World Bank Board Denies Recourse to Millions of Victims of Predatory Lending, Sets a Dangerous Accountability Precedent

Last week, the World Bank Group’s Board of Directors overruled its own independent accountability mechanism - the Compliance Advisor Ombudsman (CAO) - and allowed the International Finance Corporation (IFC), the institution’s private sector arm, to avoid accountability for the microfinance debt crisis it has contributed to in Cambodia. In response, CAO Director General Janine Ferretti has resigned. The Board must answer for its actions and explain how it will uphold the integrity of its accountability system going forward.

A CAO investigation found that IFC violated its own Sustainability Framework’s requirements inits investments in six banks providing microfinance in Cambodia, and this noncompliance contributed to predatory lending practices that have led to the loss of land and livelihoods, hunger, increased suicide risks, and threats of retaliation against the very communities that are supposed to benefit from microfinance programs.

The harms caused by the microfinance industry in Cambodia are well documented and were confirmed by CAO. However, in an unprecedented fashion, the World Bank Group Board rejected CAO’s noncompliance findings and recommendations to address the harm from its investments. In direct contradiction to the CAO investigation, and without any evidence, the Board published a statement on June 24th declaring that, ”there has been no policy noncompliance under IFC’s Policy on Environmental and Social Sustainability.” Although required by the Board-approved CAO policy, IFC refused to develop and submit to the Board a management action plan with time-bound commitments to address the noncompliance. Instead, it has promised piecemeal actions in a “Special Management Action Plan” that do not address most of CAO’s recommendations. Furthermore, according to unofficial reports, IFC has suggested that victims of predatory micro-finance lending or other consumers harmed by IFC financed products will no longer have access to recourse through CAO. This is completely unacceptable.

It is not the role of the Board to determine whether or not IFC Management has acted in compliance with its Sustainability Framework. CAO was established to serve as an independent arbiter and hold the institution accountable to the policy commitments made by IFC’s shareholders. If the Board can reject CAO’s policy on a case-by-case basis, then it means that CAO is no longer a reliable and predictable mechanism and can no longer credibly shield IFC from legal liability.

This decision sets a dangerous precedent for accountability at the World Bank Group. It comes at a time when the Board has already shaken the public’s confidence in its accountability architecture by approving a hasty merger of the institution’s public and private sector accountability mechanisms. At this point, the only conclusion we can reach is that the Board prioritizes its investment portfolio over environmental and social protections.

We call upon the Board to:

1) Meet with us to explain how they reached this decision.

2) Publish the voting record of each member of the Board.

3) Require IFC to accept CAO’s findings and develop an effective Management Action Plan in consultation with the complainants.

4) Disclose how any other current and future cases to CAO alleging environmental and social harms stemming from its microfinance portfolio will be handled fairly and predictably.

5) Explain who will be leading CAO following Janine Ferretti’s departure and before the new mechanism is established, and how this leadership vacuum will not further undermine accountability on other CAO cases.

6) Commit to a transparent and inclusive leadership selection process, which includes civil society participation on the selection committee, to ensure the independence and integrity of the new World Bank Group accountability mechanism. Despite the Board’s assertion that a transparent recruitment process has been underway since June 9th, the job posting, terms of reference, and recruitment process have not been publicly disclosed.

7) Reaffirm its commitment to strong due diligence and supervision to ensure that the costs of economic development do not fall disproportionately on poor or vulnerable people.

8) Reaffirm its commitment to strong accountability and ensure that the institution’s new independent accountability mechanism is equipped to do its work effectively.

The Statement with more than 100 signatories can be downloaded here.