Can we trust the financial industry in the social sector?

As I read the article from the Economist for this week's class--"Financial innovation and the poor: A place in society"--I couldn't help but feel a great sense of uneasiness wash over me after the first paragraph or two. The author describes the over-extension of the financial industry, and how the attempt to derive new products and services in the sector ended up bringing economic hardship to households across the country.

And then he goes on to detail how the sector is now looking at "social finance" to provide new opportunities to "innovate" in the financial field.

Am I the only one to get a little nervous here?

Certain elements of the financial industry drove our country into economic recession with their "innovative" ideas, and now we're talking about encouraging their involvement in the finance sector in countries with frighteningly fragile economic frameworks? Do we really want to encourage a sector that crashed our middle class--an economic class that, relatively speaking, had been fairly robust--to tinker around in countries where middles class is an aspiration that is out of reach for the majority of the population?

I find this proposition more than a little questionable.

The paragraph that really irked me was when the author began to detail the motivation of the financial industry to join the "social finance" movement, asserting that

"The financial industry and its clients spy a way of making money and doing good at the same time. Many impact investments are in emerging economies, which are expected to grow faster than developed ones. They may be uncorrelated with other assets and thus offer diversification and reduced risk...Bankers also detect a chance to give their image a badly needed polish."

Polish their image? Are we going to risk the financial well-being of nations already teetering at the brink of ruin so that bankers can perform PR rehabilitation?  Developing economies shouldn't become mere tools for the financial industry to diversify their portfolio and pat themselves on the back for being "philanthropic".

And yet... I found myself agreeing with many of the following suggestions made in the article. I do believe that institutions such as "social investment banks" can spur significant growth and innovation in developing economies. I do think that private capital and skills need to be tapped to support small businesses. I do think the social innovation sector--and to a certain extent, the public sector--need to start borrowing tools and strategies from the private sector to find sustainable ways to support aid projects.

But how do we borrow certain tools and strategies without opening up developing economies to the risks that could be associated with financial sector involvement? Therein lies the critical component to proceeding with the "social finance" movement. I believe that governments, nonprofits, and other social innovation institutions need to proceed with extreme caution in order to ensure that appropriate regulations are put into place to prevent negligent financial behavior from occurring. Such regulations will require not only cross-sector coordination, but most likely international and intergovernmental coordination as well, but they will prove to be well worth the effort. History has shown that a lack of regulations in the financial sector can (and most likely will) engender widespread economic damage, and preventing said damage in emerging markets is a step that simply cannot be overlooked.