Guest post by: Ben Simmes
Director Social Performance and Financial Analysis, Oikocredit, Netherlands
In July 2009, Oikocredit began a Social Performance and Financial Analysis department. This reflects the importance Oikocredit gives to social performance. From a long term perspective, we may say that microfinance has entered a third stage of development with its recent focus on social performance.
The first stage was the recognition of the importance of microfinance as a way to reach out to millions of poor people around the world who had no access to financial services. In 1975, Mohammad Yunus and also Oikocredit started to give loans to poor people. This first stage was extremely difficult as many did not believe that microfinance would work. The general opinion was that the loans would not be repaid, but the contrary was true. Loans were repaid and gradually more and more organizations joined Yunus’s efforts. NGO's began to specialize in offering credit; some of them transformed into non-banking financial institutes and even banks. Along with development agencies and social investors, commercial investors started to look at microfinance as a meaningful investment.
The second stage of development has been the focus on financial sustainability. If microfinance institutions were to expand their client base and provide services continuously, they had to be financially sustainable. Therefore in recent years, much energy, time and funds have been spent to make this happen. Financial ratios, management information systems, indicators and business plans were used to assist MFIs to develop themselves into financial sustainable institutions. The results have been overwhelming. Because more and more MFIs could show their financial sustainability, it became easy for MFIs to attract funding from local banks, commercial investors and private equity companies to fund the rapid expansion of the sector. In recent years, MFIs reported growth figures of 20, 30, to 60% or more per year, millions of people were reached, and new products were developed.
Presently we see a third, and extremely important phase of development: social performance. The focus on social performance is triggered by a number of factors. "Do no harm" is one important factor. The rapid growth of the sector has led to some negative effects. Competition between MFIs in a number of countries has led to supply-driven microfinance and insufficient screening of the capability of clients to repay their loan. The consequence: overindebtedness. Likewise, we sometimes experience lack of transparency in pricing and other negative developments such as unethical collection practices that need to be addressed.
Perhaps the most important reason for the recent focus on social performance is that it has been largely neglected. Because of the strong emphasis on financial sustainability and financial return, we forgot about the social return. It was taken for granted that microfinance indeed created a social return. But nowadays, two key questions are raised: Can you prove that clients are better off because of the services you offer through microfinance? How do you create social return in the most effective and efficient way? These two simple questions are not all that easy to answer.
Oikocredit's new department is tasked to incorporate social performance into all levels in the organization. First, additional social performance standards which are fully consistent with industry standards set forth by the SPTF and the MIV disclosure guidelines will be incorporated into Oikocredit’s monitoring system. Activities include training of staff on social performance management, developing indicators and tools to screen the MFIs we prioritize working with, and developing regional and international strategies to strengthen social performance management. On a second level, we support MFI partners in their endeavor to strengthen their social performance management. For example, we encourage MFIs to undergo a social audit in order to establish their strengths and weaknesses and we support the introduction of tools such as the Progress out of Poverty Index to enable MFIs to target poor clients and measure developments over time. Thirdly, we engage in dialogue with national associations of microfinance institutes to jointly develop initiatives to strengthen social performance. We also discuss with other funders what we can do to create a substantial social return on our investments and how we can jointly address the negative trends that we see emerging in the sector. Last but not least, we discuss with our investors the positive results of our activities but also the challenges we see.
We do hope and expect that with the focus on social performance, we will ensure that our investments result in what we aim for: a social as well as a financial return.
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For more information on Oikocredit, please visit: www.oikocredit.org and its Social Performance Centre. You can also review their fund structure, performance, fund instruments, and partnerships on MIX Market: http://www.mixmarket.org/funders/oikocredit.
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