Social Performance Indicators Blog

Calvert Foundation: A Social Perspective for “Good Business”

Posted by: Katherine Oglietti

Interview with: Eliza M. Erikson

Portfolio Manager, Calvert Foundation

 

The Calvert Foundation is a nonprofit organization that, according to its website, uses “investment capital, rather than conventional philanthropy, to create a sustainable, scalable model that enables nonprofit organizations and social enterprises to address critical social problems.” The Calvert Foundation offers a Community Investment Note, where individuals have the option to target their investment in different nonprofit sectors. Investors choose a 0-3% interest rate on this managed bond, opting at times for a 0% financial return in order to maximize their investments’ social returns in areas such as affordable housing, microcredit, small business development, community facilities, and social innovations. In the following interview, Eliza Erikson, who manages the Calvert Foundation’s international microfinance portfolio, describes the link between strong social performance, healthy portfolio quality, and client satisfaction.

MIX:  Does social performance reporting influence Calvert Foundation's choice to invest in a given MFI? If so, in what way?

Ms. Erikson: I would not say that social performance reporting alone influences our choice to invest in a given MFI. From the outset, we want to be sure that the MFIs accessing our loan capital have a strong focus on delivering essential products and services that are affordable, accessible, and appropriate for lower-income clients living at the “Bottom of the Pyramid.”  That strong client orientation should not only be the foundation of an MFI’s social mission, but at the heart of its business model and financial performance. It keeps their clients coming back for more and attracts new clients, sometimes away from the competition. This strong focus on the lower-income client and their perspective is not necessarily “social” in nature. I would argue that it is good business, especially if you are in the microfinance business.

MicroVest: Focusing on Financial Inclusion

Posted by: Katherine Oglietti

Interview with: Michael A. Edberg

Director of Investments, MicroVest Capital Management

 

MicroVest is a capital-mobilizing intermediary that facilitates the flow of private capital to microfinance institutions across the globe. It lends at market rates with the belief that a commercial approach to investment encourages MFIs to become more efficient and ultimately provide a better service to clients. MicroVest assesses an MFI’s social performance during its due diligence process before investments are made, such as client outreach and providing financial services designed to reach the poorest of the poor. It recently began a focus on how an MFI protects against client and systemic over-indebtedness. In the following interview, Michael Edberg explains the relationship between social performance and socially responsible investment.

MIX: Does social performance reporting influence MicroVest's choice to invest in a given MFI? If so, in what way?

Mr. Edberg: Social performance reporting does not directly influence MicroVest's choice of investments.  However, we do target our investments to financial institutions that provide financial services to the bottom of the pyramid for productive purposes.  We do not look favorably upon intuitions that claim to do micro lending, but in fact are low touch, high cost consumer lenders.  Our assessment of an institution’s focus and lending practices occurs as part of the due diligence process and is not necessarily driven by specific metrics reported by the MFI, but by our assessment of how market focus and lending practices are reflected at all levels within the institution (from senior management to the branch loan officer).

Ethical Staff Behavior and Overindebtedness: The Philippine Context

Posted by: Katherine Oglietti

Last week, Kate McKee at the CGAP Microfinance Blog posted an excellent article, "The struggle to be responsible - what leads good providers down the road to bad practices," which comments on growing industry discussions of responsible finance and client protection and challenges to the implementation of these goals. She notes the tension between ensuring both financial viability and customer service, paraphrasing a common response from MFIs:

“We need capital to grow and our investors are also pushing us on growth, efficiency, and profitability, sometimes with short time horizons that make it hard to prioritize quality of products, operations, and customer service.”

This difficult situation may be exacerbated in an increasingly competitive microfinance market. During plenary discussions at the Dialogue Group on Client Protection at the Center for Financial Inclusion, participants from the Philippines described a situation in which a flooded microfinance market led to client overindebtedness. According to MIX Market, the Philippines is home to the second highest number of MFIs per country, with 109 MFIs serving the 24.4 million people below the national poverty line. If it is true that the market is saturated, then supply for loans exceeds demand. Clients have the ability to shop around at different financial institutions for the best loan terms. This creates a competitive environment among MFIs, which is arguably good for clients because it puts downward pressure on interest rates and motivates MFIs to improve their programs. However, the abundance of MFIs may also tempt clients  to make payments from one loan with funds from another loan, easily becoming overindebted. 

Smart Microfinance: Observations and Ways Forward

Posted by: Katherine Oglietti

The Smart Campaign, a client protection initiative housed at the Center for Financial Inclusion, was developed by financial industry leaders in response to increasing public concern over high interest rates, accountability, transparency, and aggressive lending practices in microfinance. To assist microfinance institutions (MFIs) in determining whether the financial products and services they provide help or inadvertently harm their clients, the Campaign identifies six principles of client protection:

1. Avoidance of over-indebtedness

2. Transparent pricing

3. Appropriate collections practices

4. Ethical staff behavior

5. Mechanisms for redress of grievances

6. Privacy of client data

Last week, the Center for Financial Inclusion hosted a Dialogue Group on Client Protection with representatives from MFIs and networks from Mexico, Bosnia, the Philippines, India, and Kenya who participated in a preliminary study on the principles. Participants discussed and ranked specific indicators used to measure each principle, continually expressing the need to move from MFIs’ use of subjective and qualitative analysis to universally measurable, verifiable, and comparable indicators.

