brockmann, Vice President of KfW Banking Group
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