Social Performance Management: A Response to Three Worries in Microfinance

 

Posted by: Tomás Rodríguez Alas, 

Coordinator of  Program MISION of Red Centroamericana de Microfinanzas (REDCAMIF)

(To read the original article in Spanish, click here).

Three current events are occupying much of the attention of microfinance institutions and networks in Central America:

• the attempts by governments to regulate microfinance activities

• the decrease in resources from many investors owing to the financial crisis

• problems with client debt repayment owing to this crisis

Microfinance Regulation

Microfinance institutions and their networks are not necessarily against the creation of regulations in the microfinance sector. Such regulations could in fact render more transparent transactions as well as provide for more security in client operations within the microfinance institutions. The point of conflict, in most countries, is the parameters with which microfinance operations are regulated, where such parameters adhere to the prudential norms that are applied to traditional banks.

Microfinance institutions ask that regulations be applied to the reality of the market segments where they serve. They appeal to the social nature of microfinance’s origins, in which the target population is comprised of social sectors that traditional banks do not serve: those living in poverty, women, rural inhabitants, and micro and small business owners. Moreover, they argue that microfinance contributes to the reduction of poverty and to the economic development of the sectors that microfinance serves. But while these arguments accurately demonstrate the distinguishing factors of between MFIs and traditional banks, few MFIs can back up these arguments with solid statistics, not going beyond anecdotes and isolated case studies. How many poor people have been reached? How many clients have moved out of poverty? How can we demonstrate this?

In reality almost all microfinance institutions can present audited financial statements and make the results public through MIX. Central America has been a vanguard in financial transparency; however, this does not differentiate the microfinance industry from other financial sectors that are already obligated to do so.

Social Performance does make a difference; it justifies having particular legislation and supervision if governments want microfinance institutions to continue serving those excluded from the traditional financial system, taking into account the role that they play in development.

Diminishing Resources

The second phenomenon is the reduction of resources on the part of financial sources owing to the financial crisis and the international economic recession. There are fewer resources available and less liquidity within the financial system, which reduces the amount of funds available while increasing the cost of those funds. An important segment of these financers are social investors and some international cooperation agencies.

In Central America and Latin America, a number of important microfinance institutions have reached a high standard of financial sustainability, which contrasts with other parts of the world. Certainly this will be a point to consider by the investors when they are allotting their funds, but in an environment in which the supply side has limited resources and the demand side shows certain equality of financial performance, a differentiating element is needed in assigning these limited resources.

Again, the answer is Social Performance Management (SPM). For social investors and for MFIs, the ability to demonstrate social performance is becoming a requirement (as well as a necessity - since  some MFIs use public funds that come from taxes , so they want to know the social results of the use of these funds). Moreover, organizations such as Oikocredit are already applying some poverty measurement tools such as the Social Performance Indicators of CERISE, or are hoping that the institutions report on the indicators proposed by the Social Performance Task Force.

Recovering Debt

The third issue of concern to MFIs is the difficulty of repayment that clients currently face, owing to the same financial crisis, given the contraction in demand, the increase in unemployment, the decrease in remittances, and the fall of the price of some products. All this aggravated by the opportunism of some clients who do not wish to face their financial obligations taking advantage of the protection offered by the No-Pago Movement [a movement for no payment of loans which began in Nicaragua in 2008].

Social Performance Management is not the solution to this problem, although it can contribute to the process of finding better solutions, since SPM systems allow for a better understanding of clients’ needs. SPM also helps to better stratify the market for credit on the basis of income, geographic region, economic activities, and gender, which permits the early identification of those sectors that could face larger difficulties and those that are more secure.

In conclusion, Social Performance Management is a good answer, not the only one but perhaps one of the best, to the three problems that are currently faced by microfinance Institutions in the region.

I invite the organizations to take a step in this direction and make the Central American region not only the most transparent region in financial terms, but also in terms of social performance.

Comments

[P K RaghuRam]

To use an analogy, these three issues look like the three sides of a triangle. We need to have an equilateral triangle, and any one of these getting prominence pushes it out of balance.
One way would be to implement a strong Knowledge management system in place - brings the funders, MFIs and regulators on the same page with respect to issues and challenges and what we're doing about it.