Social Rating and Social Performance Reporting in Microfinance...Micro-Credit Ratings International Limited c/o Mador AG 602 Pacific Square, 32nd Milestone NH8 Grafenauweg 10 Gurgaon

Social Rating and Social Performance Reporting in Microfinance

Towards a Common Framework

by

Frances Sinha

for theArgidius Foundation

EDA (UK) Ltd.,inassociationwithMicro-Credit Ratings International Ltd., andtheSocial Performance Task Force Sub-committeeon

SocialRatingandReporting

Copyright©2006byEDA/M-Cril,Argidius,andtheSEEPNetwork

SectionsofthispublicationmaybecopiedoradaptedtomeetlocalneedswithoutpermissionfromEDA,M-Cril,Argidius,ortheSEEPNetwork,providedthatthepartsoranymaterialcontainingthemaredistributedfreeoratcost—notforprofit.

PleasecreditEDA/M-Cril,Argidius,andtheSEEPNetworkforthesectionsexcerpted.

Foranycommercialreproduction,pleaseobtainpermissionfromtheSEEPNetwork,1825ConnecticutAvenue,NW,Washington,DC,20009,USA,[email protected].

PrintedintheUnitedStatesofAmerica.

EDA/M-CRIL Argidius Foundation Micro-CreditRatingsInternationalLimited c/oMadorAG602PacificSquare,32ndMilestoneNH8 Grafenauweg10Gurgaon122001,INDIA Postfach348Email:[email protected] 6301Zug,SWITZERLANDTel:+91124230.9493,230.9707,405.0739 Fax:+91124230.9520 also: Co-operativeEconomyandMicrocredit Attn:Mr.KoenraadVerhagenThe SEEP Network Eikenlaan341825ConnecticutAvenue,NW 1213SJHilversumWashington,DC20009USA THENETHERLANDSTel:+1202.884.8808Fax:+1202.884.8479E-mail:[email protected]

Social Rating and Social Performance Reporting in Microfinance iii

Abbreviations and Acronyms

AMAP AcceleratedMicroenterpriseAdvancementProject(ofUSAID)CERISE Comitéd’Echanges,deRéflectionetd’InformationsurlesSystèmesd’épargne-créditGRI GlobalReportingInitiativeM-CRIL Micro-CreditRatingsInternationalLtd.(Gurgaon,India)MDG MillenniumDevelopmentGoalsMFI microfinanceinstitutionMIS managementinformationsystemMSE micro-andsmallenterprisesPPP purchasingpowerparity(basisforcomparingincome-andexpenditure-linkedpovertylinesto

reflectdifferentialsincostsoflivingbetweenandwithincountries)SME smallandmediumenterprisesSP socialperformanceSPII SocialPerformanceIndicatorsInitiativeSPM socialperformancemanagementSR socialresponsibility

The following abbreviations are introduced in this report as a suggested notation for social performance reporting and rating:

GA genderapproachMG membergovernanceinmember-ownedinstitutionsNFS non-financialservicesSG socialgoalSG-Or socialgoal—outreachSG-Sv socialgoal—appropriateservicesSG-Ch socialgoal—changeSR-CL socialresponsibilitytoclientsSR-Cm socialresponsibilitytocommunitySR-St socialresponsibilitytostaffSR-Env socialresponsibilitytotheenvironment

Social Rating and Social Performance Reporting in Microfinance �

Contents

Abbreviations iii

PrefaceandAcknowledgements vii

ExecutiveSummary 1

ObjectivesandScope 3

Context—Understanding‘SocialPerformance’ 3

ACommonFramework 5

ParametersandIndicatorsofSocialPerformance 6

SocialRating—InitiativesinProgress 11

SocialReportingbyMFIs—A‘Short’ListofIndicators 13

Social Rating and Social Performance Reporting in Microfinance �ii

Preface and Acknowledgments

Thispaperarisesfromtheworkandsharedexperiencesofdifferentinitiativesandagenciesthatoverthepastfewyearshavedirectedattentiontothesocialaspectsofmicrofinance.Representativesfromtheseinitiativessitonasub-committeeforsocialratingandreporting,appointedbytheSocialPerformanceTaskForce.Iwasaskedtoactassub-committeechair,representingM-CRIL(Micro-CreditRatingsInternationalLtd.),thefirstspecialisedmicrofinanceratingagencytodevelopatoolforsocialrating.Othersonthesub-committeerepresenttheotherthreemainspecialisedratingagencies:MicolGuarneriofMicrofinanza,EmanuelleJavoyofPlanetRating,SebastianvonStauffenbergofMicroRate;alsoRekhaReddyofACCIONInternational,AntonSimanowitzoftheImp-ActConsortium,CécileLapenuofCERISE,GaryWollerofChemonics,AllanBussardofIntegra,andMarcBergerofSIDI.

Allmembersofthesub-committeecontributedsubstantiallytothecontentofthispaper.Others,too,madesignificantcontri-butions,especiallyKoenraadVerhagenoftheArgidiusFoundationandGeertJanSchuiteofTriodos/FACETBV.

Thesub-committeewassetuptoseeifacommonframeworkcouldbedrawnup,inspiredbythedifferentinitiativesavailable,thatwasrelevanttosocialreportingandrating,butadaptableenoughtoworkwithvaryingframeworks,foci,andmethods.TheseinitiativesareprimarilytheImp-ActprojectforSocialPerformanceManagement,theCERISESocialPerformanceIndicatorsInitiative,USAID’sSocialPerformanceTool,andM-CRIL’sinitialsocialratingtool.

Consultationshavebeenmainlybye-mail,withpresentationsonbehalfofthesub-committeeattwomeetingsoftheSocialPerformanceTaskForceduringTheSEEPNetwork’sAnnualConferenceinWashington,DC,November2005,andatInterna-tionalFundforAgriculturalDevelopment(IFAD)inRome,April2006.

Themainagenciesforratinginmicrofinancearethespecialisedratingagenciesthatemergedindependentlyanddevelopedframeworksandtoolsforfinancialriskassessment.Theseagencieshavegraduallyconvergedaroundobjectiveindicatorsandagreedratios—thoughthestyleofreportingorgradingmaydiffer.Forsocialrating,assessmentischallengingand,ifanything,ismorecomplexthanfinancialrating.Becauseofthis,wewereaskedtoconvergefromthestart—toagreeonthescopeandparametersofasocialrating,thekeyindicators,andtheassessmentapproach—andthentolinksocialratingtoanagreedframe-workforsocialreportingbyMFIs.

Thispaperrepresentsa‘workinprogress’—asfaraswehavegot.Itrepresentsanattempttocoordinateourdifferentinitia-tivesandperspectives.Muchworkremainstobedone,butIhopethatthisisafairrepresentationoftheexperiencesofar,andthatitprovidesasoundbasisfordevelopingfurtherthetransparentmeasurementofsocialperformanceinmicrofinance.

IthanktheArgidiusFoundationforsupportingmyinvolvement,withspecialthankstoKoenraadVerhagenforhisencour-agementandvaluableperspective.

—FrancesSinhaEDA/M-CRIL


Social Rating and Social PerformanceReporting in Microfinance

Toward a Common Framework

Executive SummaryThispaperdrawsuponanumberofon-goinginitiativesworkingonsocialperformancetodevelopacommonframeworkforsocialratingandanindicativelistofdimensionsandindicatorsforsocialperformancereportinginmicrofinance.TheframeworkfollowstheImp-Actpathwaythatemphasizessocialperformance,notonlyasanendresult(the‘impact’),butalsoasthestepstogetthere,includingthesocialanddevelopmentvalueswidelyassociatedwithmicrofinance.Itreflectsthefollowingdefinitionofsocialperformance:

The translation of mission into practice, in line with accepted social values

Theframeworkisdividedintocontext,process,andresults,withthekeydimensionsasfollows(includingasuggestednota-tionasacounterparttothenotationnowfamiliarinfinancialperformance):

Context• Country and regional de�elopment indicators (from secondary sources)• Microfinance institution profile and financial ser�icesProcess: Policies and Strategies • Social performance management (SPM)—mission clarity; alignment of systems• Social responsibility—to clients (SR-CL), including, where applicable, gender approach (GA), member

go�ernance (MG), non-financial ser�ices (NFS)

– to community (SR-Cm);

– to staff (SR-St); and

– to en�ironment (SR-Env), from lenders to small enterprisesResults: Achievement of Social Goals (SG)• Outreach (SG-Or): Depth and breadth, may include hired (non-family) employment • Financial ser�ices (SG-Sv): Variety, appropriateness, and transparency • Change (SG-Ch): Outcomes and impact

SPM(socialperformancemanagement)hasreferencetothemissionandmodelofeachMFI.Theotherdimensionsassumegenericsocialvalues,thoughspecificindicatorsmaybeadjusted(oromitted)dependingontheMFImodel.Forexample,MG(membergovernance)isapplicabletomember-ownedinstitutions;indirectindicatorsofoutreach(forexample,hiredemploy-mentincredit-supportedenterprises)areapplicabletoMFIsthatdonotfocusonthepoor,butaimtoprovidefinancetomicro-andsmallenterprises.

