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Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

MICROFINANCE WITH

RESULTS Social Performance Certification System for Latin America and the Caribbean: Seals of Poverty, Gender and Rural Development

Isabel Cruz, Fabiola Céspedes, Mariana Carmona 01/05/2013 Presentación de aprendizajes y experiencias del FOROLACFR en sus procesos de promoción del desempeño social en la región y la construcción del Sistema de Certificación de Desempeño Social el FOROLACFR. Derechos Reservados.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Microfinanzas con Resultados | Sistema de CertificaciĂłn del DesempeĂąo Social para LatinoamĂŠrica y El Caribe

PREFACE This publication is a summary of the work that FOROLACFR has undertaken since 2005, promoting microfinance with a focus on development and which in the framework of social performance are fixed in the construction of a Certification System that involves 3 Seals: Gender, Poverty, Rural Development. The process has been long and sustained, and its important landmarks are distinguished as: the execution of over 80 SPI/CERISE social audits en 10 countries as a basis for a regional diagnostic; the construction, validation and implementation in 3 countries of common monitoring indicators; and the process of certification in itself which has included research and investigation and the holding of regional discussion workshops on regulations and standards in 7 countries, involving more than 100 operators in Latin America and the Caribbean. This initiative has implied a great challenge due to its focus on outcomes regarding clients and the participative nature of operators in the process of construction. Without a doubt the products developed respond to the need to evaluate, differentiate and promote the continuous improvement of institutions with a clear social and service mandate to poor and vulnerable people. In this process we are grateful for the patronage of HIVOS of Holland, which backed the initiative while respecting the perspectives of networks and operators. We also recognize the support of the Cerise Network, of regional allies such as the Central American Microfinance Network and the CRS MISSION project, and specially the leadership of our national networks and of the microfinance institutions which disinterestedly shared their visions and practices with complete openness. As a Regional Network we cannot say that the work has been completed; much remains to be done in accompanying the institutions along the path of excellence, always under the premise of strengthening local capacities, and in this framework future strategies have been defined. We are very happy and grateful to present our findings and results. Isabel Cruz, President of FOROLACFR

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Index General PREFACE..........................................................................................................................................................................................................................................3 I. Crisis of the Microfinance: antecedents of social performance in Latin America and the Caribbean..............................................................................................7 2. Theory and Practice of tools for the evaluation and monitoring of social performance .............................................................................................................11 2.1. Short- and medium-term challenges of social performance in microfinance................................................................................................................................................13 2.1.1. The indicators agreed in the framework of the SPTF and the proposal of Universal Standards...............................................................................................................13 2.1.2. The indicators of monitoring of the SP proposed by FOROLACFR.............................................................................................................................................................14 2.2. Challenges of short and median term of social performance in microfinance................................................................................................................................................16 3. Social performance: reflection and perspective of FOROLACFR..................................................................................................................................................19 3.1. The First Actions 2005-2007 .............................................................................................................................................................................................................................20 3.2. Design and Implementation of the Program: Constructing Local Capacities for the Measurement and Monitoring of Social performance in Latin America and the Caribbean. First Phase 2007-2008. ................................................................................................................................................................................. 20 3.3. Second Phase of the Program: Constructing Local Capacities for the Measurement and Monitoring of social performance in Latin America and the Caribbean (2009-2010)........................................................................................................................................................................................... 23 3.4. Implementation of a System of Certification of social performance (2011 – to date)...................................................................................................................................25 4. Antecedents for the Constitution of a System of Certification with base in Seals: vision of the operators.............................................................................................................27 4.1. A System of Certification that values excellence at the level of results ...........................................................................................................................................................27 4.2. Generalities of the Seals of Poverty, Rural development and Gender.............................................................................................................................................................28 4.3. Preliminary definitions for the implementation of the System of Certification...............................................................................................................................................29 5. Seal of Poverty..........................................................................................................................................................................................................................30 5.1. Theoretical considerations: the links between poverty and microfinance.......................................................................................................................................................31 5.1.1. The concept of Social Vulnerability...........................................................................................................................................................................................................32 5.2. The products of savings and micro-insurance for the reduction of poverty.....................................................................................................................................................37 5.3. Microcredit and the reduction of poverty.........................................................................................................................................................................................................38 5.3.1. The limits of microcredit in marginalized zones.......................................................................................................................................................................................40 5.4. Obstacles confronted by microfinance in attending to the poor......................................................................................................................................................................40 5.4.1. Economic factors......................................................................................................................................................................................................................................42 5.4.2. The role of the State and regulation.........................................................................................................................................................................................................44 5.5. Results of the application of the tool SPI-CERISE in MFI in Latin America.......................................................................................................................................................45 5.6. Definition of the Seal of Poverty........................................................................................................................................................................................................................47 6. Seal of Gender...........................................................................................................................................................................................................................49 6.1. Microfinance and the gender perspective.........................................................................................................................................................................................................50 6.2. Chief results of the SPI gender focus in evaluations .........................................................................................................................................................................................52 6.3. Indicators of the Seal of Gender.........................................................................................................................................................................................................................54 7. Seal of Rural Development........................................................................................................................................................................................................56 7.1. Links between microfinance and rural development.......................................................................................................................................................................................56 7.2. Obstacles confronted by MFI to implement a focus in rural development.....................................................................................................................................................................................................................59

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Microfinanzas con Resultados | Sistema de CertificaciĂłn del DesempeĂąo Social para LatinoamĂŠrica y El Caribe

1. Crisis of microfinance: antecedents of social performance in Latin America and the Caribbean Microfinance originated in Latin America around the end of the nineteen-seventies. Its emergence had the clear objective of supporting the development of poor and excluded peoples, performing a social function that filled the void left by commercial banks for which the population did not represent an attractive business, and much less a profitable one. In Latin American countries over the following years several events conspired to support the growth and evolution of microfinance. In the beginning an avalanche of public banks went bankrupt in a macroeconomic crisis that accentuated unemployment and poverty, with governments incapable of implementing effective public policies to expand and deepen the financial sector and so reactivate the economy. This set of events created a void in which microfinance emerged as the ideal instrument with which to struggle against poverty and unemployment. During the eighties microfinance was to consolidate, initiating its phase of expansion at a global level. A great part of its success was driven by adapted financial products, such as the group or supportive credit introduced by the Grameen Bank, which contributed to discrediting the negative beliefs that the poor could not be subject to credit due to their inability to make guarantees. Other microfinance institutions demonstrated that it was not only possible but even profitable, achieving excellent repayment rates (around 90% as opposed to 25% in the development banks), which permitted operational charges to be made [Khandker 1996: 66]. The great success of the Grameen Bank and the opening of the Latin American countries towards greater mobility of capital generated a growing enthusiasm for the promotion of microfinance as a strategy with which to struggle against poverty, in such a way that both international co-operators and social investors supported the gestation of microfinance institutions (MFI) enjoying an important phase of expansion in the nineties. The great majority of MFI was constituted under the figure of non-governmental organizations, all of them having a dual objective: to achieve financial viability for long-term sustainability and broaden their portfolio of clients, the majority of which are made up by micro-entrepreneurs and poor households. In the particular case of Latin America, this impulse was made with a bias or concentration towards the urban zones, as well as urban-peripheral and rural areas with a greater density of population. Similarly, as the market expanded on a world level two processes emerged: i) the regulation of microfinance in the public sector and ii) strong pressure from financiers through institutionalization, growth and short-term profitability. These two forces led the sector to operate under financial performance logic, without the obligation of fulfilling the social objectives that were their origin. The regulatory changes and the demand to achieve financial profitability provided institutional change, for which reason many operators ceased to be non-governmental organizations in order to become non-banking financial institutions. Some of these turned into banks, which still give priority to financial profitability

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

over social mission, their clientele leaning towards sectors of the population with median and high incomes. Likewise regulation, initially, constituted a barrier for the penetration of the institutions into rural and poor areas because the requisites for operating in legality, indirectly, obliged any MFI to behave as if it were a commercial bank. This led it into a financial limbo in which it had no degree of freedom and in which, to continue exercising its social function in marginalized areas, since its profile as a low-income client does not fit with standardized financial practices, following international banking norms like those of Basel, to give but one example. Another obstacle is the prohibition that was maintained – and is still maintained in a large part of Latin America - against receiving funds from public savers [FOROLACFR, 2012]. Despite not having any entirely satisfactory regulation, exponential growth was generated. This, at the beginning of the 21st century, led to a series of questionings that confronted the way in which microfinance was operating in relation to its real contribution to development and reduction of poverty. The criticism was not unfounded; it was based on the proliferation of abusive commercial practices with exorbitant interest rates, aggressive methods of charging and overburdening the clients with debt, to the degree that in some countries, like Bolivia, debtors’ associations1 arose that clamored for the cancellation of debts, at the same time as provoking social conflict. Along with the distance created from the social mission of microfinance, another important criticism emerged in which financial inclusion was not produced in a homogenous way, since there are currently, in Latin America, still around 250 million inhabitants outside the formal financial system. The indicators of financial penetration are still far below the levels observed in developed countries. For example, whilst in Latin America and the Caribbean 39% of adults declare that they have an account in a formal financial institution, the percentages increase to 42% and 89% for developing countries and high-income economies respectively. The inequalities are most notable when financial inclusion is correlated with other indicators of development, in such a way that the percentage of women that have no account in any formal financial institution is 65%, in comparison with 56% of men. The same indicators are greater in rural areas (65%) than urban areas (57%), and similar cases occur along with lower levels of income or of education [Demirguc-Kunt et al., 2012]. In this way there has been no financial inclusion, at least not in large numbers, in which more unprotected and vulnerable sectors are integrated. Similarly, the sector had a setback in 2010 with the outbreak of a non-payment crisis of global dimensions, after a tendency of sustained growth in the micro-financial market lasting just over a decade. The main sufferers in this crisis were Nicaragua, Bosnia & Herzegovina, Morocco, Pakistan and most visibly India, with the cases of Andra Pradesh and Karnataka, which were the most notable due to the suicides of debtors, news that the media carried around the world. Repetitions of this crisis continued to appear in Africa, in countries that had been considered “models” for microfinance, as is the case with Benin or Cameroon, which were followed by Senegal and Kenya. In the case of Latin America, Peru and Colombia are countries in the catalogue of high risk, since they might go through the same circumstances [Guérin, Morvant & Mourji, 2012]. 1. For example, the Association of Small Borrowers presented 60 thousand cases for defence against imminent cuts by the Ministry of Financial Services. The portfolio in these times ascended to 2,800 million dollars. prensabolivia@interlatin.com, 29 September 2002.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

This was seen as a crisis that was regionally limited, and proved to be a phenomenon on a global scale for which several hypotheses are put forward in the diagnostic [Ibid]: i) Disproportionate growth of the sector with relaxation of controls, which was tied to the deterioration of MFI governance; ii) Excessive debt of clients and saturation of the market, in which the rates of repayment did not necessarily obey the greater generation of wealth and growth of local economic activity, but rather a chain of credits of which one new one permitted the liquidation of other debts in one or several MFIs, thus becoming a spiral of uncontrolled debt; iii) Systemic crisis that submitted microfinance to the operative logic of staunch commercial and competitive funding. Although it still has not been the object of such comparisons, it is not exempt from systemic risk, for which reason one must not avoid those symptoms that may be prophesying the illness itself. A case in point is Mexico, a country whose microfinance sector has hardly been focused upon from this point of view and follows the barely-ordered growth of the market, in a way that makes it possible to observe rural territories of high and very high marginalization like the Sierra Norte of Puebla or the mountain region of the Huasteca Hidalguense, - to cite only a few cases - in which an agglomeration exists of MFIs, commercial banks, pawn shops and local loan sharks, for populations lower than 15,000 inhabitants, for whom apparently there exists a growing demand for credit. This situation would appear, in principle, not to be compatible with an agricultural economy of self-consumption, high migration and small commerce. In cases like this the suspicion arises over whether the growing demand really comes from an expansion of economic activity or whether there is simply a spiral of debt in evolution, such as occurred in Asia and Africa a couple of years ago. Furthermore, the systemic risks that sparked off the crisis of microfinance and that can stimulate new crises, respond to the concentration of capital and risks in a group of large MFIs by the large financiers, which due to their operational scale guarantee the yield of the funds, although this has been to the detriment of innovation and attention to the least protected sectors. Jean Michel Servet [2012] explains this situation forcefully: “Some MFIs, the smaller and more innovative ones, function rather like explorers for the benefit of the larger ones; this happens similarly, in some cases, with public microcredit programs or those of certain non-governmental organizations with socially innovative projects. But when the profitability of those zones and of those clients is proven and, more still, when the potential clients have in some way been educated in financial modernity, the larger ones implant themselves, reducing the margins of action in this zone and of earnings of the small MFI which had managed to open a market niche. This impedes the small MFI from harvesting the fruits of the risks they have taken and they have to move somewhere else to again play the role of explorer and open a market without having benefitted from their earlier initiatives”. Despite the fact that the scenario for microfinance may appear discouraging, fortunately the other side of the coin exists. This means that they do indeed have a fundamental role in fighting poverty and in the development of marginalized regions; just as for any market economy, the importance of the financial service is clear. Moreover, MFIs exist that maintain their social vocation and organizations at international level (networks or research institutions) that back up supportive finances as instruments for combating poverty. In this way they reposition the role of micro-financial services, movements have begun seeking to make their social impact visible through the creation of tools of measurement and evaluation.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

