BlueOrchard’s Initiatives in Social Performance

Guest Post by: Sarah Leshner
Senior Investment Analyst, BlueOrchard

BlueOrchard has, since inception, consistently used widely understood and accepted tools and benchmarks for analyzing the financial and operational performance of the MFIs in our portfolios.  In January 2009, the CEOs of BlueOrchard Finance and BlueOrchard Investments jointly proclaimed the firm’s ambition “to improve our capacity to collect quantitative and qualitative data on the social performance of our lending activities.” We are proud that in the past year we have indeed begun developing similarly rigorous systems and tools to assess, monitor, and articulate the social performance of our investments.

The mission statements of MFIs that BlueOrchard works with typically include a core objective to provide financial products to low-income clients that will help them grow their businesses, thereby improving the quality of life for themselves and their families. They often include as well the specific objectives of empowering excluded segments of the population and contributing to the socio-economic development of the community. BlueOrchard recognizes that in the context of MFIs’ tremendous growth around the world over the last several years, and the associated need for increased efficiency, scale, and profit, it has become ever more critical to ensure that institutions remain true to their mission, tailor products to meet their clients’ needs, and lend responsibly by fully disclosing all costs and properly assessing appropriate debt levels for their clients. This is at the heart of an MFI’s social performance.

In 2009, BlueOrchard developed a Social Performance due diligence tool to be rolled out alongside the financial and operational analysis conducted by our investment team on every prospective MFI client. Up until now, BlueOrchard has focused largely on outreach indicators for assessing social performance, and required that all MFIs borrowing from us report regularly on indicators such as the gender, activity, and geographic location of their clients, as well as average loan size and lending products and methodology. Our new Social Performance due diligence tool goes beyond this by more specifically addressing various key elements of not only the MFI’s outreach but also the procedures that the MFI uses to ensure social performance. In developing this tool, and our social performance framework and strategy more broadly, we have tried to maximize compatibility with other industry initiatives.

The indicators we use, for example, were designed to have substantial overlap with those used by the MIX. Some include: Who are the MFI’s target clients and how does it target and serve them?  How does the MFI ensure that its clients are not at risk of becoming overindebted? Does the MFI charge interest rates that are reasonable within the market context? How does the MFI impact the community in which it operates?  Does the MFI track clients’ poverty levels over time, using tools like the Progress Out of Poverty Index^TM (PPI) or others?  Are the MFIs’ employees treated fairly and respectfully?

The Social Performance due diligence tool has been pilot-tested in two of our most competitive regions. Results of the analysis are being synthesized and will be incorporated into decision-making by BlueOrchard’s credit committee.

We at BlueOrchard recognize that social performance is at the core of what microfinance is all about – improving the lives of micro-entrepreneurs and their families through financial inclusion. As investors it is therefore our responsibility to ensure to the best of our ability that the MFIs we finance work in ways to maximize this impact. We see this as a “win-win” proposition, as reducing the vulnerability of low-income microfinance borrowers ultimately reduces the financial risk of our investments as well.

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Additional information on BlueOrchard’s approach to social performance can be found in its 2009 Social Performance report. Its 2010 Social Performance report is set to be published imminently. A link will be available here and on the BlueOrchard website, www.blueorchard.com, upon the report’s release.