Social Performance Indicators Blog

Socially Responsible Investors: The MFI Perspective

Posted by: Katherine Oglietti and Taea Calcut

Over the past three weeks, the Social Performance Indicators Blog has presented guest posts and interviews from socially responsible investors who spoke about the relationship between financial and social performance and how their companies promote social returns on investment. But what is the MFI perspective on socially responsible investments? To answer this question, we recently asked five MFIs from around the world that work with our featured investors and other socially-oriented firms to discuss their own experiences with the due diligence process. Specifically, what aspects of social performance do MFIs find investors to be most interested in assessing? Do investors’ priorities align with the MFIs' missions? Do MFIs see socially responsible investing as a means to contribute to the achievement of their social goals?

The majority of the MFIs interviewed affirmed that investors evaluate social performance as part of the due diligence process, but one mentioned that some investors took social performance as a given and did not evaluate it. When asked which social performance indicators the investors were most interested in assessing, MFIs gave a variety of answers, demonstrating, as one MFI put it, that “investors generally look at the majority of the indicators, since ultimately they are looking for a balance between financial, social, and environmental parameters.” They did, however, state that indicators of interest to the investors were among the 22 core indicators standardized by the Social Performance Task Force (SPTF) and captured within the MIX Social Performance Report.

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.
 

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.

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.”

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).

Interests and Roles of Investors in Social Performance Measurement and Management

Posted by: Taea Calcut

Site of one of BlueOrchard’s Social Performance Due Diligence pilot tests
Photo © BlueOrchard, Bosnia and Herzegovina 

As microfinance extends its reach worldwide, it increasingly attracts the attention of "socially responsible" investors. But how important really are social performance indicators such as client protection and outreach to the poor respective to financial returns in the eyes of investors?

Over the coming weeks, the Social Performance Indicators Blog will focus on the interest and role of investors in social performance measurement and management. Using guest posts by microfinance investment vehicles such as MicroVest, ResponsAbility, and BlueOrchard, we will explore issues such as what social performance indicators are of interest to investors, what roles those indicators play in investors’ due-diligence processes, and the extent to which MFIs’ social performance reporting influences investment decisions. We will also consult microfinance institutions to gain investee perspectives on investors' expectations for social performance. Given the growing influence of investors in microfinance, we expect these issues and others will fuel lively debates – be sure to stay tuned and join the discussion!

How Transparency in Disclosure of SP Indicators will Positively Impact Clients

Posted by Micol Pistelli

One of the questions raised in the panel: “Taking stock of microfinance: Does it really help the poor?” held last week at Columbia University was to what extent increased transparency in disclosure of SPTF/MIX social performance indicators will positively impact clients.

The SPTF/MIX social performance indicators, if properly tracked and integrated into an MFI’s operations, can certainly help the institution better meet clients’ needs. The disclosure of such information on a public platform such as MIX Market aims to improve transparency of information and data analysis in the industry, with the ultimate goal of improving allocation of funds towards truly socially-oriented MFIs that best serve the world’s poor.

The purpose of measuring social performance over time is so that MFIs can make internal changes in order to meet client needs. MFIs that have begun to track social performance information such as client retention, poverty level of clients, and clients’ over-indebtedness, and have then used this information to adjust their internal policies and strategies, have already experienced positive changes in their program’s outcomes. Some of these stories have been documented in the SPM Practice Guide, Putting the Social into Performance Management.

Social Performance Management: A Response to Three Worries in Microfinance

 

Posted by: Tomás Rodríguez Alas, 

Coordinator of  Program MISION of Red Centroamericana de Microfinanzas (REDCAMIF)

(To read the original article in Spanish, click here).

Three current events are occupying much of the attention of microfinance institutions and networks in Central America:

• the attempts by governments to regulate microfinance activities

• the decrease in resources from many investors owing to the financial crisis

• problems with client debt repayment owing to this crisis

Microfinance Regulation

Microfinance institutions and their networks are not necessarily against the creation of regulations in the microfinance sector. Such regulations could in fact render more transparent transactions as well as provide for more security in client operations within the microfinance institutions. The point of conflict, in most countries, is the parameters with which microfinance operations are regulated, where such parameters adhere to the prudential norms that are applied to traditional banks.

Microfinance institutions ask that regulations be applied to the reality of the market segments where they serve. They appeal to the social nature of microfinance’s origins, in which the target population is comprised of social sectors that traditional banks do not serve: those living in poverty, women, rural inhabitants, and micro and small business owners. Moreover, they argue that microfinance contributes to the reduction of poverty and to the economic development of the sectors that microfinance serves. But while these arguments accurately demonstrate the distinguishing factors of between MFIs and traditional banks, few MFIs can back up these arguments with solid statistics, not going beyond anecdotes and isolated case studies. How many poor people have been reached? How many clients have moved out of poverty? How can we demonstrate this?

A Call for Comments: What Do You Think?

Posted by: Taea Calcut

As we mentioned in our welcome post, it is our hope that this blog becomes a vibrant forum for those interested in social performance in microfinance.  Whether you're a practitioner, donor, investor, academic, or researcher, we'd like to hear from you -- and thanks to the magic of website traffic charts, we know you're out there!  Popular issues brought to light in the comments section will be featured in Friday posts to keep the discussion flowing.

So, be sure to leave comments and let us know what you think.  For those of you with even more to share, please consider being a guest contributor to this blog.  Contact us with your ideas at spblog@themix.org.