As part of this movement that seeks to correct financial services and products, FOROLACFR presents this proposal, which has followed years of reflection and insistence upon the viability and goodness of microfinance organisms when they put forward a social objective.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

2. T heory and practice of tools for the evaluation and monitoring of social performance The efforts of co-operators, networks and support organizations, added to the disposition of MFIs for advancing in the formal management of their social performance (SP), have produced diverse agreed conceptualizations; they have permitted the development and massive application of tools of evaluation and monitoring, as well as the implementation of indicators promoted from diverse promoting organizations, as have been perfected in recent times due to the need for improvement in the precision of these measurements. Among the most outstanding pioneering initiatives is the CERISE Network, of French origin, which in 2002 began to generate reflections that culminated with the social audit tool called “Indicators of Social Performance” (SPI in its abbreviation in English) oriented to assess whether the strategies, systems and internal processes are alienated from the institutional mission and objectives. Similarly the importance is recognized of the ImpAct Program, supported by the Ford Foundation, which is oriented toward the design and application of methodologies to evaluate impact on clients. Without any doubt, a movement that has generated global recognition because of its capacity for summoning and monitoring has been the Task Force for Social performance (better known in English as social performance Task Force - SPTF) created in 2005 with the support of the CGAP and the sponsorship of the Argidius Foundation and the Ford Foundation. This space was constituted as an instance of coordination of initiatives among several exponents, investigators, co-operators, investors and qualification agencies that seek coherence and synergy in the comprehension, design and implementation of focuses, tools and methodologies of social performance. The SPTF has set starting-points, for example a broadly-accepted definition of SP for which social performance is the effective translation of the mission of the MFI in practice, in concordance with common social values that are accepted and shared such as: ´´ Providing service sustainably to poor and excluded clients; ´´ Improving the quality and adaptation of the service according to the needs of the clients; ´´ Reducing the vulnerability of clients; ´´ Generating benefits for clients and their families; ´´ Being socially responsible with clients, employees, the community and the environment. Another important promoter has been the network of operators, regional and national, that has participated actively in the promotion, application and validation of SP tools. Table I shows a synopsis of the focuses and actors that promote and have developed tools. It should be pointed out that despite that following similar ends, these diverge due to their degree of focus in the SP ambits, as well their dimensions.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Table I. Strategies of Social performance in Microfinance Strategy Management of Social performance (GSP): An institutionalized process that involves the definition of social objectives, the evaluation and monitoring of goals related to these objectives; as well as the use of this information to improve organizational performance.

Type of Tool GSP Based on 3 actions: it manages results, understanding the needs of the client and reporting to external actors. Having a GSP System involves: -- Definition of social goals and objectives -- Collection of information to monitor progress in the fulfillment of objectives and goals

Main actors and concepts that are promoted GSP Impact: the Impact Consortium has developed a guide for the GSP that permits the creation of a plan of action and establishes directives to: -- Define the GSP strategy -- Strengthen the system of information -- Utilize the information to improve the institutional performance -- Put the process of GSP into action See: http://spmresourcecentre.net/

-- Use of SP information to improve the process of making decisions in strategic and operative ways. Evaluation of the SP: Focus that evaluates the degree in which the MFI complies with social objectives. Includes the analysis of the social objectives declared by the MFI, the effectiveness that its systems and services have for reaching these objectives, the related products (at a level of focalization and cover) and achievements in terms of generating positive changes in the lives of its clients.

Tools that evaluate the institutional process: These help the MFI evaluate its intentions, systems and actions seeking to determine whether it has the capacity to reach its social objectives. They will be used as social audit tools.

QAT (Quality Audit Tool): Driven by the MicroFinance Centre (MFC) of Poland in coordination with the Consortium Impact. Considers the methodology of social rating utilized by M-CRIL and Microfinance Rating. SPA (Social Performance Audit): Developed by US USAID agency, uses a similar audit process to evaluate the performance of the MFI vis-à-vis the declaration of a social mission. ACTION (Social diagnostic tool): Developed by ACTION. Evaluates the level of fulfillment of the social mission in the MFI as well as the contribution in the reaching of goals broadly valued and accepted in the sector. MICROSAVE (Box of tools for the management of the SP): Support for a global diagnostic of SP uses a methodology with strong emphasis in inquiries to clients and employees, as well as participative processes that lead to plans of action. See:http://www.microsave.org/sites/default/files/SocialPerformanceManagement.pdf

The initiatives of evaluation of the SP are focused in different ambits: some punctuate the institutional processes and internal processes, while others emphasis what occurs at the level of the client. Finally they are combinations of both these focuses.

SPI (Social Performance Indicators): Developed by the CERISE Network. Evaluates intentions, actions and corrective measures that the MFI has implemented 4 main components in terms of its SP base: Focus on the poor and excluded, adaptation of service, benefits for clients and social responsibility. See: www.cerise-microfinance.org

Project MISSION (guide of thorough self-evaluation): consist of a guide for the thorough self-evaluation of the MFI following the adaptation of the Malcolm Baldridge prize for quality and excellence. FORO LAC FR Evaluation of the Governance: is a tool that evaluates the systems of government and internal control of the non-profit MFI. Constructed on the basis of the guide of Evaluation of the Governance of CERISE/IRAM. Tools that evaluate levels of poverty and improvements in the clients. Determines which market niche is being reached by the MFI and whether the services are improving the conditions of the clients.

1.- Measurement of Poverty: PPI (Progress Out of Poverty Index): Uses a small group of indicators and objectives, simple and easily observable, for estimating the range of clients that are below the national poverty line. See: http://www.progressoutofpoverty.org/es USAID PAT (Poverty Assessment Tool): consists of specific surveys for a country (developed under contract with the IRIS Center at the University of Maryland) that prognosticates the presence of extreme poverty among a given group of people. See: http://www.povertytools.org/ FCAT (FINCA Client Assessment Tool): Uses 13 individual filters for registering sources of income and expenditure of the home, considering monthly expense, per capita daily costs and calculating levels of poverty among clients. 2.- Measurement of relative poverty: CGAP-PAT (Poverty Assessment Tool): an index of multidimensional poverty. It permits comparisons of the level of poverty of the clients of an MFI with other people in the same community, clients of other MFIs and situations in other countries. The tool includes a survey of 200 clients and 300 non-clients selected at random. Housing index: the variables for the construction of the index based on the structure of the house, on occasion its components for differentiating between economic levels of homes and identifying which are poorest. Means Test: a survey of homes that uses some easily verifiable indicators, afterwards creating a scale of calculation that permits the evaluation of individual poverty in a home. PWR (Participatory Wealth Ranking): the Participative Ranking of Wealth was developed for members of a community using perceptions and criteria they themselves have defined. 3.- Tools of protection to the client: The analysis of protection to the client includes the evaluation of the transparency and prudence of the service provided to the client, as well as deciding whether clients are treated with respect. Two main exponents of these tools exist: SMART Campaign (Principles and tools for evaluating client protection): an initiative led by ACTION (Center for Financial Inclusion) that promotes principles of protection of the client in microfinance and the construction of tools to evaluate and improve the internal processes oriented to the fulfillment of these principles. See:www.smartcampaign.org Microfinance Transparency: an initiative that promotes the transparency of prices in the microfinance industry. It has developed a tool to help calculate and understand interest rates, the rate of Annual Percentage (APR) and the relation between operational costs and sizes of loans. See: http://www.mftransparency.org/ 4. Specific tools for evaluating impact on clients are: SEEP/AIMS Impact Assessment: survey whose variables are set out with the aim of measuring impacts at individual level, and at home, the company and the community. INAFI- Oxfam Novib- Ordina Social Impact Measurement Tool: this tool was based on a method for measuring and reporting the social impact of the work of the MFI and its programs in terms of changes in the lives of clients and their families.

Tools of social rating: developed by qualifying agencies for complementing financial ratings. Some focalize on internal processes and others consider indicators at the level of clients.

The agencies that offer social rating services are: -- M-CRIL Social Rating -- Microfinance Rating -- Micro Rate -- Planet Rating

Microfinanzas con Resultados | Sistema de CertificaciĂłn del DesempeĂąo Social para LatinoamĂŠrica y El Caribe

2.1. Proposals of common criteria and indicators for the monitoring of social performance 2.1.1. T he indicators agreed in the framework of the SPTF and the proposal of Universal Standards At a global level, the Task Force framework of social performance has reached consensus from the year 2008 onward on principles and indicators of social performance oriented toward evaluating how the MFI align systems to missions, and how they use SP information to reach social objectives. These indicators were submitted to several phases of validation, the MIX MARKET being responsible for gathering and systematizing the information provided by the MFI. In the year 2011, finally, 11 categories of indicators of social performance were established and included in the MIX report (greater detail is given at http://www.themix.org/social-performance/ Indicators) which is presented in the following table2: Table 2. Categories of Indicators of SP agreed in the SPTF, 2011. Category of indicators

Concepts to be measured

01. Mission and social aims

The express commitment of the MFI with its social mission, its market aims and its development objectives.

02. Governance

Measures whether the members of the board of directors have been trained in SP management and a formal committee exists to monitor its fulfillment.

03. Range of products and services

Products and financial or non-financial services offered by the MFI.

04. Social responsibility towards clients

Number of principles of Smart Campaign Client Protection being applied by the MFI.

05. Transparency of costs of service to clients

How to inform clients of MFI interest rates.

06. Human resources and incentives to staff

MFI policy regarding social responsibility toward working staff. This includes: policies of human resources, make-up of the board and personnel, the rate of rotation and the incentives given according to the fulfillment of social performance goals.

07. Social responsibility with the environment

Whether the MFI have policies and initiatives for mitigating environmental impact of the companies financed.

08. Projection for the poor

Levels of poverty of clients at the moment of entry and their movement away from poverty over time.

09. Projection for clients through methodology Methodology or methodologies of loans used by the MFI. of loan 10. Companies financed and work creation

Number of companies financed by the MFI and opportunities of work they have created.

11. Rate of retention of clients

Rate of retention of clients in the MFI. Source: http://www.themix.org/social-performance/Indicators

After the SPTF framework, from the year 2011 onwards, the need to advance in the construction of Universal Standards of Social Performance identified and conceived as a set of management standards that apply to all the microfinancial institutions that follow a minimum double parameter. Complying with these standards means that an institution has management practices 2. For more detail on these indicators see: http://www.themix.org/social-performance/Indicators

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

of social performance (GSP) that are “solid”. After a broad consultation, at the meeting of the SPTF in Jordan in 2012, Universal Standards were validated according to six categories3: 1. Define and Monitor Client Objectives and Social goals; 2. Assure the Commitment of the Board of Directors, Management and Employees with social performance; 3. Treat Clients Responsibly; 4. Products, Service, Models and Channels of Distribution that Respond to the Needs and Preferences of Clients; 5. Treat Employees Responsibly; 6. Balance Social and Financial performance. During the years 2012-2013, the SPTF oriented its efforts towards disseminating these standards worldwide and experiences related to their practice.

2.1.2. T he indicators of monitoring of the SP proposed by FOROLACFR FOROLACFR constructed a system of common indicators of monitoring of social performance (ISP), compatible with the framework established by the SPTF/MIX but deepening its regional operation with an eye to increasing its utility for the internal management of the MFI. In the first place, a code of values was established, which materializes in principles of conduct for the MFI, as well as general criteria for the establishment of methodologies and tools of measurement, which is summed up in the following table: Table 3. Principles of the System of Indicators FOROLACFR Social performance Principles of conduct Voluntary appropriation: the MFI implements the indicators of SP voluntarily and assumes responsibility for their measurement, monitoring and reporting. Associativity: the MFI are associated through the implementation of the indicators, according to common social objectives and a shared vision of the SP. Visibilization: the MFI implements the indicators to demonstrate its social function and giving impulse to greater sectorial transparency.