Withinthisframework,severalindicatorsarealreadyavailablefrommostMFIs(microfinanceinstitutions),fromtheirexist-ingdocumentsandportfoliodatabases.VeryfewMFIs,however,haveclient-levelinformationonresults.Portfolioinformationcanbeusedtogenerateproxy(supply-side)indicators,butmorerobustinformationdependsonclient-leveldata.SuchdatamaybecollectedaspartofasocialratingorbytheMFIaspartofitsownSPMsystem.

Thecollectionofsuchinformationrepresentsasubstantialinvestmentofresourcesandinnewskills,bothforratingagenciesandforMFIs.Thejustificationforsuchaninvestmentliesintheneedtosubstantiatethedoublebottomlineinmicrofinance,sothatthereisevidencefortheclaims(the‘hype’)aboutmicrofinance,leadingbothtogreatertransparencyandtoconstructiveeffortstoimprove.But,thesubstantialinvestmentmaypayoffthroughgreaterloyaltyofclients(andevenstaffmotivation).

Ratingagenciesaretryingoutdifferentapproaches(a‘thin’approachthatusesproxyindicatorsandamorecomprehensivecollectionofadditionalclient-levelinformation).IfanMFIiscollectingclient-levelinformation,thiscanthenbevalidated(‘audited’)andusedforsocialrating,reducingtheneedforasamplesurveyaspartoftheratingexercise.

Thescoringandweightingoptions,whichareapartofrating,arealsobeingtestedasmoredataarecollectedandcanbebenchmarked.Thebasicdatacanbepresentedsothatdifferentusersmayapplytheirownweights.Weightingwillhavetotakeintoaccountnotonlytherelativesignificanceofaparticulardimensionbuttherobustnessoftheinformationcollected.Ifa

� Social Rating and Social Performance Reporting in Microfinance

higherweightisgiventoresults,thisisanargumentforinvestinginclient-levelinformation.Theframeworkandthelistofindicatorscurrentlybeingconsideredforsocialratingprovidesafoundationforselectingaset

ofkeyindicatorsforsocialreportingthatmaybeusedbyMFIsintheirannualreports(complementingthefinancialinforma-tionandaccountsalreadybeingpresented),andtofillintheblanksforsocialperformanceintheMicrofinanceInformationeXchange(MIX)Market.

Furtherconsultationandexperimentationwillberequiredwithinthemicrofinancesector,andwillinvolvedifferentstake-holders—MFIs(differentmodelsandregions),investors,raters,donors,theMIXMarket—toselectthecoreindicatorsforsocialreporting,withappropriateandcleardefinitions.

Thetaskisanalogoustotheprocessthatestablishedtheparametersandindicatorsforfinancialreporting.Thesemusthaveseemed,earlyon,relativelycomplexanddifficult.Financialindicatorsarenowestablishedandacceptedas‘basic’andstraight-forward,andareintegratedwithininformationsystemsandreporting.However,theiracceptancehastakenseveralyearswithadjustmentstoMFIdatasystemstoenablesystematicandrobustmonitoring.Thesamemayapplytosocialreporting.


Objectives and Scope

Theaimofthisassignmentwastodevelopasystematicformatforsocialratingandsocialperformancereportinginmicrofinancewhich:

• coverskeyelementsofsocialperformance(SP),withclearlydefinedtermsandindicators;• reflectscertainaccepteddevelopmentvaluesaswellasthespecificsocialmissionofanMFI;• canbeadaptedtodifferentcontextsandorganisationalmodelsofmicrofinance;• isobtainableintermsofrequiringa‘reasonable’amountofresources(timeandeffort);• isapplicableforbothinternalself-assessment(byanMFI)andexternalreporting(withexternalvalidationorauditing);

and• facilitatesbenchmarkingofsocialperformanceacrossMFIsandacrosscountries.

Theassignmenthasinvolvedconsultationsamongthedifferentspecialisedratingagencies(especiallyM-CRIL,Microfinanza,andPlanetRating)andwithotherrelatedorganisationsorinitiatives,inparticulartheImp-Act Consortium,CERISE(SocialPerformanceIndicatorsInitiative),ACCION,USAID(SocialPerformanceAssessmentTool),theTriodosBank/GlobalReport-ingInitiativeproject(TransparencyinSustainabilityandFinance),andtheGrameenFoundation(‘ProgressoutofPovertyIndex’).

Thisreportdrawsontheseconsultationsandtheexperiencesofartopresentacommonframeworkforsocialratingandsocialperformancereporting.Thiscommonframeworksetsoutthekeydimensionsofsocialperformanceandtheindicatorsthatarerelevanttoeachdimension.TheframeworkforSPreportingbytheMFIandSPratingbyanexternalagencyisthesame,thougharatingislikelytocoveralargernumberofindicators.Thedifferentinitiativesagreeonthekeydimensions,butthereissomedivergenceonwhichindicatorstoapply.Nevertheless,ithasbeenpossibletodrawupacompletelistofindicatorsfromwhichcoreindicatorsmaybeselectedforsocialreportingbyMFIs.Anindicative‘short’listispresentedhere.

Context—Understanding ‘Social Performance’

Initial Focus on Financial Performance

Thepowerofthemicrofinanceidealliesinitspotentialtocombinefinancialsustainabilitywithmeetingsocialgoals,achievingthe‘doublebottomline’offinancialandsocialperformance.Untilrecently,however,themainemphasisoftraining,research,andreportinghasbeenonfinancialperformance.Perhapsthiswasnotsurprising,giventhatmicrofinancewasintroducedmainlywithindevelopmentorganisations(‘welfare’organisations,suchasNGOsandsocieties),whichwerenowbeingencouragedtobemore‘business-like’sotheycouldaccessinvestmentfundsratherthancontinuebeingdependentupondonorgrants.Thisbroughtinnewdimensionsofaccounting,management,andreportingwhich,overseveralyears,ledtotheestablishmentofstan-darddefinitionsandtermsforreportingonfinancialperformance.ThesearenowalmostroutinelyincludedintheannualreportsofMFIs;nearly700MFIsreportthemtotheMicrofinanceInformationeXchange(theMIX).1SpecialisedratingagenciesapplytheseindicatorstothecreditratingsofMFIs.

Whathappenedtosocialperformance?MFIsincludesocialgoalsintheirmissionstatement,butfewreportontheirachieve-ment.Partofthereasonforthisdisinclinationliesintheconceptionofsocialperformanceprimarilyintermsofimpact.Impact,technically,isdefinedas‘changethatcanbeattributedtotheintervention’.Assuch,impactassessmentrequiresverycarefulresearchandinvolvessubstantialresourcesandtimeandquitecomplexanalysis(whichisnotdisputed).Itisnotsurprising,then,thatthissortofresearchandreportingwaslefttothespecialists,whilethemicrofinancesectorconcentratedonmorepracticaltasks.

Unpacking the Concept of ‘Social Performance’

Someimportantnewinitiatives,however,haveexploredsocialaspectswithanewdefinitionofsocialperformancethatincludesimpactastheend-goal,butspecificallyunpacksthestepsandpracticestakentogetthere.Thefocusshiftsfromprovinganendresulttomanagingandreportingonthosestepsthatarelikelytoleadtopositivesocialoutcomes.Socialperformanceisseennotonlyasaresultbutastheprocessofachievingthatresult—andthiscanbereportedon.