Current Discussions on Ways to Better Serve Clients

Posted by: Katherine Oglietti

Last week we discussed transparent pricing as part of the indicator on social responsibility to clients. This week will focus on the Six Principles of Client Protection as a whole. There have been several discussions relating to social performance in microfinance over the last few weeks that pertain to social responsibility to clients. From November 2 – 6, the SEEP Network held its 2009 SEEP Network Annual Conference in Washington, DC, which brought together practitioners from around the globe to discuss innovative practices in microfinance. Last week, the Center for Financial Inclusion hosted a Dialogue Group for Consumer Protection in Washington, DC. We will dedicate the next few posts to highlighting important points discussed during those events. Stay tuned for a discussion of the challenges of measuring and ensuring client protection as well as how microfinance institutions are using poverty assessment tools to make internal improvements that ultimately serve client needs.

Microfinance or Moneylending?

Posted by: Taea Calcut

In keeping with this week's discussion on costs in microfinance, we invite you to view a presentation posted online yesterday by Chuck Waterfield, CEO and Founder of MFTransparency. Waterfield's suggestion that opaque pricing structures blur the distinction between microfinance and money lending - from which "the poor have always had access to credit... for a price!" - might especially resonate with those of you who recently participated in the spirited threads about profits and high interest rates on the Microfinance Practice Yahoo! Group.

Why We Need Transparent Pricing In Microfinance

View more presentations from MicroFinance Transparency.

Pricing and Principles in Microfinance

Posted by: Taea Calcut

Full disclosure? MFI staff and clients discuss loan repayments

Last week, Cara Forster, Program Manager at the Center for Financial Inclusion at ACCION International, posted an interesting article on the Center’s blog that highlighted the relationship between MIX social performance reports and the Six Principles of Client Protection of the Smart Campaign as well as some preliminary findings.  While the majority of the 53 MFIs featured in Forster’s analysis are active in efforts to inform clients of costs, significant gaps still exist. Forster writes, for instance, that “only two thirds of these MFIs disclose penalty and pre-payment fees before contract signing” – implying that clients at the remaining third of MFIs do not have complete information when they make borrowing decisions.  This lack of transparency threatens the well-being of both clients and MFIs, with clients risking excessive debt levels (perhaps exacerbated by the fact that 47% of analyzed MFIs do not obtain information on clients’ existing debt) and MFIs risking weakened portfolios.   

Whether these results are typical remains to be seen, as an additional 150 reports have yet to be fully analyzed. However, current data reinforces the importance of industry-wide discussions and standards on pricing transparency and client debt analyses, such as those led by initiatives like MFTransparency and the Smart Campaign, to enhance the achievement of financial and social performance goals.  

Readers interested in Forster’s article, “How MFIs are doing on Client Protection – First Reports from the MIX,” can find it here.

 

The Quest for Transparent Pricing: MFTransparency Releases World’s First True-Cost Pricing Data

Posted by: Micol Pistelli

Interview with:
Alexandra Fiorillo, Vice President, MFTransparency 

Last week, MFTransparency – a global initiative for fair and transparent pricing in microfinance – published the world’s first true-cost pricing data. In an interview with MIX, Vice President Alexandra Fiorillo shares more about the initiative, its benefits to MFIs and clients, and findings from the first reports.

MIX:  MFTransparency is a global initiative for fair and transparent pricing in microfinance.  What is your definition of “fair pricing” and how can the MFTransparency initiative help to achieve this goal?

Ms. Fiorillo: MFTransparency’s primary mission is to promote transparent pricing in the microfinance industry. We have learned over the past year that promoting fair pricing is a much more complicated endeavor. What our data and experience show is that every market is unique and coming to one global definition of fair pricing is impossible, especially if you are looking for a specific number. We have discussed the possibility of coming to a definition based on “n standard deviations away from the market price curve” but even that is difficult and may vary according to the market. We do believe, however, that transparent pricing is a necessary condition in order to get to fair pricing.

We are currently involved in several industry discussions related to the issue of fair pricing and it seems the conversation is moving towards a definition centered around affordable products that do not over-indebt clients. I think you’ll see more of this evolution coming in the next few months as the language of the Client Protection Principles is updated and MFTransparency delivers more educational materials on the subject. This is a topic that will continue to evolve as we learn more about pricing practices around the world.

Disclosing the True Cost of Lending

Posted by: Micol Pistelli

This week, we focus on one of the most important and debated social performance indicators: the cost of services to clients.  To date, microfinance loans’ true prices have never been publicly reported and there is a lack of information about how MFIs calculate their Effective Interest Rate (EIR) and Annual Percentage Rate (APR).  To address this concern, two initiatives – MFTransparency and the Smart Campaign (formerly known as the Campaign for Client Protection in Microfinance) – have been created with the aim to promote more transparent and fairer pricing in the industry.

Stay tuned for an interview with MFTransparency to learn about their efforts to establish the industry standard for pricing disclosure as well as the most recent updates from the Smart Campaign.