Principles in relation to indicators

Principles for the implementation of ISP

Measureable: the indicators are quantifiable Internalization: the ISP incorporates the processes and easily verifiable, avoiding subjective and/ and internal systems of monitoring of the MFI as a tool or imprecise evaluations. for management processes for continual improvement Comparable: the indicators are constructed of their social function.

with uniform methodologies and national Gradualness: the ISP are implemented progressively, and regional parameters are used for their initiating the monitoring with a small number of easievaluation. ly-verified indicators, immediate applicability in different types, sizes and degrees of maturity of MFI. Parametrizable: the indicator system is

adapted to different types of MFI and con- Periodicity: the ISP report periodically through the texts. Respect and value are accorded to network for regional diffusion. specificities of the MFI using criteria of classification to avoid unjust comparisons and mistaken interpretations of their social function. Compatible: the indicators are compatible with those proposed in different methodologies of measurement and monitoring of social performance avoiding duplication and waste of institutional resources.

3. For greater detail regarding these standards please consult: http://sptf.info/images/usspm%20spanish%2011.16.12%20final.pdf

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Defined as ambits of the System of Indicators of Social performance (ISP): Focalization and coverage

Indicators that define the profile of clients of the MFI according to the market niches in which their operations are carried out, and the reach or profundity of their service.

Client satisfaction

Indicators that evaluate the degree of adaptation and quality of service to clients’ needs, wishes and expectations.

Changes in clients

Indicators that evaluate the SP of the MFI from the perspective of the impact (results) that they generate in clients.

Social responsibility

Indicators that evaluate policies and/or strategies to satisfy generic needs in group goals.

The main input through which these concepts were reached came in the form of 50 SPI audits in nine countries across Latin America and the Caribbean. Meanwhile for ISP validation, three FOROLACFR network partners participated: Finrural in Bolivia, AMUCSS in Mexico and RFR in Ecuador. The indicators are presented in table 4. Table 4. Basic Indicators of Social Performance (ISP) Indicator of management

Formula of the indicator FOCALIZATION Attention to the poor: percentage of new poor clients in relation to the total number of clients and segmentation into different levels of poverty.

1. Focalization in poverty and Attention to women: percentage of women clients in relation to the total number of active clients. vulnerability Attention in rural areas: percentage of clients in rural areas in relation to the total number of active clients. CLIENT SATISFACTION Rate of desertion of clients (Formula MIX) 2. Client satisfaction

Cost of the service: rate of effective interest in relation to the average national rate for the sector. RESULTS or CHANGES in CLIENTS Consolidation of employment: consolidated full-time employment in relation to the total of clients attended.

3. Generation of employment

4. Social capital

Creation of employment: New full-time employment generated in relation to the total of clients attending. Promotion of social capital: percentage of clients attending with methodologies that provide the formation of social capital (communal bank and group or supportive credits) in relation to the total of active clients. Percentage of clients that lead or participate in social organizations in relation to the total of active clients.

5. Creation of capital or patri- Fixed assets: percentage of credits for investment of fixed assets in relation to the total number of credits. mony Long-term credits: percentage of long-term credits in relation to the total number of active credits. SOCIAL RESPONSIBILITY Reinvestment: percentage of reinvestment of surplus. 6. Destination of surplus

Support to the community: percentage of surplus invested in support for social projects. Training employees: percentage of surplus invested in the training of employees of the MFI.

Finally, the previous block was complemented with a second set of Indicators of Specialized Social performance.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Table 5. Indicators of Specialized Social performance Indicator

Form of indicator Savings: percentage of clients that receive service in voluntary savings in relation to the total of active clients. Average amount of individual savings (as percentage of the PIB per capita).

7. Diversity of service

Insurance: percentage of clients that receive service in savings, from the total of active clients. Reception of money remittance: percentage of clients that receive services in money remittance from the total of active clients. Other services: percentage of clients that receive other financial services in relation to the total of active clients. Education: percentage of clients that receive service of financial education in relation to the total number of active clients.

8. Access to services of human Health: percentage of clients that have received health services in relation to the total number of active clients. development and compaCompany development: percentage of clients that have received service in technical assistance and company ny management development in relation to the total number of active clients. Economic development: Number of initiatives in the MFI for the organization of producers, integration of chains of value and local development.

The last proposal of indicators was validated at regional level so as to work together with REDCAMIF and the MISSION project, and was socialized at a broader level in the SPTF framework. Afterwards these indicators have been complemented and updated by national networks like FINRURAL of Bolivia and RFR of Ecuador, which currently manage SP monitoring systems at the level of their partners. The implementation of these common social performance monitoring indicators allow us to identify the need to also set out specialized criteria and indicators according to a predominant focus, backing the certification initiative that we describe in detail in later chapters

2.2. C hallenges of short and median term of social performance in microfinance Without a doubt the efforts mentioned have generated important advances. For example they currently have an agreed definition and have massively developed and applied tools of evaluation and monitoring, will have implemented indicators of monitoring of the SP promoted by the SPTF through the Mix Market and adapted by the national network. The systematization and the analysis of the results obtained through the application of the tools mentioned, lead to better understanding of strategic and operative reach of the SP, as well as the Possibility of visualizing differentiated intervention of MFI, in other words, that which is

Although all the MFI seek greater financial inclusion, the social diagnostics show three dominant types of approaches: i. MFI prioritizing a “business” focus to look at the generation of profits for shareholders. ii. MFI giving priority to good financial performance but striving in parallel to exercise socially responsible management. iii. MFI responding to a clear social mandate, which prioritizes social and economic development of customers looking for balance in their actions. In what category is your organization?

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

adapted to social conditions. The emergence of a great diversity of methods and proposals of social performance after a series of criticisms and crises has confirmed that it is necessary but not sufficient, with the willingness of all the agents involved, for facilitating greater financial inclusion. It has become evident that the processes of massification must be orderly, accompanied by a consistent regulatory framework, sources of direct funding, strengthening the systems of internal governance, so as to maintain the power and focus of development and the social mission that gave origin to microfinance. On the other hand, there ever more acceptance of the importance of the formal management of SP as a mechanism of differentiation of MFI with social vocation of the purely commercial institutions, in a highly competitive market. Similarly, the SP serves as a balance between pressure by the expansion and positive financial results and the social mission, which effectively includes attending to the target population, but above all permits us to ensure, plan and monitor the social objectives with a view to generating positive impacts on the clients. Besides the references in social performance have positive effects in the actuation of the MFIs since they have allowed ordering of social Objectives, Processes and strategies. However, this has not been enough. Besides, the methodologies are subject to constant review because they cannot totally adapt to needs. For example, some MFI argue that the driven tools do not adequately value the social function of microfinance, because of generalizations that overlook the different levels of specialization and impact in clients. Similarly still being debated is the cost-benefit that means the verification and the implementation of precise measurements vis-à-vis the net benefit towards the clients. Similarly, the questioning of the value of the mechanism of microfinance as a poverty-fighter giving attention and following currents both at government level and that of cooperators and society. To the extent that in 2011, these questions were exposed during a meeting of the SPTF held in Holland, by the coordinator Laura Foose, in the following terms: “Are the organs of government of the MFI trained in issues of management of the SP and do they have social motivation? Are the clients being harmed by the MFI?, What is the value generated by microfinance for the clients?, Does the MFI focus primarily on generating benefits for the clients or the pursuit of profitability? Are profits very high? What effective rates of interest are you applying? Does that have information support for Processes of making decisions for meeting social demands? Microfinance? Does it help reduce poverty? What is the real motivation of the investors that, in the last few years, they are turning into the new owners of Microfinance? “. The scrutiny to which the sector is subjected is a reflection of the challenges ahead for the management of DS. Therefore, other initiatives have taken on the challenge of working to address this problem and give support. Highlighted in this regard are: ´´ The construction and development of tools with which to assess and improve MFI governance systems, in order to promote strategic management levels and find a balance between financial and social performance. This challenge has-been taken at the regional level by the FOROLACFR and support organizations such as PROMIFIN/SDC. ´´ The promotion greater transparency of market prices and constructive dialogue about fixing them through the Micro Finance Transparency initiative, network operators and even government organizations. ´´ Favor the creation of systems of financial and social information to facilitate decision-making at the IMFs. These actions aim to deepen measurement of outcomes in customers, implement validation mechanisms DS reports and gather data for standard setting. These fac-

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

tors are being worked by the MIXMARKET and some regional networks. ´´ Disseminate learning to the policy-making and regulatory bodies in different countries that currently define social performance regulations to ensure that from the standard the social mission of microfinance is reinforced. This is a challenge taken up particularly by FOROLACFR and national partner networks. ´´ Finally, one of the most important challenges, a purpose of this publication, is the construction and implementation of mechanisms that aim to assess, differentiate and show results of microfinance in reducing poverty and vulnerability in the clients. This challenge has been taken up by the Microcredit Summit Campaign which promotes the “Seal of Excellence for Poverty Outreach and Transformation” as well as networks in Latin America and the Caribbean led by FOROLACFR, working in Certification through three different labels: Seal on Poverty, Gender Seal and Rural Development Seal. This initiative of certification of the network represents without a doubt, one of the biggest challenges taken on up to the present, for the opportunity to develop standards from operators based on standards that reflect regional market performance and fit into different national contexts.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

3. Social performance: Perspective and concrete actions of the FOROLACFR Since 2005, the same year the Social Performance Task Force was promoted, FOROLACFR initiated actions to promote Social Performance in Latin America and the Caribbean. In this section we review in detail all actions and processes of reflection and analysis that led tote proposal for the Certification of MFIs through three seals: Poverty, Gender and Rural Development. The following graph outlines this process:

Process of construction of certification

2007-2008

FORMATION OF CAPACITIES IN NETWORKS & 50 EVALUATIONS BY SP SPI/CERISE

2009

PILOTING OF INDICATORS IN BOLIVIA, ECUADOR & MEXICO

NEED TO GO BEYOND PROCESSES ANALYSIS & DISCUSSION OF INDICATORS OFSOCIAL PRFORMANCE

CERTIFICATION PROPOSAL

FIRST REDACTION PROPOSAL

2010

ANALYSIS OF TENDENCIES SPI + 20 new SPI

ANALYSIS OF TENDENCIES 90 SPI /FOR EACH SAIL

COMPATIBILIZATION DE AVANCES

WORKSHOP: RURAL POVERTY IN MEXICO WITH RIMISP & UNAM

1ST. MEETING SPTF LATINO NICARAGUA

SURVEY VULNERABILITY RURAL HOMES IN MEXICO

CONCEPTUAL DESIGN CERTIFICATION

DISCUSSION WORKSHOPS ON NORMS IN PERU, BOLIVIA & NICARAGUA

PRELIMINARY PROPOSAL OF NORMS

HIVOS/FOROLACFR, MISION/CRS Y REDCAMIF/SEEP FOROLACFR

2013

12 PILOTS IN 5 COUNTRIES

2nd. MEETING SPTF LATINO EN LIMA FORMATION OF COMISSIONS FOR SEAL + ALLIANCES

PROPOSAL OF SP MONITORING INDICATORS

FONDOS FIDA

2012

WORKSHOPS SOBRE REGULACION Y DS

(3) LANGUAGES

FONDOS HIVOS FOROLACFR

2011

WORKSHOPS LINKING REGULATORY FRAMEWORKS AND SP (BOLIVIA, HAITI Y HONDURAS)

WORKSHOOP: VALIDATION OF RESULTS OF PILOTS IN GUATEMALA

DESIGN OF PROPOSAL OF PHASE OF IMPLEMENTACION

TRAINING & VALIDATION ON NORMS IN MEXICO, HAITI & GUATEMALA

CONSTRUCTION OF AUDITING TOOLS SEALS & OTHER TECHNICAL TOOLS HIVOS/FOROLACFR HIVOS/FOROLACFR

LONG AND SUSTAINED PROCESS OF PROMOTION OF SOCIAL PERFORMANCE IN LAC

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

3.1. The First Actions: 2005-2007 In October 2005, the International Seminar on “Measuring the Social Performance of Microfinance Institutions” in Santa Cruz, Bolivia was held. This aimed at socialization approaches, methodologies and experiences in measuring social performance, monitoring and seeking to promote these processes among its members. Two years later, 9 - 13 April 2007, we conducted a workshop on “Social Governance and the Impact of Microfinance” in the city of Oaxaca, Mexico, whose aim was to develop the capacities of partners for measuring and monitoring social performance through human resource training and technical executive levels in networks and MFIs, using the tools of social audit, governance and impact assessment. At this meeting, guidelines were established of intervention strategy FOROLACFR in eight countries which determined the active and direct participation of the networks in the process of definition, validation and implementation of measurement tools and monitoring of DS.