ThetwomaininitiativesbehindthisshiftaretheImp-ActprogramandtheCERISESocialPerformanceIndicatorsInitiative(SPII).TheImp-ActprogramsetouttoestablishwhatMFIscoulddotoimprove(andprove)theirimpact.Socialperformance

1. The MIX Market is the global microfinance information marketplace, providing financial data and profiles on microfinance institutions and the microfinance.TheMIXMarketistheglobalmicrofinanceinformationmarketplace,providingfinancialdataandprofilesonmicrofinanceinstitutionsandthemicrofinancesectorontheInternet,athttp://www.themix.org.


wasdefinedasthe effective translation of an institution’s mission into practice.Thisdefinitionemphasizesthatsocialperformanceisnotonlytheendresult(theimpact)butadeliberateprocessofgettingthere.Itreflectstheconceptofanimpactpathway(derivedfromtheconceptualframeworkforimpactassessmentresearch),anchoredinmissionandleadingtochange,butcon-tainsseveralstepstoworkthroughsoastoachievechangesystematically(i.e.,‘putintopractice’).

Theimpactpathwaycanberepresentedasanarrow,withthemainshaftrepresentingtheMFI’sgovernance,management,andstrategicsystems—theprocess;thearrowheadrepresentstheresults:reachingtargetclients,meetingclients’needsinlinewiththeircapacities,andultimatelyachievingimpact(seefigure1). Thearrowpointsinonedirection,butthereisanitera-tiveflowofinformationabouttheresults(representedbythedottedlineinthefigure)feedingbackintodecisionmaking.ThisenablesanMFItokeeptrackofwhetheritisachievingitssocialmissionandobjectives,andcontributestoanoverallprocessofsocialperformancemanagement.

TheCERISEapproachadoptsthesameMFI-centereddefinitionofsocialperformance,butaddsobjectiveconceptsofsocialvalue(improvingthelivesofpoorandexcludedclientsandtheirfamiliesandwideningtherangeofopportunitiesforcommuni-ties)andsocialresponsibility(toclients,communities,staff ).ThesemaynotbeexplicitlyspelledoutinanMFI’sobjectives,butareassumedtobeimplicitandtohavebroadapplicability,whatevertheMFI’sstatedgoals.

Figure �: The Imp-Act Pathway

Information about results enables an MFI to keep track of whether it is achie�ing its social mission and objecti�es. It feeds back into systems appraisal and design as part of an o�erall process of social performance management.

Source: Adapted from Imp-Act Guidelines, http://www.ids.ac.uk/impact/publications/guidelines/Guidelines_Text.pdf

Whose Values?

OneofthebiggestchallengesforsocialratingandreportingiswhetheritispossibletoagreeoncertaingenericvaluesthatapplytoallMFIs,toenabledirectcomparisonand‘benchmarking’acrossdifferentcontextsandmodels.Ratingnecessarilyimpliesthattherearecertainstandardsorvaluesthatprovidethebenchmarksagainstwhichtoassessanorganisation.Increditrating,mea-surementsandratiosforefficiencyandsustainabilityhavebecomeclear;indicatorsforgoodgovernance,managementsystems,andcontrolhavealsodevelopedasinformationaboutthemhasbeencollected.ThesestandardsapplywhateverthemissionofanMFI.Whetherexplicitornot,mostMFIsdoaimtobeefficientandsustainable,anditisnowacceptedasreasonabletoassumeso,whetherornotthisisclearlyspelledoutbytheMFI.

Incontrasttotheapplicationofuniformfinancialobjectives,somewouldarguethatsocialissuesaretoocomplexandtoovaried(‘everyMFIisdifferent’)toallowgenericsocialvaluestoemergeandbevalid.Inthisview,eachMFIisauniqueorgani-sationwithitsownspecificobjectives,model,institutionalstructure,andenvironmentandshouldthereforebeassessedprimarilyintermsofitsownstatedobjectives.ThereareMFIsthattargetwomenandthosethatworkwithmen,MFIsthattargetthepoorandthosethattargetthelargerpopulationexcludedfromformalfinancialservices(ofwhich‘thepoor’,howeverdefined,areasub-set),andMFIsthatapplyagroupmodelbasedonsocialcollateralandthosethatapplyanindividualmodel—andsomethatdoboth.SomeMFIshaveacooperativeinstitutionalstructureinwhichclientrepresentationingovernanceisacoreelement,butthismaynotbeanissueinotherorganisationalforms;someMFIsofferarangeoffinancialservices,somearepro-


hibitedbylawfromofferingsavings.Thelistcangoon.This,then,isthechallenge.Ifreportingonlyreflects

eachMFI’sspecificcircumstances,thencomparabilityandbenchmarkingareruledout,andbothratingandcommonreportingarenon-starters.Ratingandreporting,iftheyaretobeundertakenatall,havetoinvolvesomecomparabilityand‘generic’value,butatthesametime,theyhavetotakeintoaccountanMFIs’specificcircumstancesandchoices,otherwisetheyarenotvalid.2Theframeworkpresentedinthefollowingsectionshowsawaytobalanceboth.

A Common Framework

Reportingonsocialperformanceisnotjustaboutmea-suringtheresultsbutisalsoaboutthesystemsinplace,andtheactionsandcorrectivemeasuresthataretakentobringaboutthoseresults.Socialratingandreportingmustthereforelookatboth—bothprocessandresults—afeaturewhichmirrorstheworkinghypothesisofcreditrating:thatanMFI’sfinancialperformanceiscriticallyaffectedbyitsmanagerialcapabilitiesandgovernance.

Inaddition,whileeachMFIhasitsownmissionandmodel,therearecertaingenericvaluesthatapplytothe‘mannerofdoingbusiness’ingeneral,reflectingconceptsofsocialresponsibilityandcertaindevelopmentvalueswhicharewidelyassociatedwithmicrofinance.Thesearecapturedinthedefinitionofsocialvalueinmicrofinance,andarticu-latedbytheSocialPerformanceTaskForce,inbox1.

Accordingly,socialperformancemayberedefinedas:

The translation of mission into practice, in line with accepted social values

Thekeyelementsofsocialperformancereflectthisdefinitionandprovideaframeworkforsocialratingandreporting,assetoutintable1.TwoelementsrelatetoorganisationalprocessintermsofanMFI’spolicies:strategiesandsystemsputinplace(1tomanageitssocialperformanceand(2toensuresocialresponsibility—toclients,community,staff,aswellastotheenviron-ment.Threeelementsrelatetotheachievementofgoalsorresultsatclientandcommunitylevels:outreach,appropriatenessofserviceswitheffectivecommunication,and[achieving]change.

Table �. Key Elements of Social PerformanceProcess: Go�ernance, policies, and systems� Social performance management: Mission definition and strategic systems� Social responsibility: Policy and mechanisms for compliance

Results or Achievement of Social Goals: Client and community � Outreach—depth and width � Financial ser�ices—appropriateness and transparency� Achie�ement of change

Thereisaclear—andintended—overlapwiththeImp-Actpathway,asshowninfigure2.

2.ThisisthedrawbackwiththescoringmethodologyforsomeindicatorsoftheCERISEtoolandtheAMAPtool.Theybuildincertainassumptionsaboutmodelsofmicrofinanceorproducts,forexample,whicharenotapplicabletoallMFIs.

Box �. Social Value in Microfinance

The social �alue of microfinance relates to:

• impro�ing the li�es of poor and excluded clients and their families; and

• widening the range of opportunities for communities.

To create this �alue, the social objecti�es of an MFI may include:

• ser�ing an increasing number of the poor (and people excluded from financial and other ser�ices) sustainably, and expanding and deepening outreach to poorer people;

• impro�ing the quality and appropriateness of financial ser�ices a�ailable to the target clients through a systematic assessment of their specific needs;

• deli�ering such ser�ices in a cost-effecti�e way that offers low fees and fair interest rates on loans and deposits;

• creating benefits for the clients of microfinance, their families, and communities, that relate to social capital and social links, assets, reduction in �ulnerability, employment creation, income, access to ser�ices, and fulfillment of basic needs;

• impro�ing the social responsibility of the MFI towards its employees, its clients, and the community it ser�es; and

• monitoring and acting upon unintended negati�e side-effects of microfinance, such as o�er-indebtedness and multiple loans.

Source: Part of the common definition (and social �alue language) of social performance agreed upon by the Social Performance Task Force at the March �00� meeting in Paris.


