Proving Progress: Social Performance Measurement in Microfinance

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Aug 2014
Global, August, 28 2014 - Microfinance is unique within the banking world, because it promises to serve those excluded from the formal banking sector, while also being financially sustainable. Thus, MFIs must meet a “double bottom line” of financial and social performance.

“Profits shouldn’t take precedence over sustainability, which is determined not by the amount of credit available to a woman, but by the resources she can leverage to improve her life,” said writer Estee Ward in an article criticizing the microfinance industry in Jordan, published last week on the Guardian’s website.

In the article, Ward described her experience interviewing female microfinance clients in Jordan. From her interviews, she found that a majority of women were not satisfied with their experience. “Almost all complained that the process lacked proper evaluation,” Ward said, adding, “Some women received half of what was requested for startup costs, while others were offered more than they could afford and failed to pay back the full amount.”

Making MFIs Responsible

In Ward’s focus group of 15 female entrepreneurs, she found that “high interest rates forced more than half to use savings for payments and spend the initial loan on immediate needs, such as utilities and healthcare, rather than on what it was intended for. Many women experienced shame for their apparent failure, and deferred loan management to their husbands.”

It was not made clear in the article what criteria was used to determine the focus, however, no matter the statistical significance of this sample group, the facts presented in Ward’s article are too upsetting to casually dismiss. While much has been discussed in regards to global standards and regulations, critiques of microfinance based on unsustainable growth and profit-centric behavior continue to mount.

Of Jordanian MFIs, Ward wrote, ”The issue is not the amount of funding given, but the lack of clarity about how it is distributed.”

In Jordan, there is currently no regulatory body to monitor MFIs, which is a major contributor to ongoing mispractice in the industry. However, passing regulation takes time and, once implemented, the enforcement of this regulation is not guaranteed.   In order to promote immediate and effective client protection, Social Performance Measurement (SPM) strategies and tools should be considered and enforced by development agencies and investors who fund MFIs.

Using SPM, MFIs are directly responsible for recording and reporting social impact to investors, development agencies and other sources of funding. It can be implemented without the bureaucracy of passing national legislation, as well as be immediately required. There have been many debates regarding if MFIs should be required to follow SPM practices, which is discussed later in this article, but especially in the light of malpractices such as those reported by Ward, perhaps the time for debate is over.

The Benefits of SPM Worldwide 

If done responsibly and ethically, SPM serves as direct proof of social benefit to critics of microfinance. Ward’s criticisms were directed at the microfinance sector in Jordan, but her words present a challenge to the global microfinance sector to prove it’s relevance and benefit to marginalized communities. In order for microfinance to be accepted worldwide as a means of alleviating poverty and fostering small business growth, microfinance professionals must be prepared to meet criticism with accurate social performance measurements (SPM).

Social performance is defined by the European Microfinance Network as “the effective translation of an institution’s social goals into practice.” MFIs with high social performance “serve the poor and/or financially excluded, improve the quality and appropriateness of financial services and products, and improve the economic and social conditions of clients.”

Microfinance is unique within the banking world, because it promises to serve those excluded from the formal banking sector, while also being financially sustainable. Thus, MFIs must meet a “double bottom line” of financial and social performance. As the 2010 crisis in India demonstrated, the microfinance industry suffers financially when it fails to achieve its social promise.

SPM can be a financial burden for smaller MFIs. Additionally, social achievements are less easily quantifiable than financial ones. The oversimplification of complex societal problems is another argument against SPM that should not be taken lightly, and must be considered in the development SPM tools. While there are drawbacks to measuring social performance, the benefits justify the continued investment in effective tools.

The benefits of SPM include attracting socially conscious investors, building confidence among the public and borrowers, as well as ensuring consistent use of best practices at every level of an organization. Within the investment world, social performance measurement is often more well-received than social theory or ideology. SPM also helps demonstrate that investing in people saves money for public authorities and society as a whole.

Socially responsible investors are becoming more common, and MFIs potentially have much to gain from the promotion of social performance measurements. JP Morgan recently announced it would invest $10 billion in client assets through its Investing with Impact platform and Goldman Sachs created a $250 million Social Impact Fund. Many of these investments could go towards MFIs and anti-poverty organizations, but only if they are able to exhibit tangible social impact.

The current business environment requires the increased use of social performance measurement tools for several reasons. First, we live in an age of information, where data and transparency are respected and valued. Additionally, contractual arrangements between organizations and governments to improve the social sector are becoming more common. Finally, the continued growth of impact investment and the professionalization of the social sector will yield a greater demand for progress reports containing both financial and social statistics.

Industry leader OikoCredit worked with partners to “implement industry tools to monitor indicators of social performance.” These tools include: the environment, social, governance scorecard; the progress out of poverty index and social performance indicators.

Universal Standards 

Within the EU, there has been evidence to suggest more work needs to be done to mainstream social performance measurements. In last year’s Final Evaluation of the EU/ACP Microfinance Programme for the European Commission, the authors observe that “while the attention to social performance rose significantly over the last years of the Programme, it could have done more.” The report, released January 2012 states: “The Programme did not focus its action directly on poverty reduction or social performance, but considered this rather as an ultimate, resulting objective, with an immediate need lying rather in capacity-building. This was in line with the leading paradigm at the time. It appears however to be a weakness.”

Many MFIs already use SPM, but methods can vary drastically, causing confusion within the industry and among investors. A 2009 EMN survey found that “60% of responding MFIs were already measuring the social impact of their activities on client’s lives. However, this is done in a nonstandardized way.”

Despite these findings, progress is being made.  The Social Performance Task Force (SPTF) was created in March 2005 to develop a universal social performance framework. The task force was formed with the help of CGAP, the Argidius Foundation, and the Ford Foundation, bringing leaders together from various social performance initiatives in the microfinance industry. Officially released in 2014, SPTF’s Universal Standards are meant to assist MFIs informally assess their current level of performance management, guide future strategies and self-regulate social performance. The Universal Standards are also meant to benefit other stakeholders in the microfinance industry.

According to the SPTF website, “Investors and donors can use the Standards to understand an MFI’s SPM practices relative to generally accepted good practices. This may help investors and donors to direct their funds toward MFIs with strong SPM, and to identify SPM capacity building needs among investees.”

CERISE, in collaboration with SPTF and a panel of experts, updated the SPI assessment tool this year to align it fully to the Universal Standards. 

Compliance with the Standards is not mandatory, and the document offers no grading or certification system. This being said, the ability to demonstrate compliance will not only benefit the social mission of MFIs, but also benefit their financial goals. In order to ensure MFIs are motivated to take on the task of implementing SPM into daily practice, those who fund these organizations must hold their investments accountable for social impact.

While regulation is important, adherence to government standards alone cannot effectively demonstrate commitment to social goals. Perhaps future regulations could include the adoption of a set of universal standards for SPM in microfinance. However, this should be done carefully to ensure accurate measurements and prevent overburdening MFIs.



 

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