Social Performance Indicators Blog

New Research Results on Trade-offs and Synergies between Social and Financial Performance

Posted by Adrian Gonzalez

A few months ago we presented a MIX Research Agenda to explore relationships between social and financial performance. Now we are ready to discuss the main results from this research, based on the social performance data collected for 2008. When reviewing the findings, the reader should keep in mind that they are based on regression analysis that controls for other factors known to impact financial performance (such as age, loan size and lending methodology) in order to isolate the specific set of relationships being investigated.

The research investigates whether social and financial performance interact to lead to important trade-offs or synergies in terms of MFIs' achievement of their double bottom line. For those who like to visualize data, Figure 1 summarizes the expected relationships between financial performance (FP, down the first column) and social performance (SP, across the top row) goals, with green indicating synergies, and red indicating trade-offs, as discussed in the original posting laying out the research agenda.

Figure 1: SP and FP Expected linkages

  

+:   Expected relationship is positive, meaning that an increase in the respective SP is associated with an increase in the respective FP, and a decrease in the respective SP is associated with a decrease in the respective FP.  In other words, the variables move in the same direction. 
-:   Expected relationship is negative, meaning that an increase (decrease) in the respective SP is associated with a decrease (increase) in the respective SP. In other words, the variables move in the opposite direction. 
++, --: These are the areas where strong relationships between SP and FP are expected. 
0:   No relationship (effect) expected at all. 
?   Expected sign of relationship cannot be determined.

New Resources for Social Performance Management from the Imp-Act Consortium

Guest Post by:
Veronika Thiel, Microfinance Research Consultant

The primary goal of microfinance has always been to help people out of poverty through the provision of financial services to people who were previously thought to be unbankable. After a period of growth and going from strength to strength, there has been a tendency to focus too much on the financial stability of microfinance institutions (MFIs) rather than on the social impact they are creating. There has been the assumption that a financially-viable organization is automatically creating beneficial social outcomes. Following a series of articles and academic research that highlight serious problems with overindebtedness and the destruction of savings in certain contexts, the microfinance sector is being challenged to revisit their approach to effectively achieve their social mission. Financial viability needs to be seen again for what it is – a means to an end rather than an end in itself. The achievement of social outcomes is not an automatic side effect of having a financially viable organization – social performance management (SPM) needs to take center stage.

In other words, microfinance needs a social performance approach that measures and monitors the social impacts organizations’ work have on the lives of their clients and the communities they operate in. Do organizations help or hinder? Do they reach the clients they seek to reach? Do their products help clients reach their goals? Are MFIs creating a lasting legacy or do they unintentionally destroy existing assets? To find this out, MFIs have to become as attuned to social indicators as they are to financial ones. By mainstreaming social performance management across an organization, they can ensure that they track social – and financial – performance in a meaningful way.

The Imp-Act Consortium, a partnership of nine organizations operating worldwide, has over the past 10 years demonstrated that most MFIs can improve their services with relatively small and affordable changes, and that social performance needs to be integrated into management for social goals to be achieved. Their work has promoted the mainstreaming of SPM into microfinance by providing practical guidance and research on how to do so. The underlying idea of marrying social and financial outcomes to help MFIs fulfil their promise is also reflected in a set of principles for SPM endorsed by the Social Performance Task Force in June 2009. Over 75 MFIs have signed to these principles already.

Advocating for Financial Performance Indicators: What Can We Learn from Efforts in Social Performance?

Guest Post by:
Drew Tulchin, Managing Partner, Social Enterprise Associates
Leah Nedderman, Consultant

Most advocates of social performance acknowledge that financial performance indicators are more widely recognized than social measurement indicators.  Financial value is considered less subjective and financial metrics are more widely utilized. For example, the CEO of a microfinance institution (MFI) is more likely to track and report return on equity (ROE) than clients’ progress out of poverty. A country’s central bank is more likely to have portfolio at risk (PAR) requirements than client protection requirements in evaluating the success of an institution being regulated.

However, those of us promoting financial performance standards still find considerable challenges when encouraging the revision and adoption of new financial standards, particularly since there is a revision and update to current standards underway.

What can be learned from the work of social performance advocates, particularly in terms of reaching out to stakeholders with targeted and consistent messages?

First, the challenge: The SEEP Network, an international membership association based in Washington, DC, has launched a revision of the SEEP Framework for Reporting, Analysis, and Monitoring—a tool for MFIs and stakeholders to generate comparable and internationally accepted financial information. The Microfinance Industry Reporting Standards Initiative is a formal mechanism to maintain and update the standards.  This is the first time in 6 years an update has taken place. 

Oikocredit's New Department: Social Performance and Financial Analysis

 

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.
 

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.

Hand in Hand: Financial and Social Performance

Guest Post by: Cécile Koller
Head of Research, responsAbility Social Investments AG

 

The 2009 Microfinance Banana Skins Report identified credit risk as the number one threat to the microfinance market, while only one year earlier credit risk ranked tenth on the list. What does this change in perceived risk have to do with social performance? The seemingly purely financial risk is putting microfinance’s core mission at stake, which is to lift people out of poverty by providing access to financial services. Credit risk thus is of equal importance for an MFI’s financial as well as social performance.

 

Photo credit: responsAbility Social Investments AG 

The sharply increased awareness for credit risk is due to real effects of the economic crisis on MFIs. However, the crisis only uncovered what has already been inherent in the market: a growing risk of over-indebtedness. Thus implicitly, the results of the report call upon the social responsibility of both funders and MFIs by stating that the increase in credit risk is a “self-inflicted risk, caused both by the sharp growth in microfinance lending in recent years due to rising competition, and poor management of credit risk such as inadequate credit assessment (and) multiple borrowing.”