Figure �: Social Reporting and the Imp-Act Pathway

Infinancialperformancereporting,thereareagreednotationstoidentifythekeyindicatorsandratios,suchas,forexample,ROA(returnonassets),FSS(financialself-sufficiency),OSS(operationalself-sufficiency),OER(operationalexpenseratio),andPAR(portfolioatrisk).Theseacronymsandtheirmeaningsarewellestablishedandwidelyused.Socialperformancereportingneedsitsownnotation.Suggestedacronymsforthekeysocialdimensionsareshowninbox2.

Box2alsosetsoutthebalancebetweenanMFI’sownmissionandmandateandgenericsocialvalue.SPMhasreferencetotheindividualMFI,andassessesmissionclarityandsystemsalignmentwithreferencetotheMFI’sarticulatedmissionandmodel.Forexample,itshouldnotbeassumedthateachMFItargetspoorclients(thoughmostsaytheydo,includingbanksinthissector).Somemaytargetareas,butnotparticularhouseholdswithinareas(forexample,cooperatives,whichshouldfollowtheprincipleofopenmembership).Strategicsystems,humanresourcepolicies,andinformationsystemsshouldsupportthemandateofeachorganisation,whichisthereferenceforassessment.

SomedimensionsareapplicabletocertainMFImodelsandnottoothers:undersocialresponsibilitytoclients,thereareissuesofgenderapproach(GA),membergovernance(MG),andnon-financialservices(NFS)—whichareapplicabletoMFIsthattargetwomen,oraremember-ownedinstitutions,oraimtoprovide(orlinkclientswith)non-financialservices.Thesedimensionsarenotassumedtobeapplicabletoall(thoughthereisacaseforgenderequityasauniversalvalue).

Otherdimensions,alsoshowninbox2,maybeassumedtohavegenericsocialvalue:clientprotection(asthekeyelementofsocialresponsibilitytoclients—SR-CL)andtheothersocialresponsibilities(SR-Cm,SR-St, SR-Env).Twosocialgoals—out-reach(SG-Or)andappropriatefinancialservices(SG-Sv)—reflectsocialvaluesassociatedwithmicrofinance:reachingsub-stantialnumbersofthepoorandexcluded,andprovidingappropriatefinancialservicesinlinewithclientneedsandcapacities.Thethirdsocialgoal,achievingchange(SG-Ch),reflectswiderdevelopmentobjectives(suchastheMillenniumDevelopmentGoals)andmayalsobelinkedtoanMFI’sspecificobjectives.

Thiswillbecomeclearerasthedetailsofparametersandindicatorsrelevanttoeachdimensionarediscussedinthenextsection.

Parameters and Indicators of Social Performance

Socialperformancerelatestoprocessandresults;italsorelatestocontext.Thissectionsetsoutthemainparametersandindica-torsforthesethreeaspectsandthedifferentdimensions.Theindicatorslistedarecurrentlyinuseorbeingconsideredbythespe-cialisedratingagencies.Theyalsoreflectrelatedinitiatives,aslistedinthe‘ObjectivesandScope’sectionabove.Someofthemorecommonlyusedindicatorsarelistedinbox3below.Thelistmaynotbecomplete,butitreflectscurrentthinkingandapplication.


Context

ContextinformationisimportantfordescribingkeyfeaturesofanMFIandtheenvironmentinwhichitoperates.Themainfeaturesandindicatorsofcontextare:

• socio-economicdatafromsecondarysourcesaboutthecountryandregion(s)wheretheMFIoperates,includingGDP/GNIpercapita,nationalpovertyline,percentofpopulationbelowthenationalpovertyline,percentofpopulationwithaccesstobankingservices,HDI(humandevelopmentindex)indicators,andmarginalcommunities/population;

• theregulatoryenvironment;• theMFI—evolution,institutionalform,model,andmission;• theMFI—portfoliosize,totalsavings(ifapplicable),numberofclients(borrowersandsavers),percentofwomenand

men,percentfromrural,town,orcity;and• theMFI’sfinancialservicesandproductsandclientaccess(bytypeofproduct,byhowaccountsaredistributedduring

differentcyclesandbyyears[inpercents],andbymean/medianamounts).

Process—Organisation Level

Keyelementsofprocessattheorganisationlevelaresocialperformancemanagementandsocialresponsibility.IndicatorsofthesedimensionsarebasedoninformationanddataavailablefromtheMFI.

SPM—Social performance management referstoclarityofmissionandthealignmentofanorganisation’sstrategiesandsystemstoitssocialmission.Thisdimensionincludes:

• clarityandcommunicationofmission;• establishmentofspecificsocialobjectives;• alignmentoforganisationalsystems(humanresources,incentives,andmanagementinformationsystems)withobjectives;• monitoringandreportingoftheachievementoftheseobjectives(through,forexample,povertyscoringofclients,con-

ductingmarketresearch,trackingdrop-outs,settingupimpactstudies);and• useofsuchinformationforstrategicdecisionmaking.

Box �. Social Dimensions: Acronyms and Reference

TENTATIVE ACRONYMS *

DIMENSIONSREFERENCE

MFI Mission/Model

Social Value

Process: Governance,policies,andsystems� SPM Social performance management •

�

SR-CL

GA

MG

NFS

Responsibility to clients—client protection

Gender approach

Member go�ernance—if a member-owned institution

Non-financial ser�ices (direct pro�ision or linkage)

•

•

•

•

•

•

SR-Cm Responsibility to community •SR-St Responsibility to staff •

SR-Env Responsibility to en�ironment •Results or Achievement of Social Goals: Clientandcommunitylevels

� SG-Or Social goal—outreach •� SG-Sv Social goal—ser�ices •� SG-Ch Social goal—change • •

* This is a first attempt at de�eloping a notation for social performance to be the counterpart of the notation for financial performance (FSS financial self-sufficiency, OSS—operational self-sufficiency, OER—operating expense ratio, PAR—portfolio at risk, etc.).


SR—Social responsibility has fourdimensionswhichareapplicableattheorganisationallevelintermsofpoliciesandmech-anismsforcompliance.

SR-CL—Responsibility to clients isafundamentaldimensionandisincreasinglybeingrecognisedassuch,especiallytotheextentthatMFIsarecateringmoretopoorerclientswhomaybeilliterateandlackfinancialskills.Itrefersprimarilytoclientprotectionandincludesissuesof:

• fairandtransparentpricing;• effectivecommunication(includingteachingfinancialliteracytoclientsandadaptingcommunicationmethodstoinclude

illiterateclients);• sensitivitytoover-indebtingclients(effectivecreditappraisalandmonitoring)• ethicalbehaviourofstaff,includingappropriatedebtrepaymentpractices;• provisionforloaninsurance;and• pro-activemechanismsforclientcomplaintandredress.

Otherdimensions,detailedbelow,alsorelatetoclientresponsibility(whereapplicable).

GA—Gender approach isapplicabletoMFIsthathavewomenclients(ifnot,assomeargue,applicabletoallorganisations).Thisdimensionincludes:

• thenumberandpercentofwomenandmenontheorganisation’sboard,management,andstaff;and• whethertheMFIstrategicallytriestoaddressthesocialandeconomicconstraintsthatwomenfaceinitslocalarea(for

example,lowliteracyandlimitedaccesstomarkets).

MG—Member governanceincorporatesstrategiesforeffectivemembergovernanceinorganisationsthataremember-owned(e.g.,cooperativesandcreditunions),suchas:

• boardelectionsincompliancewithby-laws;• trainingandcapacitybuildingofrepresentativestohelpthemperformtheirgovernanceroleeffectively;• regularall-membermeetingsandattendance;and• effectivestrategiestocommunicatepolicydecisionstoordinarymembers.

NFS—Non-financial services:itisnotassumedthatanMFI,whichisprimarilyafinancialintermediary,willalsoprovidenon-financialservices(enterpriseskillsdevelopment,businessdevelopmentservices,andothersocialservices)orensurelinkagestoNFSforclients.But,someMFIshavedecidedtoofferdirectorlinkedprovisionaspartoftheirmandate.Forthosethatdo,theissuesinclude:

• whatnon-financialservicesareprovided/availabletoclients;• whatnon-financialservicesareofferedtohowmanyclientsinpreviousyear—byservice;and• whetherthereisevidenceofhoweffectivesuchservicesare.(IsittrackedbytheMFI?)