3.2. D esign and Implementation of the Program: Building Local Capacity for Performance Measurement and Social Monitoring in Latin America and the Caribbean: First Phase 2007-2008. During 2007 and 2008 the program “Building Local Capacity for Performance Measurement and Social Monitoring in Latin America and the Caribbean” was launched in order to implement a platform for measuring and monitoring DS, aimed at steadily improving processes, strategies and results of MFIs, in accordance with its mission and social goals. Among the participants in this program were: AMUCSS in Mexico; KNFP in Haiti; ALPIMED and ASOMI in El Salvador; REDIMIF in Guatemala; REDMICROH in Honduras; RFR in Ecuador, COPEME and PROMUC in Peru, and FINRURAL in Bolivia. The program had four specific objectives: 1. Promote Processes of training, experimentation and validation of tools. 2. Develop a system of indicators of monitoring of social performance as well as financial indicators applicable at regional level. 3. Promote applied research oriented to the development of tools of measurement as well as for deepening the imbrications between the SP, the governance of MFIs and regulations. 4. Implement communication tools and dissemination of approaches, trends, practices and /or experience related to DS.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

In turn, these goals led to national work plans that favored the operation, which were developed based on the needs and the degree of progress in each network. The following actions were also taken according to area of intervention. Table 6. Areas of Intervention, Strategies and Actions of the Program constructing Local Capacities for Measurement and Monitoring Social Performance in Latin America and the Caribbean

AREA OF INTERVENTION

Strengthening of local

STRATEGIES AND ACTIONS • Training in SP tools: regional and national workshops, mechanisms of transfer between networks and national bodies • -Experimentation and validation: Processes led by networks to adapt tools to national and institutional contexts • Implementation of a system of indications of monitoring of

Development and applied

• Performance studies and research: for design and operation of tools, systematization of experiences and links of SP to other strategic areas •

and

The results in each area of intervention are detailed below: A. STRENGTHENING of LOCAL CAPACITIES Training ´´ Three regional workshops were held: Mexico (April 2007), El Salvador (October 2007), Mexico (May 2008) to train networks and MFIs in monitoring and DS evaluation tools, exchange experiences, plan actions and assess the compliance objectives. ´´ Over 20 national training workshops were promoted on the implementation of the SPI tool-CERISE. Experimentation and validation of tools ´´ Through regional coordination - or directly through microfinance networks -social audits were applied 50SPI-CERISE in nine countries in Latin America and the Caribbean.49% of these were located in rural areas, 39% with influence on peripheral urban zones and urban fringes, while 12%were active in urban areas. Within the focus, 24% had credit methodologies and solidarity communal banking clients, predominantly women, 22% had specialized loans for the agricultural sector and 51% credit with no specific methodology or a combination of several methodologies.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

´´ There was also support for the transfer of methodology evaluated in impacts from the FINRURAL Network in Bolivia to the RFR Network of Ecuador as a first experience of interchange of capacities. ´´ We applied the poverty measurement tool PPI among two partners of the RFR Network of Ecuador and in a Mexican micro-bank, AMUCSS. ´´ We conducted a pilot assessment tool of governance and internal control among nonprofit MFIs in two FINRURAL partners in Bolivia. B. DEVELOPMENT and APPLIED RESEARCH ´´ We designed a first set of DS indicators which was validated in three countries: Bolivia, Ecuador and Mexico. This was presented at the SPTF global meeting in June 2008. The characteristics of the common monitoring indicators are detailed in Chapter 2. ´´ With the support of CERISE-France, we carried out a study on the theory and practice of the evaluation of impacts and social performance. C. COMMUNICATION and DIFFUSION ´´ We organized several workshops in coordination with other regional networks ´´ In August 2008, in Guatemala, we signed an agreement for cooperation between FOROLACFR, REDCAMIF and the MISSION Program in order to promote and advance DS in microfinance in the region through the following actions: a) Apply DS indicators massively; b) Facilitate a sustainable and cost-effective social function c) Strengthen and develop the institutional capacities of the national network; d) Implement common platforms of tools for management, monitoring and evaluation of impact; e) Maintain a dialogue and align visions with donors, social investors and governments. f ) In addition, a Regional SP Committee was formed to define DS guidelines, a regional coordination strategy and monitoring of compliance. ´´ A regional website on social performance was built and implemented. ´´ Two bulletins specializing in social performance were generated.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

3.3. S econd Phase of the Program: constructing Local Capacities for the Measurement and Monitoring of Social performance in Latin America and the Caribbean (2009-2010) In 2009 the second phase started, in order to meet the needs identified in the IMF after applying SPI assessments, requiring them to be complemented with globally generated trends and developments. The general objective of this second phase was: to promote the implementation of joint platforms to facilitate cost-effective management of evaluation and monitoring processes, and continuous improvement of social performance of MFIs in Latin America and the Caribbean. This project had three specific objectives: ´´ To support the implementation of common indicators for monitoring and other tools related to social performance, ensuring their adaptation to different national and local MFIs in their prevailing approaches, seeking to facilitate social performance management from the IMF and thus promote greater sectoral transparency. ´´ Promote a proposal for the implementation of a system of certification of social performance that would permit differentiation of the MFI fulfilling their social mission. ´´ Consolidate common communication platforms and dissemination practices, progress and learning related to the measurement, assessment and monitoring of social performance, as well as strategic and operational links with other areas of management. Three lines of intervention were defined:

MONITORING PLATFORM

• Technical assistance and support to processes of validation and implementation of indicators for SP monitoring. • -I mprovements in the tools of evaluation of governance and other factors linked to SP.

PLATFORM OF CERTIFICATION

•

internal processes that characterize IMF with good SP

• Design of a conceptual proposal for the implementation

PLATFORM OF COMMUNICATION AND DIFFUSION

• Interchange of experiences and learning through workshops, publications, virtual forums and consolidation of virtual webpage.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

The results achieved in this second phase were as follows: A. MONITORING PLATFORM We implemented a basic proposal of common indicators (IDS) in 3countries: FINRURAL/ Bolivia, RFR/Ecuador and AMUCSS/Mexico. In the case of Bolivia and Ecuador, the DS monitoring indicators have been updated and managed to date, becoming regional models. Subsequently we launched a similar process of technical assistance with support from the Oiko credit network PROMUC of Peru. Also, based on the conceptual design evaluation tool Governance Systems and Internal Control, sponsored by FOROLACFR in the first phase, we further developed: ´´ A computer tool for evaluation of governance (SISGOB): this is a program of computation that serves as a tool of evaluation or self-evaluation of governance. ´´ A self-learning tool: a computer self-learning system, in the form of an interactive CD, which includes a program of training on governance and internal control. ´´ A Program of virtual training in governance: this program was implemented by FINRURAL of Bolivia in 2010with the participation of thirty-nine officers from several financial development institutions (dfis) and cooperatives. The tools of governability are being brought up to date for a new application pilot and its reproduction at regional level. B. PLATFORM of CERTIFICATION The SPI diagnostics carried out by FOROLACFR identified that the centre of the intellectual and operative debate is rooted in the definition of mechanisms that evaluate and differentiate the impacts of the MFI in the clients. With a basis in this analysis, during the annual reunion of the SPTF of 2009, work was proposed on the design of a system of certification that complies with this objective. At this stage we outlined a conceptual proposal for the implementation of a Certification System of Social Performance in Microfinance (SC-DSM) involving three stamps depicting common social objectives of MFIs in the region: Gender, Poverty and Rural Development. We defined the objectives of the system, its foundations, components, management mechanisms: funding arrangements began. C. PLATFORM of COMMUNICATION and DIFFUSION WE supported the development and publication of three national dossiers in Bolivia, Ecuador and Mexico which included trend analysis and diagnosis, a description of developments and good practices in social performance of MFIs in the three countries. Similarly two publications were promoted relative to principles and practices of Good Government and Internal Control Corporative both for non-profit making MFIs and for Savings and Credit Cooperatives. Both books have been published in www.forolacfr.org

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

3.4. C onstruction of a System of Certification of Social performance (2011- 2013) Based on the above, from the year 2011, FOROLACFR decided to concentrate its involvement in the development of the Certification Scheme involving 3 Seals of Social Performance: Gender, Poverty and Rural Development. This process was sponsored by HIVOS regional allies and Central American Microfinance Network and the MISSION Project of Catholic Relief Services. The strategy for defining and validating rules and standards was adjusted according to process needs, initially (2011) Technical Committees were formed (consisting of three networks) that promoted the validation of Seals in their countries. Subsequently we worked with networks interested in changes in regulatory environments, which provided financial aid /or had specialized member institutions in the areas of the Seals. The most important landmarks in the process of construction of the system of certification were: In the year 2011: preliminary definitions of the rules ´´ 90 new SPI audits were systematized (depending on databases provided by CERISE) discriminating results for each seal as the basis for a first approach to indicators. ´´ Discussion workshops were carried out of rules in Peru, Bolivia and Nicaragua4 in which se a more than 70 institutions were involved ´´ Advances were made compatible in the above events to generate a preliminary proposal of norms and standards In the year 2012: Validation of the rules and construction of technical instruments ´´ National workshops were conducted to validate the proposed a set of standards in Bolivia(2), Ecuador, Mexico(2), Haiti and Guatemala. ´´ A Workshop on Rural Poverty was held with RIMISP and the Universidad Autónoma de Mexico that has as an objective a conceptual deepening and practice of the rules and standards. This involves a network of operators from 5 countries. ´´ Workshops are held on regulatory frameworks on deeper analysis and reflection of social performance standards in Bolivia, Haiti and Honduras ´´ With the support of a specialist in methodologies of certification, we translate advances in certification, and regulatory instruments are developed following procedural technical documents: Guidelines for Social Performance Management System; Social Performance Standard Approach; Rural Development Poverty Focus; Standard Social Performance, Social Performance Standard Approach to Gender; Criteria for a good measurement system; Sheet Certification process; Certification Procedure; Format evaluation Plan; Format for nonconformity; Format Executive Report; Format assessment Report, Guidelines for the review of the rating committee; Format Checklist; Procedure qualification of Evaluators. ´´ Auditing tools are constructed for the Seals of Poverty, Rural development and Gender ´´ Controlled environment are drawn up in 6 institutions, thanks to which we can complement and define uniform criteria 4. The workshops on Nicaragua are managed directly by REDCAMIF with financial support from the SEEP Network)

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In the year 2013: final Validation of the normative through pilots ´´ Documents of analysis are culminated on theoretical links and practices between microfinance and the ambits of poverty, gender and rural development ´´ A methodological document is created on evaluation of impacts and minimum criteria defined for the execution of this type of studies ´´ 12 pilots are carried out on the 3 Seals of Certification under the leadership of network national with capacity technical. The pilots are executed in the following countries and institutions: Bolivia: CRECER, SARTAWI, EMPRENDER and FONDECO Mexico: COSECHANDO JUNTOS and NETWORK ECO SUPPORTIVE Guatemala: ASDIR, REFICOM, ADICLA and ADISA Ecuador: FODEMI Peru: ADRA and ALTERNATIVA. ´´ A technical workshop is promoted for the month of May in Guatemala in which the indicators are validated according to results from pilots and a plan of work is defined for the phase of implementation.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

4. The System of Certification of Social performance: the Proposal and Vision of the operators As mentioned in previous chapters, the crisis of credibility that microfinance confronts, based principally on abusive practices, excessive debt, and exorbitant rates of interest, has generated the need to legitimate its social function as an instrument of support for the struggle against poverty and of the generation of opportunities for development. So as to confront these questionings, an evaluation was promoted of social performance of Micro-financial institutions, in equilibrium with a good financial performance. As a result, today there are important advances at a level of common standards and tools for align the internal processes with the social mission. Although the generation of results and impacts in clients is the final objective of the management of social performance, the advance is significantly lesser in the design and implementation of tools that they evaluate and give evidence. This is the challenge that has been taken in by FOROLACFR through the construction of a system of certification that involves the implementation of 3 Seals (Gender, Poverty and Rural development) that evaluate predominant focuses for microfinance in Latin America and the Caribbean. All the actions described in the previous chapter have resulted in a set of definitions in relation to the characteristics, focus and reach of this initiative.

4.1. A System of Certification that values excellence at the level of results The System of Certification of Social performance have as a proposal the implementation of a group of norms and standards of excellence - specialized in predominant focuses of microfinance- oriented towards evaluating and differentiating Microfinancial institutions that demonstrate coherent results with a function of social and economic development with clients. Evaluate and certify …

RESULTS in clients in the ambits of the Seals. Tools are not certified. Oriented toward institutions that prioritize a function of DEVELOPMENT of CLIENTS and manage RESULTS to demonstrate this.