Innovating Microinsurance

Guest Post by: Craig Churchill - Head of the Microinsurance Innovation Facility, International Labour Organization (ILO)

 
MiBanco, Peru, and the insurance company it now owns, Protecta.

Craig Churchill is the head of the ILO's Microinsurance Innovation Facility, launched in 2008 with a grant from the Bill & Melinda Gates Foundation to promote better insurance products for more low-income households. In this post, he evaluates the pros and cons of implementing microinsurance policies, and offers specific guidelines that MFIs can follow to increase their leverage and negotiating power.

Many microfinance institutions (MFIs) are looking beyond credit to see what other financial services they can offer their clients, and in those discussions insurance invariably is raised as a possible option. But should an MFI get involved in offering insurance?

When microfinance institutions are interested in insurance, their primary motivation is often to reduce their credit risk in the event that borrowers or their family members experience death, illness or other losses. If insurance can help protect the households in such circumstances, it will indirectly safeguard the MFI’s portfolio.

Another significant motivation behind the interest in insurance is to improve the welfare of their clients. MFIs typically have dual missions to alleviate poverty or promote economic development while generating a profit (or covering their costs). The social mission of improving the welfare of poor households can be enhanced through the protection provided by insurance.

There are also a number of legitimately commercial reasons why MFIs might be interested in providing insurance, such as enhancing retention, improving product profitability, diversifying their income streams and reaching out to new markets.

Worse than a War Zone: Sogesol Assesses the Damage in Haiti

Guest post by: Melissa Lumpkin, ACCION International

 

Melissa Lumpkin is a member of ACCION’s Africa & Haiti Global Programs team.  Based in Washington DC, she is the project manager and board representative for ACCION’s partner in Haiti, Sogesol.  She can be reached at mlumpkin@accion.org.

Anyone who has experience living, traveling or working in Haiti will tell you that life for most Haitians is tough – and this on a good day.  The impact of last week’s earthquake has been catastrophic and the country will face immense challenges in rebuilding.

For the past decade, ACCION has worked with Sogesol, the microfinance arm of Haiti’s largest bank, to bring microfinance services and hope for a better future to Haiti’s self-employed poor. Over the past week, we’ve remained in close communication with the President and Directeur Général of Sogesol. The DG confirmed that she, along with several staff and ACCION’s resident advisor, were at the Sogesol headquarters in Petion-Ville when the earthquake hit. Fortunately, they were able to get out of the building and safely home. Yet, a disaster of this magnitude leaves no one untouched – all have lost many close friends and witnessed widespread destruction. Our own resident advisor wrote, “Melissa, the conditions here in Haiti are unimaginable. Please… whatever ACCION can do to help.  It is worse than a war zone.”   

MFIs Respond to Disaster: Fonkoze in Haiti

Posted by: Leah Nedderman

Leah Nedderman is a microfinance consultant based in Washington, DC and former Director of Social Performance Management for Fonkoze.  She can be reached at Lnedderm@gmail.com.

As a former Fonkoze employee and resident of Port-au-Prince, I have a sense for the catastrophe that has occurred, and the challenges that lie ahead for Fonkoze and other institutions who serve the poor of Haiti. 

This afternoon, I spoke with Fonkoze employee Natalie Domond, where she called from a friend’s home in Port-au-Prince. She and the other Fonkoze staff safely exited the central office in Port-au-Prince on Tuesday. Outside, dust and screams filled the air. She recounted gruesome scenes at every turn.

Institutions like Fonkoze, who exist to provide services to the poor, will require support now more than ever.  Just fifteen months ago, Haiti was hit by several powerful tropical storms and a hurricane. Fonkoze responded by mobilizing leaders in forty communities throughout the country to assess the damage, account for members, and generate information for relief agencies. Almost immediately, Fonkoze was able to offer new financial products to affected families so that they could get their micro-businesses up and running again, re-stock their goods, and begin recovering their livelihoods. I am confident their response to the current crisis will be just as resolute.

The name Fonkoze stands for “Shoulder to Shoulder Foundation” in Haitian Creole. It reflects the commitment of the institution and its staff to standing in solidarity with the Haitian poor. This commitment comes from loan officers who work with rural women to establish small businesses in a despondent economy, in the dogged determination of literacy trainers who travel sweaty miles to hold classes for illiterate members, and in the steely resolve of the members who toil year after year to provide food and schooling for their children.

Today, Natalie remarked that this incredible event is a defining moment for the international community. She believes that with assistance, Fonkoze will recover, and will be a leader in the recuperation of the country. 

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You can help Fonkoze by making a donation to the Fonkoze USA “Earthquake Relief and Rehabilitation Fund” today. To follow Fonkoze earthquake news and updates click here.

Social Responsibility to the Community: Improving Workplace Safety in Egypt

Posted by: Richard Carothers, PPIC-Work project and President of Partners in Technology Exchange Ltd.

Even items in a small family-owned restaurant can cause significant injuries, especially to young workers

In a previous post, “Defining Social Responsibility to the Community: Occupational Safety and Health,” guest contributor Dr. Richard Rinehart outlined some of the ways in which hazards might present themselves in businesses supported by microloans. In this post, guest contributor Richard Carothers explores an example of how an MFI can assist in improving workplace safety.

The PPIC-Work project, working with the Egyptian Association for Community Initiatives and Development (EACID), has begun to develop a pragmatic approach for improving workplace safety that can be incorporated into routine visits by loan officers. Dual purpose loans provide the basic support for the business as well as additional funds to cover the costs of improving workplace safety.