SR-Cm—Responsibility to communityisaratherbroadnotion,butitsreferencetomicrofinancemaycover:• apolicyforthetypeofactivitiesforwhichcreditisprovided,suchasthoseactivitiespromotingpositivecommunityvalue

(e.g.,start-upenterprisesandjobcreation)andthoseavoidingnegativecommunityvalue(e.g.,enterprisesemployingfull-timechildlabourandliquorvending);

• othersupporttothecommunity(investmentanddonations,asapercentofrevenues);• fundingineventofcollectivedisasters(aspercentofrevenues);and• positiveactiontoimprovelocalculture,e.g.,governance,anti-corruption,andothersocialvalues.

SR-S—Responsibility to staffincludes:• stafftraining—percentofstafftrainedandnumberofdaysofstafftraining(excludingnewhires);• salarystructure(andbenefits)inlinewithcomparablesectors;• securityofworkingconditions;• fairnessandtransparencyofincentiveschemesasperceivedbystaff;and• feedbackmechanismsforstaffandtheirinvolvementindecisionmaking.


SR-Env—Responsibility to environmentislikelytobemostapplicabletofinancialinstitutionslendingtosmallandmediumenterprises,thoughitseemslessrelevantatthelevelofmicroenterprisesandlivelihoodsusuallysupportedbymicrofi-nance.Whereapplicable,itincludes:

• environmentalpoliciesappliedtocorebusinesslines;• processesforassessingandscreeningenvironmentalrisksincorebusinesslines;• processesformonitoringclientcompliance;and• processesforimprovingstaffcompetencytoaddressenvironmentalrisksandopportunities.

Results—Client and Community Levels

Theresultsofmicrofinanceareofprimeimportanceandultimatelydependongoodinformationattheclientlevel.Suchinfor-mationisnotnecessarilyavailabletoanMFI,anduntilrecently,thereportingofresultshasdependedon‘proxy’indicators,basedonportfolioinformationthatMFIsmaintainaspartoftheirfinancialmanagement.Theseproxyindicatorsareincludedhere,alongwiththedirect(client/communitylevel)indicatorsthatcanprovideamorerobustpicture.

SG-Or—Outreach—depth and width referstooverallnumberofhouseholdsserved,theirlocationinmoreremoteorunder-developedareas,andtheirsocio-economicprofilesrelatedtopovertyandexclusion.Thisdimensionmayrefertothetar-getingapproachoftheMFI,butisnotlimitedbyit.Inotherwords,theindicatorsapplytoallMFIs,whatevertheirtargetorapproach.Thisenablescomparisonwithintheindustryonafundamentalissueofsocialvalue—depthofoutreach,orhowmanyclientsofmicrofinancearepoorwhentheyjoinanMFI.

Depthofoutreachmaybeindirect,includingexpandedmarketopportunitiesandemployment(thosehiredfromoutsidetheclienthousehold)incredit-supportedenterprises.TheseindicatorsareparticularlyrelevanttoMFIsthattargetSMEsanddonotspecificallyfocusonthepoor.(Indirectemploymentisespeciallyrelevanthere;expandedmarketopportunitiesaremoredifficulttoassess.)Relevantindicators,therefore,include:

Proxy indicators of outreach

• Minimumamountrequiredtoopenasavingsaccount(ifsavingsoffered)• Averageloansize(ofnewclients)asapercentageofper-capitaGDP/GNI• Averageloan/per-capitaGDP(incorrelationwithGINIindex)• Percentageofloanslessthan(a)US$300inAsia,Africa,andMiddleEast;(b)$400inLatinAmericaandtheCarib-

bean;and(c)$1,000inEuropeandCentralAsia• Calculatedloaninstallmentamount,relativetoper-capitaGDP

Direct outreach�

• Percentofclientsinareaswithlowerthanaverage–socio-economicdevelopment(povertylevels,illiteracy,HDI,infra-structuredeterminedbyusingsecondarydata)

• Percentofclientsbelongingtomarginalcommunitiesorwithmarginalcharacteristicsrelativetoshareinlocalpopulation(asrecognisedindifferentcountries,e.g.,theilliterate,casuallabourers,female-headedhouseholdswithnoadultmaleearner)

• Percentofrecentclienthouseholdswithoutasavingsaccount(bank,postoffice)• Percentofrecentclienthouseholdswithoutaccesstoformalcredit(bank,cooperative)• Percentofrecentclientsfromhouseholdslivingbelowinternationalpovertyline(lessthanUS$1/day,lessthan$2/day

purchasingpowerparity—PPP),andbelownationalpovertyline• Percentofrecentclientsfromhouseholdswhoareverypoor(lessthan$0.50/dayPPP;morethanhalfoverthenational

povertylineoranyotherindexofqualityoflife,including,forexample,poorlivingconditions,owningminimalassets)• Estimatedtotalclientsfromhouseholdsexistingonlessthan1$/dayPPPwhentheyjoinedtheprogram• Numberoffamilymembers(men,women,andchildren)workingincredit-supportedenterprises(fulltimeandpart

time)

3.Povertyoutreachintermsofkeyindicatorsofpovertyandfinancialexclusionshouldideallybeassessedfornewclientsorthosejustrecentlyjoinedtocapturetheirstatus(orratherthestatusoftheirhouseholds)atthetimetheyjointheMFI.Thisisbecausethepovertystatus(forexample,ownershipofassets,in-come)ofclienthouseholdsmaychangeasaresultofuseofmicrofinanceservices.

�0 Social Rating and Social Performance Reporting in Microfinance

Indirect outreach

• Numberofhired(non-clienthousehold)employees;men,women,andchildrenincredit-supportedenterprises(fulltimeandparttime)

• Profileofhiredemployees:theirhouseholdpovertylevel,whatpercentbelongtomarginalcommunities

SG-Sv—Financial services—appropriateness and transparency—refertotheextenttowhichanorganisationismeetingitsclients’financialneeds(withdifferenttypesofservicesandproducts),inrelationtotheircapacities(cashflowsandopportuni-ties).ItalsoincludesacheckonSR-CLatthefieldlevel,toconfirmwhetherclientsarefullyawareofthetermsandconditionsofMFIproducts,andtheirviewsonandexperiencewithservicesoffered.

Proxy indicators—range of products and services (with reference to the regulatory environment)

• Voluntarysavings(iflegallyallowed),designedforspecificpurposes• Distinctloanproducts(forenterprises,housing,education,emergencies)• Varietyofcollateralaccepted• Flexibleterms• Portfoliodistributioninuseofloan• Insuranceproducts(life,health,asset),directlyprovidedorlinkedtoinsurancecompanies

Direct indicators

• Effectiveinterestrates,comparedtoalternative,accessiblecreditoptions• PercentofclienthouseholdswithamemberinanotherMFI• Percentofclienthouseholdsborrowingfrominformalmoneylenderinpreviousyear• Clienthouseholdindebtedness(allsources),asaproportionofhouseholdincome• Clientexit:drop-outrate(methodofcalculationdefined)• Clientawareness:

– Savings(ifapplicable),terms,interestpayable,owntotaldeposit– Credit—rangeofproductsandterms,includingfees,interestrates,anddistributionofloaninstallmentamountbetweenprincipal

andinterest– Insuranceavailabilityandterms– Passbooksuptodateandkeptbyclients– Procedureincaseofcomplaint

• Clientfeedback:– Meetingsandfrequencyoftransactions– Savingsterms– Creditproducts,amounts,timeliness– Insuranceutility,experience– Non-financialservices(ifapplicable)

• Reasonsfordrop-out

SG-Ch—Change isnotdefinedintermsofthe‘impact’thatcanbeattributedtoamicrofinanceprogram.Impactassess-mentsareinterestingandcanbeusefulto‘prove’whatmicrofinanceservicesachieve.Ifthereisanimpactassessmentofamicro-financeprogram,thenthefindingsshouldbeincluded.Evenwithoutresearchonfullimpact(research,forexample,withoutanon-clientcomparisongroup),itispossibletodocumentortrackchangesattheclienthouseholdlevel,whichmayplausiblyrepresentatleastsomecontributionfromaccessingmicrofinanceservices.Suchfindingsmaybeincludedunderthisdimension,providedtheyappearvalid.Indicatorsincludefindingsofanyrecent(withinpasttwoyears)studiesofchangesattheclientandcommunitylevel,aswellasthesebelow:

Social Rating and Social Performance Reporting in Microfinance ��

Change indicators that may be linked to the MFI’s specific objectives, for example:

• Diversificationoflivelihoodsandnewenterprises• Increaseinhouseholdincome• Managementofenterprisesbywomen• increaseinemployment(self-employmentandhiredemployment,menandwomen)andearnings;otherbenefitstohired

employees• Reducedhouseholddependencyonmoneylenders• Sustainabilityoflivelihoodsandgreaterfinancialinclusion:percentofloanclientswhohaveevolvedfromtakingloansto

makingdeposits.