The certification …

It is NOT OBLIGATORY, and each institution decides the Seal that it applies to its predominant focus it is NON-PROFIT MAKING, and promotes the leadership of the national network for its implementation Evaluate RESULTS Are oriented towards EXCELLENCE

The norms and standards…

Their fulfillment is not necessarily Immediate, they require a process of INSTITUTIONAL DEVELOPMENT and platforms of network support They are defined on the basis of BETTER PRACTICES from operators and are CONTEXTUALIZED on the basis of national market dynamics

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Why Seals of Social performance that evaluate results? ´´ In the crisis current of credibility that microfinance faces there are urgent mechanisms that legitimate their social function ´´ Not all the MFI prioritize social objectives, and differentiation is required to avoid generalizations that back up the questionings ´´ The over-evaluation of good financial indicators parameters of success have generated distortions in the mission, and a motivation towards the excessive remuneration. Good practices must be recuperated, returning to the origin of microfinance ´´ Criteria and tools of universal application are necessary as base parameters but are not sufficient to reflect and evaluate predominant focuses, is fundamental understand differences to promote improvements in differentiated contexts ´´ According to tendencies in public policies and new regulatory frameworks in Latin America and the Caribbean local contexts take on importance, it is urgent to feed these processes with instruments that reflect national realities and guide state interventions

4.2. G eneralities of the Seals of Poverty, Rural development and Gender To promote Seals of Social performance in 3 ambits: Poverty, Gender and Rural development. the objectives common of the 3 Seals are: Evaluate and function of the IMF in each attribute

Demonstrate the impacts they generate in their clients

Promote the continuous improvement in their social function

The Seals are applicable to all financial institutions that declare a focus on one of the ambits of the Seals. the main and particular proposal in each case is:

Seal Poverty

Generate opportunities for overcoming poverty and the development of poor and vulnerable people, through the design and implementation of products and service focused on its needs

Seal Rural development

Contribute to the socioeconomic development of the rural population, through the offer of products and financial and non-financial service, specialized and adapted to its needs

Seal Gender

Promote the development and personal and company autonomy of women in situations of poverty and/or Social Vulnerability and economic. In a way that reduces gender gaps through the design, implementation and institutionalization of methodologies adapted to the strategic needs and practices of women, and focused on gender equity.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Each Seal evaluates: Reach and focalization: Standards that evaluate the strategy of focalization at the level of clients, products and service including criteria for reach and deepening of markets Satisfaction of the client: Standards that evaluate the institutional results related to the satisfaction of financial and non-financial needs of its clients incorporating them in the evaluation, criteria that are deepened in types of products and service offered and their reach, cost of the service and complementary service Results in clients: Standards that evaluate results in the clients for the ambit of the Seal and/ or profile of clients attended

4.3. P reliminary definitions for the implementation of the System of Certification The organizational-institutional outline of the System of Certification will have several levels for complying with the requisites of professionalism, impartiality and control of possible conflicts of interest: i) Strategic and political; ii) Processes of inspection and monitoring of process for achieving certification; iii) taking of decisions relative to the certification and award of the seal; iv) Relation of the evaluation and plan of action with the training and improvement of the management of social performance. An outline of combined certification would be adopted “second and third hand”, which means it is the sector which validates / controls the norms and legitimates certification; but it besides it institutes impartial instances for the award of certificates of fulfillment. To this effect it will involve different interest groups (cooperators, government, MFI, academics and client representatives) in a Directive Council that will be charged with the direction of the System of Certification According to its capacities, 3 levels of participation of the network are foreseen in the certification: a) Level 1: Constituting instances of certification (having supervisors in Social performance) that carry out evaluations and emit the reports of fulfillment, in this level it is expected that the network will have instances of formation, training of MFIs for supporting the strengthening of the SP. The personnel of the network may act as inspectors as long as they comply with conditions of objectivity, impartiality and technical competence, these inspectors will be evaluated and certificated by the Regional Certifier. b) Level II: the network has the capacity to implant its own system of inspection (Inspectors of the network) but without having a system of formation, it makes an alliance with other providers or national organisms; c) Level III. - the Network has no specialized personnel or sufficient experience, works with a network of inspectors independently certified by the Certifying Company and also with providers of service of technical assistance and training defined with the MFI members An institutional architecture has been defined for the implementation of the system of Certification that will be socialized once it is validated by the strategic levels of FOROLACFR.

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5. Seal of Poverty It is up to the operators and their networks to demonstrate that microfinance is an effective tool to fight poverty, either by offering the possibility to accumulate capital and assets, or for the implications of financial inclusion to promote access to other markets and income-generating activities. But not all microfinance reduces poverty and questions about its effectiveness are not unfounded. After the crisis in several countries the prevalence of poverty, and abusive behavior of some MFIs to clients, it is completely valid question their effectiveness, cost-benefit and the opportunity cost of the resources that are channeled into microfinance, compared with other actions and policies to combat poverty. [Weiss & Montgomery, 2004]. This analysis is necessary to find those links between the use of microfinance and poverty reduction and this is the base precisely of the definition of the Seal on Poverty. The certification of an MFI with this label will mean that both targeting, such as the processes, products, services, interest rates and non-financial services that give customers will strengthen those links. The Seal in Poverty is based on the premise that microfinance alone will not eradicate the problem in a region, because as you will see, poverty is a multidimensional and dynamic business that involves endogenous factors, ie the capacities of the individual that suffers it, as well as exogenous factors, ie belonging to the conditions of the economic, social and political context in which an individual develops. In this sense, microfinance to reduce poverty are those that attack the corresponding dimension, which refers to the creation of financial assets, which in turn, contribute to the generation or accumulation of other assets, such as human capital, physical capital and social capital. So much is it so that several evaluations, with different measurement methodologies, have found positive impacts in microfinance on income growth [Morduch, 2002], in other cases there have been positive externalities such as better nutrition of children [Weiss & Montgomery 2004 18] or increased levels of schooling [Maldonado, Vega & Romero, 2003]. So, the Seal of Poverty seeks two main objectives: 1. Generate a differentiation mechanism of MFIs that have real results in reducing poverty, a situation that will allow consumers, financiers and regulators, to discriminate between an MFI that has anti-poverty practices and one that does not. 2. Establish requirements, policies and services to address poverty from microfinance and convert these guidelines into parameters that serve any other MFI with an interest in social performance achieved in this regard.

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5.1. Theoretical considerations: the links between poverty and microfinance The Seal on Poverty is based on the contribution of microfinance to reduce poverty and vulnerability. In order to present these links, the starting-point lies in several definitions. Firstly, microfinance is the set of financial services covering savings, microcredit, microinsurance, payment, transfers and other financial and non-financial areas targeting poor clients, who are also systematically excluded by commercial banks, whether because they have no collateral or minimum savings balances to access the different services or because the services are not available in their region. Hence, microfinance is a mechanism for financial inclusion for reasons of scale and proximity to the target population [Adechoubou, 2006]. Then we need to define poverty. Poverty is usually calculated as an income level below a certain threshold, which is determined on the basis of prices of a basket of consumer goods, but recently from studies by Amartya Sen, we see that the definition of poverty encompasses broader concepts including lack of capabilities and freedoms providing wellbeing, in such a way that the measurements have evolved towards quantitative methods involving aspects such as: i) Access to housing and basic services (drinking water, light, sewage) ii) Availability of food or food security, iii) Access to education, iv) Access to social security and health service, v) Possibility of participating in society With these variables, the measurement of poverty becomes a multidimensional factor, an aspect that permits measurement also of the number of poor, some patterns that will determine the reproduction of poverty in a given territory. On the other hand, for the effects of the Seal, it is also is relevant to differentiate between levels of poverty, since there is no equivalent – for reasons of cost and methods of care – between the population suffering extreme poverty, in which the individual suffers from hunger or food insecurity that is almost permanent, and those who suffer moderate poverty(less deep), which refers to a lack of assets and opportunities for basic goods such as footwear, clothing, housing, education. Besides, moderate poverty is a state where one could fall after having been exposed to negative shocks [Weiss &Montgomery, 2004: 6]. From any viewpoint it is important for microfinance to have an impact in the struggle against poverty. In Latin America and the Caribbean, in 2012, there were 168 million people suffering poverty and of those, 66 million were living in extreme poverty. (Cepal, 2012)

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5.1.1. The concept of Social Vulnerability This is additional to the measurement of poverty, which is static because it reflects the condition for a period of time. Instead that variable measures, dynamically, the probability of a household falling below the poverty line due to negative shocks, or deepen this if it is below the threshold; this is the concept of social vulnerability5. So, vulnerability is related to a chain of risks in which three components intervene [See Figure 1]: i) The materialization of risk, ii) The set of strategies for facing the risk and, iii) The expected result. For each household, the strategy or strategies with which an unexpected shock is faced is crucial to the outcome of falling into poverty, staying there or falling in deeper. In turn, strategies are defined in terms of physical, financial, environmental, and social. Thus, if a home is not vulnerable it may eventually overcome the negative shock and maintain its standard of living, while a vulnerable household is more likely to fall into poverty. Also, a poor and vulnerable household may deepen its poverty, i.e. poverty will arise from extreme poverty. Figure 1.Chain of risks that determine the vulnerability of a home

Source: Thürbeck, 2009.

On the other hand, additional classifications exist to allow more timely analysis of poverty. In principle, it is observed this phenomenon attacks certain social groups more profoundly, precisely those that are more vulnerable: such as: women, senior citizens, the sick or vulnerable, the indigenous, who face additional barriers in their way out of poverty, discrimination and abuse. 5. O ther definitions [Thürbeck, 2009: 4] indicate that vulnerability refers to exposure to contingencies and stress together

with the difficulty of handling the situation. But in general, vulnerability is related to insecurity, potential damage and/ or the probability of loss. At the micro level it is denoted as the probability that a home or a person, as a consequence of the manifestation of a risk, faces a future under the threshold of wellbeing.

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As for its geographical distribution, poverty focuses on the cities, and extreme poverty towards rural areas. This can be explained because rural poverty is a phenomenon with structural causes, either through a lack of infrastructure - roads of communication and transport – distance or non-existence of health and education services, limitation of economic activity by the size of the market, a lag in human development and high costs of transaction. In contrast, in urban areas, poverty is a phenomenon that serves circumstantial causes because there are more services, roads and market size, but poverty exists because there are barriers to access to all these elements of social wellbeing, such as unemployment, the saturation of services, human capital backlog and the failures of the market. Statistics show the differences noted. On the graph in Figure2, taken from ECLAC [2012: 67] these phenomena can be observed: in column I that means extreme poverty, notably greater in rural areas. Meanwhile in the column PNI (poor, not extreme), 3 of each 4 are urban. Moreover, when the same study examines the proportion of poor among Latin American poverty, ranking them low, medium-high and high, a result is that among the countries with high poverty, 47% live in rural areas. This percentage is reduced to 8% among the countries with low poverty6 [op. cit. :70], i.e., as a country progresses in its level of income, poverty tends to be concentrated in cities. Figure 2. Poverty in Latin America according to area of residence Source: Image taken from the report Social Panorama of Latin America, CEPAL, 2012.

The different relations between poverty, vulnerability and social inequality in vulnerable

groups, show the magnitude of the problem facing microfinance. Hence, the question arises: Is it realistic to assume a position that microfinance can help reduce poverty and social vulnerability? The answer is yes, albeit with the safeguard that microfinance is a contributing factor to the reduction of poverty and that there is noun ambiguous solution to be eradicated. Assuming a multidimensional definition of poverty, logic leads us to think that the answer must also be varied, i.e., there must be a set of interventions for different forms of deprivation, in order to equalize the original conditions in homes. 6. Countries with low poverty: Argentina, Chile, Uruguay y Costa Rica. Countries with medium-high poverty: México, Bolivia, Ecuador, República Dominicana. Countries with hight poverty: El Salvador, Nicaragua, Honduras, Guatemala y Paraguay.

