Microfinance has an image problem. It has had for a while now—instances of corruption, unfair interest rates, cover-ups, suicides due to coercive collection tactics—and the real victims are inevitably not the microfinance institutions (MFIs), but their clients: poor people caught in spiralling debt and little hope of legal recourse or financial relief.

Many directly involved in microfinance and related fieldwork do not agree with sceptics like David Roodman and Hugh Sinclair, and would argue that the benefits still outweigh the problems noted above. Nevertheless, the need for more rigorous review and transparency is indisputable.

But HOW exactly does one impose “transparency” and more exigent controls for institutions that are not banks, and thus not subject to local or international banking regulations, and rely heavily, in some cases, on the trust and good will of absentee donors?

Social Performance Management (SPM or Responsible Finance for short, since both are easier to remember) is one possible solution to refocus the mission of microfinance and to provide more concrete support for their many struggling clients.

The idea of a social bottom line is not new. UN agencies and others whose charters differ from a market-based approach would argue that social audits have underpinned their work for more than 40 years. And SPM has slightly different meanings, depending who is proposing it as a solution for MFIs and other problems that beset financial inclusion.

In general, however, most can agree that this aspect of social performance measures how well a money-lending/savings institution has translated its social goals into practice. Even more generally, these goals break down as:

  • Intention and Design: MFIs and their supporters’ mission—and how they plan to implement it (easy to assess, equally easy to succumb to dreaded "mission drift" )
  • Output : Number of loans and savings accounts, and average size (relatively easy to monitor and assess)
  • Outcome: Improved money management for small businesses or households (also possible to assess)
  • Impact: Effects on individual and community income, savings, and longer-term effects on education, nutrition, sanitation, health, etc. (more complicated, maybe impossible to assess fully and accurately)

(For an early but helpful overview of SPM, please see this CERISE Social Performance and the CGAP Social Indicators Initiative’s report. For a broader and more in-depth look at Responsible Finance and its many components, please click here.)

All very well and good so far. But how does one actually move the guiding principles above from the reports and Power Point slides into early planning and daily practice? We already know the impact assessments are tough, and, no surprise, many MFIs, including credit and savings cooperatives, see SPM as too expensive, too time-consuming, or the wrong solution to the problem.

One way to shift the focus away from the institutions and their hesitations and back to the MFI customers and their needs is MicroSave’s MFI Client Protection assessment tool, known as ServQual.

Tested last year with 357 microfinance clients in India, the Philippines, and Bangladesh, ServQual yielded some rather surprising results. (Research often does which is why it is worth doing and paying attention to). In the first two countries, respondents rated fair and respectful treatment from MFIs as the most important aspect of client protection in their opinion, followed by transparency. Interestingly, complaint resolution and data privacy ranked last in the seven aspects of client protection discussed in the 82 group and individual interviews. For more about this research, please click here.

Other projects seeking to make Output, Outcome, Input and other intangible headings more concrete often use USSPM, or Universal Standards of SPM. This tool helps evaluate systems and processes for both client protection and MFI staff treatment, and translates the “mission” into specific goals and measurable results. (There’s more, but these are the basics.)

“We promote breaking-down social performance into practical steps and by degree of importance,” explains Yamini Annadanam, MicroSave’s Responsible Finance practice group leader. “Most MFIs actually have some existing practices. These standards can give them confidence to build on what they already have. And that is more a matter of filling in a few key gaps, rather than implementing something entirely new.”

This initial engagement with the MFIs is complicated enough, as anyone involved in SPM in other parts of the world will attest, but the far harder piece is actual implementation and enforcement. One of the reasons many who believe in financial inclusion also believe banks and their regulators must play a more active role in local and global microfinance is because money, especially other people’s money, need legally binding restrictions and penalties, in addition to universal standards and suggested codes of conduct. This protection is important for all creditors and investors everywhere, but all the more necessary for the clientele microfinance seeks to serve.