Change indicators that may be linked to wider development objectives, as reflected in the Millennium Development Goals (MDGs):

• Povertyreduction(percentofclienthouseholdsmovedoutofpoverty)• Universalprimaryeducation(percentofschool-ageboysandgirls,inclienthouseholds,thatgotoschool)• Women’sequalityandempowerment• Improvedhealth(andaccesstomedicalcare)

AcoupleofinitiativesaredevelopingindicatorsandtoolstoenableMFIs(withtheirownstaff )tocollectinformationabouttheirclientsthemselvesinarelativelytrouble-freeandroughlyaccuratemanner.IndicatorsrelevanttotheMDGsarecurrentlybeingtestedundertheFordFoundation-CGAPSocialIndicatorsProject.Aspartofthisinitiative,GrameenFoundationUSAispilotinga‘ProgressoutofPovertyIndex’fordifferentcountrieswithitsMFIpartnersindifferentcountries.Theindexhasasetofindicatorswhicharesimpleandeasytomeasure:ittakesaloanofficerjust4–5minutestocollecttheinformationfromaclientaspartofstandardloanappraisal.TheindicatorsarestatisticallycorrelatedwiththeUS$1/day-povertyline,basedonnationaldatasets.Thisresultsinaquickyetrobustassessmentofthelikelihoodofclientpoverty,whetherbyMFIstafforbyanexternalagency,thatenablesanMFItotrackitsdepthofoutreach(throughthepovertyscoreofclienthouseholdswhenjoiningtheMFI)andthechangesinthepovertyscoreofclienthouseholdsovertime.

Social Rating—Initiatives in Progress

Thespecialisedmicrofinanceratingagenciesareexperimentingwithsocialratingasacrucial,additionalassessmentofanMFIthatwillcomplementthefinancial,organisationalappraisalofacreditrating.Itprovidesabalancedassessmentofthedoublebottomline(ifnotthe‘triplebottomline’,whereenvironmentalaspectsarealsorelevant),ratherthanjustthe‘one-sidedassess-ment’offinancialrisk.

Manyofthequestionsontheprocessofsocialperformance(SPM,SR)canbeeasilyincorporatedintotheMFI-leveldiscus-sionsthatarealreadyapartofcreditratings.Asocialratingcancoverallthedimensions,usingarangeofindicators,aslistedinbox3.

Insocialrating,thereremainperhapstwomainchallenges:scoringandweighting,andthemethodofcollectingdata.Bothofthesearelikelytobeinfluencedbythepotentialusersofasocialrating:investors,donors,andMFIsthemselves.

How—and Whether—to Score?

Onthequestionofscoring,‘rating’impliesanassessmentofperformanceandapplyingmeasuresandindicators,whicharescoredagainstbenchmarkstandards.Benchmarkstandardsareyettobedevelopedthatcancomparemanyoftheindicatorsacrossdifferentregions.Somestandardsareavailableforsomeregions.Forexample,insouthAsia,therearestudiesthatshowtheaveragedepthofoutreachofMFIs(thepercentofclientswhohaverecentlyjoined,whoarepoordefinedaslivingbelowtheinternationalUS$1/daypovertyline)tobeintherangeof25–35percentonaverage.4Thislevelissimilartoorslightlyabovethepovertyratioreportedfordifferentcountriesintheregion,butnotsomuchaboveasapparentlyassumedinstatementsabout

4.StudiesconductedbyEDARuralSystemsinIndia(2002–2005,21MFIs),Bangladesh(2004–2005,12MFIs)andMyanmar(2005).PovertyassessmentofclientswhohadrecentlyjoinedMFIswasbasedonatriangulatedmethodologyforpovertyassessment:participatorywealthranking,indexscoring,andper-capitaincome(cashandinkind)benchmarkedtothenationalpovertylineandtheinternationalUS$1/daypovertylineatpurchasingpowerparity(PPP).SimilarpovertylevelsamongstMFIclientsarereportedinUSAID,‘DevelopingandTestingPovertyAssessmentTools:ResultsfromAccuracyTestsinBangladesh’,IRISCenter,UniversityofMaryland-CollegePark(Washington,DC:USAID,2005);andJamesCopestakeetal.,Money with a Mission,vol1,‘MicrofinanceandPovertyReduction’(Bourton-on-Dunsmore/Rugby/Warwickshire,UK:ITDGPublishing,2005).

�� Social Rating and Social Performance Reporting in Microfinance

the(100percent)povertyoutreachofmicrofinance.Basedonthis,M-CRILhassetits‘optimal’scorefordepthofoutreachatlessthan60percentofrecentclientslivingbelow$1/day.Thisseemstheappropriatebench-markincountriesofSouthAsiaandAfrica.Inregionswherethecostoflivingishigher,the$2/daypovertylinewouldbetherelevantstandard,asappliedbyACCIONanditsnetworkpartnersinLatinAmericaandtheCaribbean.5

Forsomeindicators,itisrelativelyeasytofigureoutthecut-offsfor‘optimal’,‘average’,and‘weak’—e.g.,foroperationsinextremelypoorareas,membergovernance,orevengenderratios(thoughthereareculturalvariations).Inthepresentearlyphaseofsocialrating,ratingagencieswillpresentthe‘basedata’,withorwithoutscores,astheygraduallybuilduptheirdatabase.

Similarly,onthequestionofweightsbetween—andwithin—thedimensions,oneapproachcurrentlyinfavouristopresentratingresultsinsuchawaythatuserscanapplytheirownweightingtotheratingfindings.Forexample,moreresults-orientedsocialinvestorsmightgivemoreweighttooutreach,appropriatenessofservices,andchange,thantomanagerialsystemsleadingtotheseresults.

Data Available + Additional Data?

ThesecondissueistowhatextentratingsshouldrelyondataavailablefromanMFI.Ideally,ratingsshouldbebasedonanMFI’sowndata,butavailabledataintheMISisusuallygearedtowardfinancialanalysisandreporting(andthat,ofcourse,iswhatratersasfinancialanalystsaretrainedtouse).

Thereisneverthelessachoicetobemadeinsocialrating—betweena‘thin’approachandacomprehensiveapproach.A‘thin’methodologyreliesonexistingdataandusesproxyindicatorstoreflect‘results’—forexample,usingaverageloanoutstandingasaproportionofcountryGNPfordepthofoutreachornumberoffinancialproductsforappropriatenessofservices.ThisistheapproachemployedbyUSAIDSocialPerformanceAssessmentToolandtosomeextentbyCerisetoo.Amorecomprehensiveapproachusesavailabledata,butintheabsenceoffieldlevelinformation,prefersnottorelyonportfolio-based(supply-side)proxies,whichprovideaverylimitedpictureofthedemandside(since,forexample,smallloansizesdonotexcludethenon-poor,andnumberofproductsisnotnecessarilythecriticalfactorinmeetingthefinancialneedsandcapacitiesofdifferentclientsegments).6Acomprehensiveapproach,therefore,involvestheadditionaltaskofcarryingoutafieldsurveytoobtaininformationdirectlyfromclientsforSG-OrandSG-Sv.

TheratingsurveydoesnotincludeSG-Ch(whichismorecomplex),butthedataobtainedtoassessthepovertylevelofrecentclients(includinghouseholdper-capitaincomesandothersocio-economicindicatorsofpoverty)canserveasabaselineforalaterfollow-upsurveyofthesamesample.Suchafollow-upsurvey(whichcouldbepartofasocialratingupdate)wouldprovideevidenceforchangeovertime.Though,ifanimpactassessmentoftheMFIhasbeenundertakenbyanyagency,andtheimpactfindingsarewellresearched(valid/robust)anduptodate(fresh),suchfindingswouldbeincludedaspartofthesocialratingforSG-Ch.