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It should be noted that microfinance enhances its positive effects, which turn out to be a very powerful tool when complemented with other actions that address the other dimensions of poverty, i.e., are more effective when combined with agricultural development policies, social or economic [Chowdhury, 2009: 2]. Moreover, in rural areas, structural weaknesses cannot be overcome without concurrent intervention of the state (government and society).Therefore, microfinance will have a greater impact on poverty reduction if they are intertwined into a comprehensive development strategy [Visconti, 2012]. While MFIs are not responsible for defining a comprehensive development policy, they can have influence in detonating their processes if they adopt the perspective of financial asset formation and so risk reduction because they area means by which households can make better decisions, where other conditions must be available - that is, access to other services, assets and markets. To put it another way, microfinance per se will not eradicate poverty if there are no other aspects of development that converge at the same time. But on the other hand, the lack of financial services can be a condition that prevents breaking with the causes that breed poverty. Added to this, it is important to add that microfinance can increase poverty if it does not take into account family dynamics, financial needs and financial products that satisfy them. For microfinance to work assertively in poverty reduction, it is necessary to answer: What financial products and services are required by the poor?, Moreover, it is necessary to know: What are the financial services needed by the poor? (See Figure 3). Figure 3. Detection of links between microfinance and reduction of poverty

So, to answer these questions, the analysis can be divided into three main conditions in the target population, which are not mutually exclusive but rather cumulative, as one person is poorer than another:

1. Food insecurity is defined as the inability to ensure a sustained supply at all times, under the necessary conditions and quality requirements; 2. Exposure to unexpected risks – diseases, weather disasters, accidents, others for which there is no response or mitigation strategy, which increases social vulnerability. 3. Deprivation of assets of all kinds: financial, material, human capital, natural capital and social capital. Microfinance can modify these three negative positions, altering the structure of a family’s present and future assets. Besides, in the case of peasant families, the change in the composition of assets will have effects on both consumption and production, i.e. if improvements are made directly then production capacities are increased such as consumer capacities, and vice versa, since the peasant family is a dual economy: production and consumption [Ellis, 2000: 7]. Said duality is important because it has implications for the allocation of available resources.

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For example, if the access to financial service (credit) permits the acquisition of inputs for sowing and technological change, such as introducing irrigation to the land - by pumping, drip, etc. - it is likely that the family can perform two production cycles in a year and is likely to reduce the amount of labor offered to the market, for use in increasing production from the land, which will produce a larger amount of food, generating revenue and enhancing consumption7. Figure 4 outlines the link between the problem caused by poverty of getting a result, financial need, the right product and the changes that this generates: Figure 4. Needs of the poor and financial products

As seen in the figure above, the triad savings- credit – microinsurance is one that contributes to the reduction of poverty and vulnerability. In this sense, the virtuosity of microfinance is to adapt the product to the needs. For example: a customer in extreme poverty will suffer food insecurity both as high risk exposure and lack of assets, so that the use of the three financial products is not trivial and therefore requires a strategy of gradual care by the IMF, in such a way that the user and his family are inserted into a path for the formation of assets to help them out of their chronic condition.

7. Regarding this example, one assumes that relative prices of certain agricultural products lead to investing credit in their own land. This type of decisions depends on prices and variables of access to the market. In any case, access to financial services opens a range of possibilities for a family, because it offers investment options that were not there before.

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Figure 5. Financial products according to levels of income

The gradualness is sketched out in figure 5, where it is possible to visualize the relation that exists between levels of income on the vertical axis and the time-variable horizontal axis. On two superposed axes is a sample of what would constitute a strategy of gradual attention. In this way, dealing with homes in extreme poverty, the financial product that contributes most to reducing vulnerability is savings, and not credit as is commonly thought, since credit is a risk added to a family that does not in itself have mechanisms for facing unexpected risks to which one is commonly exposed. For its part credit, in cases of profound poverty, must be available only for emergencies, under methodologies of solidarity and in small quantities. Generally when there are levels of marginalization that are so profound, governments respond with direct transfers, or transfers conditioned to income8 that can be complemented with options for savings and micro-insurance, since such a symbiosis would permit acceleration of the accumulation and prevention of risks. Moreover, as the family overcomes the poverty trap, saving continues to be important, but there are other needs such as the demand for savings in the form of investment (fixed term) or funding to drive a micro-business .Hence the complexity for an MFI that has its focus on an approach to poverty, the diversity of products that must be adapted according to their customers transitioning from one phase to another. Although this gradualness does not represent a straitjacket for the MFI, what it does provide is a guide to the necessary condition for knowing the family environment and the degree of poverty, for offering those products and services that reverse causes and do not deepen them. Another two elements exist that are highly relevant for an MFI to achieve the desired impact in the reduction of poverty: the first of them is focalization and the second is the formation of

8. Transferences to the family income in exchange for the family carrying out some activities such as: taking children to school, periodic medical checks, talks on nutrition, among others. Programs like these exist almost everywhere in Latin America, in Mexico it is known as Program of Human Development Opportunities and in Brazil it is called Bolsa Familia.

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human capital through financial education. 1. Focalization: For achieving effective attention to the poorest, it is necessary to select adequately, for which eligibility criteria are needed that permit detection and measurement of poverty among its clients. With this, information is generated that, besides, will permit the MFI to monitor changes in its client, once he or she begins to use the financial service. 2. Financial education: observing figure 4, financial education appears as a transversal element through which microfinance may maximize the probability of positive impacts. This is a non-financial service desirable for all income levels, although for the population enduring poverty it is a condition necessary for making efficacious and efficient use of financial assets. The former is due to the fact that the cause-effect relation between microfinance and the reduction of poverty is not automatic due simply to the availability of the service, since external factors intervene in the process, as well as intangible factors such as: the ability of the people in transforming the resources into assets and these assets into incomes, dignity, empowerment and sustainability. In other words, in order for access to a financial service to translate into better living conditions, human and social capacities are needed so that the structural transformation may be effective and the exit from poverty may be definitive [Bebbington,1999]. Regarding this point, financial education must be oriented towards the development of skills and capacities so as to take better advantage of the financial service.

5.2. T he products of savings and microinsurance for the reduction of poverty Savings are an effective tool in fighting poverty. In this section we present additional analysis on characteristics of saving products by degree of poverty. In this sense we must consider that the greater the poverty, savings are used for the prevention of risks, for example, to cover expenses for diseases or to ensure consumption in times of scarcity, whereas in rural areas these are worse in pre-harvest times. Furthermore, the lower the family’s prior heritage and ability to face unexpected risks, the greater the need for liquidity and the lower the amount it can save. Added to this, food-insecure families aim to ensure minimum food consumption, therefore saving products as well as liquidity, requiring availability in times of contingency, over and above those with more attractive yields that concentrate wealth [Zeller etal.2009: 49]. Another important aspect of prioritizing a savings basis is that poor clients generate a log to improve the conditions of access to credit, and that the greater the extent of the poverty, the lower the ability to pay and this the greater the risk, even when participating in group solidarity credit, so that the MFI has also an advantage in promoting this type of strategy. For its part, microinsurance reduces the impact of unexpected events in accumulated patrimony, in other words, it is not properly an instrument for the accumulation of assets, but is that which impedes the decapitalization of the home. These strategies are still more effective when employment, the access to consumer goods and land – in rural areas - are reduced or uncertain [Zeller et al, 2009: 51].

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The impact in wellbeing from savings has been evaluated with favorable results both at individual level and at territorial level. Such is the case of Malawi, a country in southern Africa with a very low level of development and densely populated, in which the introduction of formal savings had a positive impact in flows and the accumulation of wealth, notably in rural areas with emphasis during the pre-harvest season [Flory, 2011]. This example dates from the year 2007, in which from a donation by the Bill & Melinda Gates Foundation to the International Opportunities Bank of Malawi (OIBM to use its abbreviation in English) set a banking service in motion to bring financial services to rural areas, prioritizing savings. This initiative was evaluated afterwards in a sample of 2,006 homes that included both inhabitants of attended communities, as control communities, in other words those that were not attended by this program. Although the poorest and most vulnerable families were unable to access formal savings through this program, failure to maintain minimum balances, positive side effects were found in them. The evaluation results showed that those populations that were present OIBM, informal credit from family and friends to the most vulnerable has increased from 39.7% in 2008 to 49.2% in 2010, while in areas where there was no presence not only did not increase this possibility for the poor, but also declined. The increased availability of monetary resources, despite being given through informal credit allowed between11.8and 16.3percent of households move from extreme food insecurity, to a moderate position, that is, if not entirely overcome their poverty, increasing cash flows locally, had a redistributive effect reduced the severity of poverty[Flory, 2011:30]. Despite the poorest and most vulnerable families not having access to formal savings, through this program, due to the impossibility of maintaining minimum balances, positive side effects were found in them. The evaluation results showed that those populations where OIBM were present, informal credit from family and friends to the most vulnerable has increased from 39.7% in 2008 to 49.2% in 2010, while in areas where there was no presence not only did this possibility not increase for the poor, it even declined. The increased availability of monetary resources, despite their being given through informal credit, allowed between11.8 and 16.3 percent of households to move from extreme food insecurity to a moderate position, that is, if they did not entirely overcome their poverty, the increase of cash flows locally had are distributive effect and reduced the severity of the poverty[Flory, 2011:30].

5.3. M icrocredit and the reduction of poverty Microcredit is the financial product most utilized by microfinance, that is implemented most rapidly, which can be offered by all types of financial institution, whether a bank, non-governmental organization, cooperative, etc. Similarly it is the most questioned in terms of its contribution to the reduction of poverty. In 2010, the crisis of microcredit was globally visible with the suicides of debtors and the exacerbated loan problems in Andra Pradesh, India and thus the domino effect towards Africa [Guérin & Roesch, 2012]. These developments intensified the debate over whether microcredit had contributed to the reduction of poverty or, in the contrary, there are those who confirm that it was poorly proportioned and used the increase [Servet, 2012].

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The questions regarding microcredit have acquired, on the other hand, Manichean and absolutist postures that do not contribute to intellectual clarification. In the middle of this confusion it is necessary to re-establish the role of microcredit and place it in its corresponding dimension, so that it is understood that not all credit combats poverty, just as neither can is be said that an absence of credit contributes to reduce this condition. The Nobel Prizewinner for Peace, Muhammad Yunus, creator of the Grameen Bank, explodes the myth that the poor were incapable of acquiring a credit to improve their living conditions, He has indicated: “Microcredit is not a miracle cure that can eliminate poverty at the blink of an eye. However, it can eliminate poverty for some and reduce its severity for others. Combined with other innovators program that unchain people’s potential, microcredit is an essential tool in our quest for a world without poverty9” [Chowdhury, 2009: 2] According to this perspective, the centre of the debate is not whether credit is a positive or negative tool, but rather a definition of what microcredit serves as an effective development tool, and under what conditions. In this way it acquires its true dimension. In this way smokescreens are blown away, by means of which, for example, credit to the consumption is severely reproved for not being directed towards producing monetary incomes when in reality is a necessary product in the quantities and gradualness opportune for a poor family. With greater reason if is a peasant family for which consumption, the production and the investment are not separate activities. Moreover, emergency credit in small amounts and over short terms for food or for treating illnesses have a high impact on poverty reduction because they indirectly affect individual productivity, since if food is really poor or insufficient, a hungry worker is weak and therefore will be less able to work. This situation at home means less ability to feed people and thus further poverty. In this way consumer credit should not be stigmatized as unproductive when it comes to serving the most vulnerable, since it operates asa safety net. To put it another way, the importance of access to credit for clients that suffer from poverty lies not in the fact that they have to direct themselves necessarily to the acquisition of goods of capital or input for production, but rather in their being able to avoid the de-capitalization of goods that the family has managed to make constitute previously, a situation that if it occurs, brings greater impoverishment in the long-term [Zeller & Sharma, 1998]. Moreover, credit can be available on the informal market, through friends, family members or lenders. Therefore, we cannot talk of financial inclusion if itis assumed that this need exists and therefore must be addressed. Finally, if the tools of credit are linked with other measures of reduction of poverty (savings, microinsurance and programs of production and social insertion) it is far more probable that the point will be is reached at which the demand for credit will have productive purposes only.

9. The text between quotation marks is a translation of this publication.

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5.3.1. The limits of microcredit in marginalized zones Credit has limitations and MFIs have the obligation to recognize the signs of when credit may cease to be a tool for development and become an obstacle. The MFI must analyze the context of the economy in which the credit is offered, because if in the region an expansion of the market is not observed, the greater demand for credit can have behind it a Ponzi game, that is one in which a debt is contracted in order to pay another debt, a situation which in the long term is fatal. Therefore, it is worth mentioning that the offer of credit does not create its demand and if the market is not expanding, the larger is the portfolio placement, which will result in under utilization and over-indebtedness. Also the recovery rate cannot be the only indicator of success used, and this should be checked in all economic activities of a territory served, because if the payment comes from the acquisition of other debt in the medium term then families that are credit users lose more assets, shed their liquidity and thus de-capitalize, finishing in a situation of greater poverty and vulnerability. For its part, the microfinance sector is at risk of non-payment crisis and uncertainty; the situation described above has occurred in other countries due to not having this type of approaches and controls.