  1. While I agree with MicroSave’s efforts to develop new tools to bring greater understanding of MFI clients, I also believe that there is a fundamental missing element in how MFIs report the composition of their loan portfolios. Due to their stated mission to provide services for the poor, MFIs should be required to clearly define their portfolios to make clear the type of lending which predominates.

    At the core of the controversy about microfinance is the interest rate conundrum. Most of us who work in the field are not scandalized or shocked by interest rates as they can be understood due to the inherent costs and risks. Moreover we know that these clients live in an environment where the “normal” better stated informal sources of credit to this market are exorbitant and usually multiples of MFI rates when calculated using compounded interest (APR).

    Nor are we against the concept of profits which are intrinsic to creating solid financial institutions.

    WHAT IS WRONG is that the many billions of dollars of assets that are part of the microfinance institutions probably have a form of lending very difficult to defend in terms of development or direct/indirect subsidies from donors. Essentially these are loans to low income SALARIED workers that debit payments from their payroll.

    As a former banker I can say that this form of consumer lending is entirely normal, natural and inevitable in any financial sector. It is the first product usually offered to low income clients without any support of donors. Like the microcredit which formed the basis of the microfinance industry these portfolios often grow exponentially in the same way and, as the client profile in terms of size of loan and socioeconomic strata, is similar to the objective of microfinance there is nothing that differentiates this form of different lending in the portfolios analyzed under MIX or other industry standards.

    Microcredit was born as lending to self employed individuals requiring a methodology intensive in the use of credit agents as the means to determine and develop loan portfolios. This level of client interaction fundamental to the creation of viable institutions resulted in a cost totally unlike formal banking institutions.

    Lending to low income salaried employees is a far different methodology which can be done often in a similar fashion to credit card operations where factors like address, age, years of employment can be used effectively to create credit scoring models and a form of lending that requires little or no client interface. It is also often the most profitable form of lending for financial institutions which become specialized in this sector. Given that the size of loans and type of beneficiary (in terms of socio economic strata) is very similar to the characteristics of “classic” microcredit, it is entirely possible (if not probable) that much of what passes for microcredit maybe disguised consumer lending.

    OF COURSE it is entirely possible and even probable that low income salaried workers engage in part time or support family member businesses that need assets (white goods, vehicles etc.) and as such there is NO CLEAR CUT way to differentiate a consumer loan that goes to consumption or to business or both.

    My single and only argument is that for the sake of clarity and transparency loans paid via salary debits should be clearly segregated and defined in participating MFIs. It also makes good business sense to clearly differentiate these portfolios in terms of methodological issues and credit/quality analysis.

    With the entry of private equity firms in the sector with extremely short term high return expectations there is, to my mind, a strong incentive that may be a push factor that leads to more consumer lending than to “businesses” in supported MFIs.

    Making no value judgement it would be good practice to see which institutions rely heavily on debiting low income salaried workers and those that are being paid from the cash flow of businesses financed.

    This will not resolve the interest rate conundrum but would immensely clarify the debate and perhaps even teach us much from those institutions that are more focused on the support to economic activity than to consumption.

    best to Graham et al

    Hank

    Reply
  2. I agree that CGAP and CERISE are too expensive and intensive for many MFIs to implement. These social performance systems need to be more lithe. Not sure that I agree on universal standards.

    We developed a system for FIDES that had to be simple enough for field staff to monitor and complex enough to capture gender issues, asset building and poverty scores. The system was both market research and SPM. Not easy to do. These issues are highly contextual. I wrote a paper on our challenges with design. It’s on the MF Gateway.

    Under “Intention” (Strategy) we included consumer protection policies along with targeting policies. Under “Output” (Operations) we included effective rates and wait times. These are important to trade-off against who is being reached and to what depth.

    Also, donors need to be much more savvy in holding MFIs accountable to transparency and client protection. They need to be able to really assess when inefficiencies are simply being passed on to clients and where there are transparency/literacy issues. Some of the European donors are demanding triple or double bottom line audits for financing with a range of tools.

    I would favour home-grown SPM systems with varied donor audit tools to ensure that the systems are well-rooted and adaptive.

    Reply

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