Iftheuserofasocialratingisinterestedintheresultsofmicrofinance,asreflectedintheideaofastrongweightingoftheresultsdimensions,thissuggeststheneedforhavingmorerobustinformationsuchaswouldbeavailablefromaclientlevelsurvey.Thisdoeshoweverimplyanewskillsetforraters,andentailsahighercostbecauseoftheadditionaltimeinvolved.M-CRILusesaminimumsamplesize(127clientquestionnaires)forstatisticalconfidenceinquantitativefindings.7

5.Povertyassessmentiscomplex—bothindefinitionandmeasurement.Theinternationalpovertyline(US$1/dayatpurchasingpowerparity)providesabroadlyacceptedandinternationallycomparablebench-mark,butitsdirectapplicationrequiresverystrongskillsbothindatacollectionandanalysis.Inresponse,therearesomeinterestinginitiativestodeveloptoolsforpovertyassessmentwhicharebenchmarkedagainstthe$1/daypovertyline,usingindicatorsthataremucheasiertorecordthanincomeorexpenditureestimates.The‘countrypovertyscorecards’beingdevelopedbytheGrameenFoundation,followingtheworkoftheIRIS/USAIDproject,havealreadybeenmentioned.Oncetested,suchscorecardswillprovideasimplemethodologyforassessingthedepthofoutreachofanMFI,andpossiblytooclientshiftsoutofpovertyovertime.ThecardswillbeausefultoolforMFIsthemselvestoapplyaspartoftheirsocialperformancemanagementandreporting.Thecardscouldalsobeusedaspartofasocialrating.

Untilsuchtoolsareavailablefordifferentcountries,directmeasurementremainstheoption,ashasbeenappliedbyACCIONandbyM-CRIL.M-CRIL’sassessmentofpovertylevelatthehouseholdlevelinvolvesaquestionnairecoveringdetailsofhouseholdincome(cashandinkind)andotherindicatorsofqualityoflife.Fromthis,dataforhouseholdpercapitaincomescanbebenchmarkedagainstthe$1/daypovertylineatPPP,adjustedforeachcountry.Theexpendituremeasure(whichisthebasisofthe$1/daypovertyline)isusuallypreferredasmoreaccuratethanincomes(sincehouseholdsaremorelikelytounderstateincomes),butitrequiresamorecomplexquestionnaireandassumesabilityfordetailedrecall.Ineithercase(expenditureorincome),whilethe$1/daypovertylineisausefulmeasurebecauseitenablesobjectivebenchmarking,thepossibilityofbenchmarkingshouldnotblindonetoitsshortcomings:itsmeasurementisboundtocontainsomedegreeoferror;thereis,afterall,notmuchpovertydifferencebetweenhouseholdswithinafewcentsofthePPPcut-off,anditrepresentsjustonedimensionofpovertyunderstoodasamorecomplexsituationofdeprivation.

6.See,forexample,ChrisDunford,‘What’sWrongwithLoanSize?’FreedomfromHunger,Davis,CA,2002;andM-CRIL,‘CanMFIsAchievetheDoubleBottomLine?’TechnicalNote4(Gurgaon,India:M-CRIL,2005).

7.TheM-CRILassessmentofpovertylevelinhouseholdsemploysaquestionnairethatasksfordetailsofhouseholdincome(cashandinkind)andotherindica-torsofqualityoflife.Fromthis,dataforhouseholdper-capitaincomescanbebenchmarkedagainsttheUS$1/day-povertylineatPPP,adjustedforeachcountry.Theexpendituremeasure(whichisthebasisofthe$1/day-povertyline)isusuallypreferredbecauseitismoreaccuratethanincomes(sincehouse-holdsaremorelikelytounderstateincomes),butitrequiresamorecomplexquestionnaireandassumesabilityfordetailedrecall.Ineithercase(expenditureorincome),whilethe$1/day-povertylineisausefulmeasure,sinceitenablesobjectivebenchmarking,thepossibilityofbenchmarkingshouldnotblindonetoitsshortcomings:itsmeasurementisboundtocontainsomedegreeoferror.Inpractice,thereisnotmuchdifferenceinpovertyamonghouseholdswithinafewcentsormoreofthePPPcutoff.Itrepresentsjustonedimensionofpoverty,whichisunderstoodtobeacomplexsituationofdeprivation.


SPM by MFIs Will Improve the Data Available

PotentiallyusefulclientprofiledatamayalreadybecollectedbysomeMFIs,aspartofatargetingapproachinMFIswithagrouplendingmethodology,forexample,oraspartofcreditappraisalsinMFIsprovidingindividualloans.However,thisinfor-mationisnotusuallypartoftheMISandmaynotinfactbecollatedatall—andthereareissuesofreliabilityrelatedtothecon-textinwhichloanofficerscollectinformation.

AsMFIsthemselvesundertakeSPM,includingtheuseoftoolsforclientlevelprofiling(reviewingandimprovingtheirexistingdatacollectionorapplyingapovertyscorecardbenchmarkedtotheinternationalpovertyline—seefootnote4),marketresearch,andmonitoringchangeattheclientlevel(household,enterprise,localcommunity),suchreportswouldbecomepartofthematerialforasocialrating.

Theirmethodsandfindingswouldneedtobeaudited(validated)aspartoftheprocessofrating,withperhapssomecross-checkingatfieldlevel(butthiswouldreducetheadditionalworkload—andcosts—ofacomprehensivesocialrating).SuchinformationwouldstrengthensocialreportingbyMFIs.

Social Reporting by MFIs—A ‘Short’ List of Indicators

Basedontheframeworkpresentedhere,thatisbeginningtobeappliedbyspecialisedraters,somesuggestionscanbemadeforsocialreportingbyMFIs—thatmakeuseofthespacescurrentlyleftblankintheMIXreportingformatandthatbalancetheorganisationalandfinancialinformationprovidedinannualreports.

Ashortlistofrelevantindicators(butstilltoomany)isoutlinedinbox3.Theyaredrawnfromthelonglistofindicatorscollectedbythesub-committeeforsocialratingandreportingoftheSocialPerformanceTaskForceandshouldbeseenasastepforwardintheprocessofdefiningthekeyindicatorsforMFIreporting.Furtherconsultationandexperimentationwillberequiredwithinthemicrofinancesector,involvingdifferentstakeholders,suchasMFIs(differentmodelsandregions),investors,raters,donors,theMIXMarket,toselectthecoreindicatorsforsocialreportinganddevelopappropriateandcleardefinitions.

TheindicatorsinBox3arepartlythosethatarelikelytobeavailableinatypicalMIS.Somemayrequireadjustment(asindi-catedbythissymbol,•)tofocusonclientlevelinformationratherthanloaninformationortoincludereferencetosecondaryinformation.Otherindicators(thosemarkedwitha‘#’)willdependonclient-levelinformation.ThismaybecollectedbytheMFI(aspartofitsSPMsystem)or,inpart,couldbeobtainedthroughacomprehensivesocialrating.

Thetaskisanalogoustotheprocessthatestablishedtheparametersandindicatorsforfinancialreporting.Thesemusthaveseemed,inearlydays,relativelycomplexanddifficult.Financialindicatorsarenowestablishedandacceptedas‘basic’andstraightforward,andareintegratedwithininformationsystemsandreporting.However,theiracceptancetookseveralyears,withadjustmentstoMFIdatasystems,toenablesystematicandrobustmonitoring.Thesamemayapplytosocialreporting.

Going Forward

Thispaperhasdrawnoncurrentinitiativesaroundsocialperformanceanalysisandmeasurementinmicrofinancetosetoutacommonframeworkforratingandreportingonsocialperformance.Theframeworkdefinesthekeydimensionsandtheirconceptualbasisandlinkages.Possibleindicatorsarealsolistedundereachdimension.Thelistisacomprehensiveoneandisintendedtoprovideabasisforfurtherexperimentationandrefinement,whichshouldultimatelyleadtoindicatorselection,defi-nition,andspecificationoftoolsfordatacollection.

Forsocialrating,thespecialisedratingagenciesarewellplacedtostartbuildingdatacomparisonsandtotestbenchmarksandscoringacrossdifferentmodelsandcontexts.ForsocialreportingbyMFIs,thereneedstobeaprocessofengagementacrosstheindustrytobuildconsensusonkeymeasuresthatarebothrobustandpractical,andwouldideallybepartofanorganisationalsystemforsocialperformancemanagement.

Initiativesforbotharealreadyunderway.