5.4. O bstacles that confront microfinance through attention to the poorest In this section references abound to the conditions that hinder the access to microfinance of the poorest people, even if there is a focus on poverty. In this sense, as will be appreciated, the mere existence of microfinance does not guarantee effectiveness in the reduction of poverty, for this precise reason, the creation of this Seal has as its aim the measurement and systematization of the capacity of an MFI to: ´´ Focus on the poorest with quantitative indicators. ´´ Develop and offer financial products adapted with incentives for which the poorest might adhere to them. ´´ Provide additional services that increase capacities so that clients may capitalize the access to financial service and translate this into production, income, empowerment and sustainability. Thus, part of the “failures” to address poor clients comes from the lack of tools for proper targeting, and ambiguity in criteria for eligibility and promotion. In social sciences there is the phenomenon of self-selection, in which households with higher incomes10 have greater management capacity, the advantages are easily identified of any opportunity that presents itself, it is a program of public subsidies or financial services that is directly approached; while the poorest households have greater difficulty in just self-management, so they are excluded and implicitly 10. The less poor people

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generate a widespread psychosocial thinking that in this case, banks or anything similar are for “another kind of people. “ In the study carried out by Navajas, Schreiner et al. [2000] in five Bolivian institutions that provided credit with the intention of attending to the poorest: Banco Sol, FIE, Caja los Andes – mainly in urban zones of the capital city - and, moreover, PRODEM and Sartawi with greater presence in rural areas of La Paz, a fatal bias was found toward the inclusion of less poor clients. The study revealed that while in the urban zone of the capital city, 45% of the population was not poor, the proportion of non-poor clients in the three urban MFI overcame this threshold, being 69% for FIE, 67% in Caja los Andes and 48% in BancoSol. When analyzing the moderate poverty focus, we found that the proportion was exceeded only by BancoSol, this being 47% compared to 38% in the moderate poverty population. In other words, none of the three institutions that dealt with the urban side came close to the threshold of population in extreme poverty, since the ranges of the study showed a profile inclusion of this population of between2 and 5%, while the proportion of urban population living in extreme poverty was 17%. The same pattern was seen in MFI in rural zones. In addition, rural borrowers were fewer than urban ones, but credit to the poor as a proportion of the total portfolio was larger. [Navajas, Schreiner, 2000: 341-342]. This study provided evidence that the five institutions with over half of the microfinance market in Bolivia, had among its customer profile the richest of the poor and the poorest of the rich, while the poorest of those who continued to be poor were excluded. So the issue of targeting is not trivial. Recent data from Mexico shows similar scenario, in which although the government has invested human and fiscal resources to increase financial inclusion, which currently hovers at 30%of the population, again the rural and the poorest are still outside. Table 7 shows official data from the CNBV, the regulatory body of the Mexican financial system, information which shows that the greater the poverty in rural areas the lower the coverage by microfinance. Table 7. Indicators of poverty and lack of points of access to microfinance according to the size of the population in Mexico, 2011. Average of population in extreme poverty

Average of population in poverty

Percentage of that have NO points of access to Cooperatives

Percentage of municipalities that have NO points of access to Microfinance

Urban

14.4%

54.4%

49%

42%

Semi-urban

23.8%

68.2%

73%

87%

Rural

31.9%

73.3%

95%

98%

Size of the Municipality

Source: in-house redaction with dates from CONEVAL11, 2010 and CNBV, 2011.

11. This organism is responsible for carrying out measurements of poverty in Mexico.

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Similar cases occur in other countries of the region and the question that arises in addition to the errors of inclusion, what other obstacles faced by MFIs to serve the poor? The reasons are diverse, although here they are put into two large groups: ´´ Economic factors: among these are the high operating costs, information costs, lack of guarantees and cost savings. ´´ The role of the State and the regulatory framework

5.4.1. The economic factors “In the microfinance community, there is a strong difference of opinion on what should be the” raison d’être” of an MFI, financial sustainability and poverty reduction” [Gulli, 1998: 12]. This phrase describes a dispute that is constant in microfinance. Recently, however, the microfinance community has been leaning toward a compromise on the need to balance both objectives, but the way to do it is still the Achilles heel, mainly because the cost issue is not yet resolved. So that an MFI in poor areas may be feasible, a high volume of small transactions is required, and this cannot necessarily be achieved quickly. Particularly in rural areas, the costs of providing financial services of proximity are higher for reasons such as: distances, poor communications infrastructure and low dynamism of their economies. Thus, small and few financial transactions in poor areas make it difficult to maintain a constant presence and the consequent removal of the MFI ends up being decisive for the poor, who mainly continue largely excluded. Under these conditions, financial sustainability cannot be achieved in a short time, so serving microfinance poverty requires external support, which does not make them ineffective, but rather requires understanding the context in which they are developed. Therefore high operating costs remain the primary impediment to providing financial services to the poor [Zeller et al, 2009: 69]. Moreover, solutions are not simple when it comes to cost. In principle, the most recurrent is to think that this problem is over when you reduce the interest rate used for this purpose, through artificial mechanisms such as subsidies. While this may be the most direct mechanism, maybe it’s less suitable because it distorts the market and on the one hand lowers operating costs, but on the other raises costs of information. Hence much more complex instrumented measures have to be used to reduce operating costs such as reducing financial intermediation margins, developing methodologies and technologies to provide and recover credits, or accepting deposits from smaller economies more efficiently [Miller, 2000]. An example of this is the use of technology such as mobile banking, internet banking and debit card usage, prepayment or credit from microfinance users. Another part is what is needed to provide better telecommunications infrastructure, security for the transfer of securities and thus improvement in the conditions so that an MFI has proximity to poor areas, especially in rural areas. In second place, there is the barrier of information costs for which the development of markets and infrastructure are elements that contribute to their reduction. Examples include the creation of credit bureaus, credit bureaus, market information systems, although these are policies that relate directly to state action.

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For MFIs, the option is to design methods that reduce the cost of obtaining information, such as solidarity credit methodologies, in which the functions of research, participatory monitoring and enforcement are vested in the members of the group and not in the MFI. Other MFIs seek to strengthen customer relationships and reduce information asymmetries through membership, as in the case of community banks or cooperatives. Thus MFIs that work with partners are based on the principle of gradual and repeated transactions, which encourages the enforcement of contracts to maintain access [Zeller, op.cit: 71]. In third place is the obstacle of a lack of collateral, which is still a problem in serving the poorest, especially for production credit. In this case, there are still significant limitations that reduce the supply, for example, in rural land there should be collateral for loans but various situations prevent leaving land under guarantee. In principle, because the poorest do not own the land but the rent or the usufruct in partnership, property rights are not defined or legal impediments to the land being collateral, such as a social property in Mexico.12 Again, in these cases, solidarity group lending is a very efficient mechanism to meet the tangible guarantee. Although its success requires that the service will be uninterrupted, close contact is maintained with groups, providing training and technical assistance, which may raise operating costs, having to find a balance must be found between these two objectives. Other tangible collateral substitutes that have been implemented are: a) Credit with obligatory savings, where the savings remain blocked while the debt is paid off; b) Tied contracts in which the lender of funds acquires authority over part of the production, marketing of products or merchandise; c) Collateral or of third party guarantees; d) Thorough research on the ability to pay off an individual through recommendations from their family, neighbors and friends; e) Social sanction: f ) Threats of losing access in the future. Finally, a no less important impediment to reach and serve the poorest optimally is that of the cost of savings. While mentioned that savings have positive impacts in reducing poverty, and assuming that there were no legal impediments to mobilize savings from the public, the truth is that it can be an unattractive product for MFIs because initially they only generate a cost to them. Also for poor families savings impose costs if there are not the right incentives, either because the cost of transportation to the windows exceeds the amount that can be saved or because liquidity is short and the opportunity cost of keeping cash is very high. So we must create savings products that minimize restrictions for both parties. An example of this are community savings groups and village banking loans or, where travel costs are divided among all members of the group and captured, not individually but collectively, in larger amounts that give viability. Another solution to mitigating this barrier is the use of technology: use of correspondents, prepaid cards, mobile banking, and others that attract while facilitating with less cost. 12. In México, the majority of rural poor live on land that is social property, which from article 27 of the Political Constitution is declared as inembargable, inalienable e imprescriptible.

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5.4.2. The role of the State and regulation As will have been seen, the state plays a key role in the development of microfinance. In many Latin American countries the public sector has been an engine for development of this sector, as in the case of Brazil, Mexico, Nicaragua and Guatemala. However, governments have also been extremely conservative or have omitted to influence this market growth in poor areas and rural regions. In this sense, the omissions of State participation are multiple: inability to reduce information asymmetries, lack of investment in infrastructure, absence of strategies that place microfinance as an essential ingredient of economic development policy. In other countries this has been due to a lack of financial intelligence to reduce the cost of funding, which impacts on higher interest rates for the poor, among many other actions in which the public sector has limited its performance, which has prevented massive penetration among the poor population. On the other hand, the regulation has left little freedom, preventing the development of MFIs with attention to poverty profile. For example, in countries in this region, NGOs are not recognized as financial institutions and that limits their actions, when an institutional profile, par excellence, has the flexibility to adapt to the financial needs of the poor. Also, when the adjustment raises microfinance requirements to the same footing as commercial banking it impacts negatively, because in some cases it limits competition and in others, MFIs seeking survival and that act within the law, choose to sacrifice in order to attend to the poor. Then they raise their financial standards and are forced to concentrate their activity on sectors of the population with lower risk and higher return; hence they prefer to focus on urban zones and a middle-income population. Perhaps the most important limitation regarding the regulation has been the inability to capture, save or open the microinsurance market for MFIs [FOROLACFR, 2012], which is a huge impediment to serving the poor with appropriate products which moreover are products capable of creating their own demand. Therefore it is necessary for Latin American governments to go hand in hand with them in improving the regulatory framework, strengthening links between social policy and economic development with microfinance and thus providing comprehensive conditions as a way out of poverty.

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5.5. Results of the Application of the SPICERISE tool in Latin American MFIs, with attention to the results for institutions with a focus on overcoming poverty. FOROLACFR analyzed 90 SPI-CERISE evaluations in MFIs in Latin America and the Caribbean. A proportion of these institutions reported having a poor care approach(IMF-POB) with a percentage of customers in this condition over 30%, while other institutions do not have this approach(MFIs-OE) and had a poor customer profile, on average, less than or equal to 30%. The systematization of these assessments provides qualitative information on the current situation of MFIs and the areas of opportunity to make an impact in reducing poverty. It also confirms that it is not enough to declare a caring approach to poverty for this to be fully satisfied. Therefore, on studying the results one sees interesting contrasts, which are presented and summarized in the following figure: Figure 6. Comparative Analysis of MFI with focus on poverty and other focuses

69% 48% Focalización

65% 36% Focalización individual

48% 46% RS comunidad 76% 77% RS clientes

Metodología propobres 66% 54%

52% 63% RS empleados

Gama de servicios 55% 58%

57% Capital 48% social/empoderamie nto 28% 31%

Calidad de los servicios 55% 60% Servicios innovadores y no

clientes economicos para los clientes 49% 49% IMF-POB

46% 50%

IMF-OE

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In general, neither MFIs nor MFI-POB-OE showed significant differences in their overall social performance – which was generally fair. Those with a poverty approach, highlighted by having best practices for the selection of poor clients, such as methodologies used to define areas of intervention and measure poverty in customers. They also managed to influence empowerment and social capital by having social responsibility policies and pro-poor community care strategies; however, they suffer from adapted financial practices and diversified financial products. In contrast, MFI-OE had good results in the adaptation of products and services, quality in them, the ability to innovate and provide non-financial services as well as labor policies that increase the wellbeing of employees. The SPI evaluations tell us that to have an impact on poverty reduction, requires integrity and consistency in all customer service policies: focus, products, processes, methodologies and non-financial collateral services. The IMF-POB showed attributes in understanding the poor and social responsibility to the communities, which is a key element. However, it is necessary to transfer this understanding to the field of financial products and services, to cite one case. Moreover, within the IMF-POB, interesting findings were made when stratifying the analysis based on variables such as the age of the MFI, institutional figure, financial sustainability, etc.. Here are some of the most relevant pieces of evidence: The age of the MFI-POB proves relevant because the longer they have been operating, the greater also is the congruence between their focus and the actions that they take. Institutional maturity is reflected in key aspects, since those with more than eight years’ operation showed a better adaptation of credit and non-financial services, social valuesin staff engagement with customers in order to resolve issues, awareness of the need to avoid over-indebtedness in customers and a bigger presence in rural areas. In second place, the non-profit MFI-POB showed benefits for social performance because they have more impact on underdeveloped areas, and excluded clients are much more democratic in taking into account the points of view of the customer, even self-assessing their performance with social criteria. For their part, those MFI-POB with operational self-sufficiency outperform others in terms of the social investment they make, have more competitive wages for their employees, but lack geographical proximity in poor, more remote rural areas and the percentage of women clients is lower than the rest. As can be seen, the complexity that an institution must acquire to have an approach to the poor that is effective and comprehensive is high. However, it is important to mention that an institution can achieve optimal balance in the different variables that involve social performance if these are based on guidelines, goals and means of verification, aspects precisely that contribute to the Seal of Poverty.

