MIX Research Agenda: Linkages between Social Performance and Financial Performance

Posted by: Adrian Gonzalez and Micol Pistelli

One of the main goals of MIX Social Performance research is to understand the links between social performance and financial performance outcomes by microfinance institutions (MFIs). In particular, we are interested in understanding whether significant relationships between social and financial performance exist and if these relationships lead to trade-offs in terms of MFIs' achievement of their double bottom line.

Analyzing the correlation between financial and social performance will help us to:   

• Identify links to the MIX Global 100 and make recommendations for a set of new, more comprehensive rankings; and

• Identify links between MFIs’ performance and product development.

We already identified the Social Performance Standard Indicators (SPIs) that are more likely to affect MFIs’ financial performance.  Among this group, we decided to focus on indicators with the highest expected data quality and largest subsamples among the group of 208 MFIs that submitted Social Performance reports to MIX in 2008.  The SPI short list is:

• Financial Services
• Non-Financial Services
• Training on Social Performance
• Client Retention
• Social Responsibility to Clients
• Social Responsibility to Staff
• Geographic Outreach
• Employment
• Children in School
• Poverty Assessment

Previous research carried out by MIX on financial performance helped us identify four areas of financial performance and related indicators that are more likely to be affected by SP outcomes. These areas include:

• Productivity: Borrowers per Staff and Savers per Staff
• Efficiency: Operating Efficiency (as % of Average Loan Portfolio) and Cost per Borrower as % of GNIPC
• Portfolio Quality: PAR30 & Write-off Ratio
• Profitability: Return on Average Assets (ROA)

We also identified additional interactions between SPIs and financial performance indicators (FPIs) for testing in order to answer the following two questions:

1) Is Average Loan Size per Borrower as % of GNIPC a good proxy for the poverty level of clients?

This is a common assumption in the microfinance community that we can now test by using poverty assessment data from the SP report.

2) Are rural loans smaller or larger than urban loans?

This interaction can be explored by looking at the relationship between Average Loan Size per Borrower as % of GNIPC and Geographic Outreach. 

We will carry out our analysis by looking at the interactions between the short list of SPIs and each of the four areas of financial performance. The order of the financial performance analysis is consistent with the way FPIs interact with each other.  For instance, productivity is an important driver of efficiency, especially when it is measured as cost per borrower.  Therefore, once we find out how SPIs interact with productivity, it will be easy to understand how SPIs interact with efficiency. The same idea applies to other areas of financial performance analysis. (While an alternative would be to analyze the interaction between each SPI and the combination of the four areas of financial performance, we would ignore the effect of other SPIs on financial performance.)  After we are done with all four areas, we will be able to summarize the results for each SPI and their interactions with financial performance.

A summary of the next steps is to:

• Generate descriptive statistics and a correlation matrix for SPIs
• Determine relationships between SPIs and Productivity
• Determine relationships between SPIs and Efficiency
• Determine relationships between SPIs and Portfolio Quality
• Determine relationships between SPIs and Profitability
• Examine whether Average Loan size per borrower as % of GNIPC is a good proxy for borrowers' poverty levels
• Examine whether rural loans are smaller or larger than urban ones
• Summarize results by SPI:
  -  Relevant interactions between Financial Services and financial performance
  -  Relevant interactions between Non-Financial Services and financial performance
  -  Training on social performance and financial performance
  -  Client Retention and financial performance
  -  Social Responsibility to Clients and financial performance
  -  Social Responsibility to Staff and financial performance
  -  Geographic Outreach and financial performance
  -  Employment and financial performance
  -  Children in School and financial performance
  -  Poverty Assessment and financial performance
• Make recommendations regarding the data quality, reliability, and type of these indicators
• Integrate results into the Global 100 or new rankings

To read about updates on the research agenda and preliminary results of the analysis, be sure to visit the Social Performance Indicators Blog in early April. As always, readers' comments are most welcome!

***

Update:

Posted on July 26, 2010, by Mike Krell

Adrian's most recent paper is almost ready for publication! Using the MIX 2008 SPS dataset, he investigates the synergies and trade-offs of social versus financial performance and arrives at a number of fascinating and sometimes counterintuitive results. Adrian discusses these findings in our latest blog post.

Comments

[benazir]

Hi, being student of economics I must appreciate this effort of measuring social performance of MFIs as these are made for providing social service but social performance measurement aspect has always been ignored. So best of luck for this great effort.