Box �. Suggested ‘Short’ List of Indicators for Social Reporting by MFIs

• : Indicators likely to be a�ailable in the MIS; may be adjusted to pro�ide client le�el information rather than loan information or to include reference to secondary information.

# : Indicators that depend on client-le�el information.

1 CONTEXT Organisational Profile Legal form; years of microfinance operations; model of microfinance (group type, indi�idual) Total portfolio and total loan accounts Total sa�ings and total sa�ings accounts

• Total client households

• Percent of rural and urban clients (separating semi-rural and urban if possible); percent of women and men

Financial Services and Access Product information: sa�ings products (compulsory and �oluntary), deposit amounts, interest payable, withdrawability Loan products, first loan sizes, costs (fees, declining interest, term) Insurance ser�ices—and whether they are the MFI’s own or are linked to an insurance company Type of sa�ings: total sa�ings amount, number of accounts, a�erage deposit outstanding Type of loan product: total portfolio, number of accounts, a�erage amount outstanding

• Number and percent of accounts in different loan cycles (or percent of clients by loan cycle or years with MFI

Number and terms of insurance policies; percent of clients who applied for, or recei�ed, pay-out in pre�ious year Effecti�e interest rate on different loan products (EIR)

2 PROCESSSPM Social Performance Management

Mission statement and date of formulation Target group(s)—how defined or how criteria applied Main parameters on which staff incenti�es are based Whether MFI uses information about clients to track outreach Whether MFI has conducted, commissioned, or used market research in past � years How MFI defines drop-outs; whether it tracks drop-out rate and reasons for exit

SR Social ResponsibilitySR-CL Whether MFI has a written formalised code of conduct for client protection

What measures MFI has in place to ensure client protection (board re�iew, operational manual, staff training, staff appraisals) Whether MFI pro�ides written statement of repayments to clients that distinguishes principal, interest, and other payments; adapts com-

munication strategy to capabilities of (poorer) clients A�erage time between appro�al and disbursal of loan Time between application for insurance pay out and payment Whether MFI monitors client indebtedness (at time of loan appraisal for possible default)

GA Women and men on board of directors, in management, field staff, and support staff Specific strategies to address gender constraints in the local cultural/market en�ironment

NFS Any non-financial ser�ices pro�ided (directly or through linkages with other NFS pro�iders) and description , Percent of clients who ha�e accessed these ser�ices in each of pre�ious � years

SR-Cm Percent of operating re�enues rein�ested in the community during pre�ious yearSR-St Written, formal code of conduct go�erning actions towards staff

Career and training opportunities: number of days/year per staff category SR-En� Organisational practices in line with en�ironmental conser�ation (energy, paper, etc)

Description of en�ironmental policies applied to core business lines (where applicable, as for SME finance)


3 RESULTSSG-Or Social Goal—Outreach • Operational areas ranked—with distribution of clients across areas

# Percent of clients belonging to marginal communities (as applicable in different countries) # Percent of [recent] client households with no sa�ings accounts or loans from other sources (bank, cooperati�e, other) # Percent of recent clients li�ing below US $�/day and $�/day at PPP# Percent of clients according to other po�erty le�els defined by the MFI (with details of how defined)

# • Number of financial ser�ices-supported enterprises by number of hired (non-household) employees (0, �–�, �–�,�–�, �0–�0, < �0)

Proxies if direct information not a�ailable:

A�erage loan size as a percentage of GNI/GDP per capita for new loan clients Percentage of loans (a) > $�00 in Asia, Africa, and the Middle East; (b )> $�00 in Latin America and the Caribbean; and (c) > $�,000 in

Europe and Central Asia

SG-Sv Social Goal: Appropriate Services# Findings of any market research (in past � years with sample details), including if possible:

Percent of clients aware of interest payable on sa�ings Percent of clients aware of full costs of borrowing (fees, declining interest) Percent of clients from households with member in another MFI Percent of clients from households borrowing from informal moneylender in pre�ious year Drop-out rate in pre�ious years (and how defined)

# Results of any drop-out tracking or sur�ey, if a�ailable, including if possible: exit rates within different client categories (po�erty le�el, loan

cycle), and reasons for drop-out

SG-Ch Social Goal: Change—Effects or Impact

# Findings of any recent (within past � years) impact studies of MFI (design details, methodology for, size of sample, method for po�erty as-

sessment)

# Contribution toward achie�ing MDGs (indicators being de�eloped by C-GAP Ford Social Indicators Project), for example, percent of clients

who ha�e mo�ed out of po�erty after � years, percent of school-aged children (girls and boys separately) of clients who attend primary school (compared to children of non-clients)

Sustainability of li�elihoods and greater financial inclusion: percent of loan clients who ha�e e�ol�ed after � years from taking loans to mak-ing deposits

# Contribution to employment generation

Total number of credit-supported enterprises, percent of new enterprises started with microcredit and continuing for at least � years Increase in number of clients employed in credit-supported enterprises, separately for family and hired: men, women, boys, girls (children

defined as younger than �� years), and for full time and part time (full-time defined as working more than � months of the year, and at least � hours/day; part-time is less than this, including both seasonal and irregular work)


References

Copestake,James,MartinGreeley,SusanJohnson,NailaKabeer,andAntonSimanowitz.2005.Money with a Mission. Vol1,‘MicrofinanceandPovertyReduction’.Bourton-on-Dunsmore/Rugby/Warwickshire,UK:ITDGPublishing.

Dunford,Chris.2002.‘What’sWrongwithLoanSize?’FreedomfromHunger,Davis,CA.FoundonAlternativeFinancewebsite:http://www.alternative-finance.org.uk/cgi-bin/summary.pl?id=243&view=html&language=E&sourcelang=E.AccessedSeptember9,2006.

M-CRIL.2005.‘CanMFIsAchievetheDoubleBottomLine?’TechnicalNote4.Gurgaon,India:M-CRIL.http://www.m-cril.com/pdf/new/Technical%20Note%204%20-%20Financing%20Microfinance%20in%20India.pdf#search=%22M-CRIL%20Technical%20Note%204%22.AccessedSeptember9,2006.

USAID(UnitedStatesAgencyforInternationalDevelopment).2005.‘DevelopingandTestingPovertyAssessmentTools:ResultsfromAccuracyTestsinBangladesh’.IRISCenter,UniversityofMaryland-CollegePark.Washington,DC:USAID.http://www.povertytools.org/Project_Documents/Bangladesh%20Accuracy%20Report%20Final.pdf,accessedSeptember9,2006.

Web Sites

ACCION:http://www.accion.org/products.aspCERISESocialPerformanceIndicatorsInitiative:http://www.cerise-microfinance.org/publication/impact.htm;http://www.cerise-microfinance.org/publication/pdf/impact/spi2/spi2_reportno3_result_ve_june05.pdf#search=%22CERISE%2

0Social%20Performance%20Indicators%20Initiative%22CGAP-FordFoundationsSocialIndicatorsInitiative:http://www.microfinancegateway.org/content/general/detail/

35402?PHPSESSID=9f7bae42a5c13ea37ead4d4e183474adGrameenFoundation(‘ProgressoutofPovertyIndex’):http://www.gfusa.org/programs/social_performance/

http://www.microfinance.com/#Poverty_Scoring(WebsitedevelopedbyMarkSchreiner)Imp-Act:http://www.ids.ac.uk/impact/resources/SPM_index.htmlM-Cril:http://www.m-cril.com/social-rating-microfinance-institutions.htmlMillenniumDevelopmentGoals:http://www.un.org/millenniumgoals/MicrofinanceInformationeXchange-MIXMarket:http://www.mixmarket.org/Microfinanza:http://www.microfinanza.com/MicroRate:http://www.microrate.com/PlanetRating:http://www.planetrating.com/Triodos-GRI‘TransparencyinSustainabilityandFinance’:http://www.triodos.com/com/static/pdf/coen_gri3.pdf#search=%22tr

ansparency%20in%20sustainability%20and%20finance%22USAIDSocialPerformanceAssessmentTool:http://www.povertytools.org/USAID-AMAP:http://www.microlinks.org/ev_en.php?ID=1222_201&ID2=DO_TOPICPovertyAssessment:http://www.microlinks.org/ev_en.php?ID=1212_201&ID2=DO_TOPICImpactAssessmentInitiative:http://www.microlinks.org/ev_en.php?ID=11937_201&ID2=DO_TOPIC