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5.6. T he model of intervention, standards and indicators of the Seal of Poverty The Seal of Poverty is the materialization of the links between poverty and microfinance. This is a certification of quality in focalization and financial and non-financial service, but above all it measures congruence in the strategy of attention of the MFI towards the poor population. This marks a difference to approaches taken until now, because they do not guarantee minimum requirements of satisfaction, but rather requirements of peak results in reducing poverty. If there are MFI that have in their constitutive statutes a vision and mission of attention to poverty, in practice there is no evaluation of whether they are reaching this aim; others diversify their products but offer no additional services that generate capabilities, or else they emphasize educational issues but their products do not match needs. The Seal of Poverty avoids these inconsistencies because it integrates all the elements needed to promote the following model of intervention: Figure 7. Model of intervention of an MFI with focus on overcoming poverty

The seal embraces a set of standards, indicators, assessment and evaluation (partial and global). Uniform criteria for measurement, evaluation and interpretation of results are deepened by regulation.

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Table 8. Standards, indicators and criteria of evaluation of the Seal of Poverty SEAL OF POVERTY STANDARDS

INDICATORS REACH AND FOCALIZATION

Does the institution have a strategy of focalization on clients in conditions of poverty?

The institution prioritizes, in its interventions, the attention to clients in conditions of poverty.

a. Attention to people in conditions of poverty

Higher than the % of poverty in the country

b. Credit intended for people in conditions of poverty

a. Higher than 30% b. 20%,40%,60%

Does the institution prioritize the financial inclusion of women in conditions of poverty?

Attention to women in conditions of poverty

Higher than 10%

Does the institution prioritize the financial inclusion of clients who have not finished school education?

Outreach to clients who have not finished school education:

Higher than 30%

Does the institution prioritize attention to areas with high incidence of poverty?

Attention to areas with high incidence of poverty

Higher than % in areas with high incidence of poverty in the country

Does the institution prioritize the financial inclusion of clients in conditions of poverty? Focalization on poverty

Focalization on people in conditions of poverty

LEVEL OF REFERENCE

SATISFACCION CLIENTS Retention of clients in conditions of poverty

Quality of service

Facilitation of services nonfinancial

The institution gestiona the retention of clients como indicador proxy of monitoreo periódico of the client satisfaction

The institution makes an effort to satisfy its poor clients through fair costs, the adaptation and diversification of its financial and non-financial services

The institution facilitates the access to non financial services that reduce vulnerability of their clients

Does the institution strengthen the loyalty of its rural clients?

Retention of poor clients;

Higher than rate of institutional retention

Does the institution provide services for its clients at a fair cost? Does the institution ensure that its clients know and understand the effective price they are paying for its services?

a. Fair cost of credit b. Transparent cost of credit

a. R ank defined by sector average (standard deviation) b. Higher than 80%

Does the institution promote savings intended to satisfy social needs? Do specífic savings products exist with this objetive?

a. Savings for social needs (health and education) b. Rate of savings growth (accounts) c. Rate of savings growth (amounts)

a. 20%, 40%, 60% b. Higher than or equal to10% c. Higher than or equal to 10%

Does the institution facilitate credits to satisfy social needs? Do specífic savings products exist with this objetive? Does the institution facilitate credits to promote the capitaization of clients?

a. Specífic credit for social needs (health, education) b. Portfolio of credit for capitalization

a. Higher than or equal to 10%, b. Higher than or equal to 20%

Does the institution ensure that its poor clients access to financial education services?

Access to financial education

Higher than or equal to 50%

Does the institution ensure its poor clients access to non financial education?

Access to non-financial education

Higher than or equal to 50%

Does the institution facilitate micrinsurance to its clients in conditions of poverty?

Access to microinsurance

Higher than or equal to 50%

Does the institution satisfy the financial and nonfinancial needs of its poor clients?

Index of client satisfaction

Higher than or equal to 75%

Client satisfaction

The institution monitors the degree of satisfaction of its clients with regard to its financial and non-financial services and respectful treatment

Overcoming poverty

The institution monitors outcomes of its financial services in overcoming poverty

Have the institution’s poor clients overcome their conditions of poverty?

Overcoming poverty

5%,10%,15%

Working capital, economic unit

The institution monitors outcomes of its financial services in the client’s income, demonstrating positive tendencies in this sense

Have the institution’s poor clients increased their working capital?

Increase in working capital

10%, 30%, 50%

Assets

The institution monitors outcomes of its financial services in the client’s assets, demonstrating positive tendencies in this sense

Have the institution’s poor clients increased their assets?

Increase in assets

10%, 30%, 50%

Savings family unit

The institution monitors outcomes in family savings

Have the institution’s poor clients increased their savings?

Increase in family savings

10%, 30%, 50%

Social capital

Measurement and evaluation will be conducted of community social capital or individual social capital

Do the poor clients demonstate having improved their social capital?

Improve social capital

10%, 30%, 50%

OUTCOMES IN SOCIAL and ECONOMIC DEVELOPMENT of CLIENTS IN CONDITIONS of POVERTY

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6. Seal of Gender The gender focus is an obligatory question for all members of any society, because women have gone through centuries of discrimination and exclusion. Similarly they have experienced a great deal of economic and social burdens, without having the means at their disposal to address them. Therefore, women have responsibility for the upbringing and education of children and now are even responsible for the family income, or may take charge of total support for the family. In many countries in Latin America, above all in rural areas, the woman takes on physically exhausting tasks such carrying water and wood, grazing livestock or even working on the land, as well as domestic work. Moreover, the migration of men in search of employment, leaving the entire domestic load to women without including the facilities to address the situation, for example, ownership of the land, and women are left defenseless to support their children financially. The inequality faced by women in Latin America is seen in differences in access to media and to educational materials, as jobs and wages13 and in the countryside, as noted, little or no access to land or means by which use it for the benefit of the family. Also, in the region there is a paradoxical culture rooted among “machismo” and “Marianism”14 [Dobra 2009: 45], in which the woman is both respected as a mother but degraded as a woman, which generates an enormous socio-cultural barrier that slows women’s development. On the other hand, the importance and urgency of reducing poverty and vulnerability in women, as well as eradicating practices of discrimination and abuse, is not only desirable from an ethical point of view but has implications for development and economic growth [Dobra 2009: 2]. The unequal access to health, nutrition and education for women in poor homes has been correlated empirically with high birth rates, low participation in the workforce, little hygiene and greater incidence of infectious diseases in the members of the household [Armendáriz & Morduch, 2005: 184]. Also, eliminating unequal treatment of women has implications for the development of future generations, raising the probability that children may not inherit poverty. Diverse economic and sociological studies show that better-educated women have children with a greater degree of academic potential, similarly women with access to resources invest more than men in the human capital of children; in other words, they spend more on health, nutrition and schooling, thus many subsidy programs direct economic support to women, as is the case with Oportunidades in Mexico, Bolsa Familia in Brazil, and others. With this in mind, microfinance takes on a gender focus and even more urgency for good reason, since 70% of the world’s poor are women [ILO, 2008: 2], more reason to contribute from every possible angle to bridge the inequality gap that prevails in women’s lives. So if microfinance is a tool to reduce gender inequality, the Seal of Gender is responsible for confirming that MFIs achieve positive impacts on the welfare of the women who use their services. In this sense, this chapter analyzes how financial inclusion is involved in the welfare of women and what are the criteria for certification.

13. For example, the Inter American Development Bank indicates that women’s salaries in Latin America are 17% less than those of men taking into account the same age and educational level. News BID 15/0ctober/2012. 14. An allusion to the figure of the Virgin Mary.

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6.2. M icrofinance and the gender perspective The link between microfinance and an increase in the wellbeing of the woman occurs through the “empowerment” that produces access to financial services. Empowerment is defined as making a disadvantaged individual or social group powerful or strong15. This concept emerges as a result of the focus of “capacities” in combating the poverty of philosophers such as Amartya Sen, as has been mentioned. Other definitions that broaden the way in which empowerment works in the individual indicate that it is the process through which economic, psychological and socio-cultural barriers are removed to achieve self-management or personal autonomy [Sugg, 2010: 4]. On the other hand, the economic theory of the family developed by Gary S. Becker16, Nobel Prize in Economics, can explain how empowerment translates into decision-making. For economic theory, the family is a unit of production that “makes” goods such as food, nutrition, housekeeping or parenting, so that for the members of a family, depending on the preference, prices of goods and services in the market, income and bargaining power of each one, face different incentives and make decisions about what are the dynamics of the home. This translates to areas such as deciding fertility, marriage, divorce or investment in the human capital of children, to name a few examples. So, from the economic point of view, the empowerment that allows access to financial resources raises women’s power of negotiation in relation to the rest of the members of the home and particularly her spouse. With this she may take on and modify crucial decisions such as the quality and quantity of children17, reducing the time dedicated to domestic work and initiating a micro-business. Practical examples of the empowerment of women due to access to microfinance have been quantified. Such is the case of the impact evaluation of the credit awarded by the Grameen Bank in Bangladesh, where it was found that a loan of 100 taka awarded to men had an impact on the family expenditure of 11 taka in food, nutrition and durable goods for the home; however, when the loan was awarded to women it had a impact of 18 taka in expenditure on these same variables [Armendáriz & Roome, 2008: 5]. For its part, the International Labor Organization said that among the children of women who have accessed microfinance, full-time schooling increased and there was a reduction in the dropout rate [ILO, 2008: 2], from which it could be inferred that there was also a decrease in child labor. Another impact study carried out by IPA on the target savings product in the Philippines, aimed at both men and women, showed positive effects on women’s empowerment; the home was more likely to purchase durable goods proposed by the woman18 - increasing women’s confidence in achieving a savings goal. Women were more disciplined than men in reaching that goal - and decisions were modified regarding consumption with respect to durable goods [Ashraf, 15. Definition given in the Diccionario de la Real Academia Española www.rae.es 16. A piece of work that brings together the greater part of Gary S. Becker’s theories of the family is found in “A Treatise on the Family”. 17. Quantity of children refers to fertility decisions; quality of children refers to investment in human capital. Empowered women make decisions in this sense and, for example, begin to use contraceptive methods, contrasting with those who do not do so for fear of their husbands’ reaction. 18. Goods such as appliances, means of transport, ventilator fans and recreation.

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Karlan & Yin, 2010: 338]. Also, for the MFI, the profile of women clients is preferable, and the numbers reflect this: 85% of microfinance clients in the world are women. The preference for women clients is due to several reasons, among which we may highlight: i) A better rate of recuperation, because women are more sensitive to social coercion – they fear public exposure of their incapacity to pay; ii) As they have less access to sources of funding, the moral risk is reduced and they are more disciplined in the use of credit; iii) Transaction costs are reduced for the MFI because women are less complaining and argumentative, largely because their groups - when it comes to credit solidarity - are much more accurate, saving the MFI promoters from wasting time searching for members, thus increasing staff productivity. On this point, it is necessary to indicate that there are limits; microfinance alone it not sufficient to eradicate poverty, and neither does the effect on empowerment guarantee equality of gender. Added to this, the contribution made by microfinance is achieved under certain social circumstances and it is not the financial service necessarily which manages the impacts, but non-financial services of the MFI in the form of such factors as financial education and counseling on health, nutrition and literacy. Despite the positive results, a contrary argument also exists. This postulates that not only does microfinance not contribute to woman’s equity, but it actually makes the situation worse, increasing the levels of domestic violence, the psychological effects - greater tension and anxiety - as well as ambiguous impacts on the empowerment and the human capital of the children. This debate is not very complicated to elucidate and gauge, because if we divide empowerment into three categories: empowerment in i) economic19, ii) psychological20 and iii) socio-cultural21 terms, microfinance is more likely to affect the first two directly. In contrast, little or nothing can be done to directly modify traditions, ingrained forms of behavior and social patterns such as the culture of “sexism -Marianism”. Economic empowerment is direct because a tangible increase exists in the resources available –although it does not, in all cases, imply an increase in incomes – equally, the psychological effects, on average, are positive because the greater availability of resources (money and the means of making it) vouchsafes autonomy, which in turn raises self-esteem, self-confidence and the capacity for self-determination. But, though not in all cases, microfinance is also able to break socio-cultural and institutional barriers22 that neutralize “empowerment” or else have negative consequences [Armendáriz & Roome, 2008:17]. When carefully studied, why is there no improvement in the children of women who have access to credit? What has been seen is that the money that women borrow is intercepted by the husband and he continues to take all the decisions. In contrast, single women can postpone the time for marriage. Another self-defeating form of behavior is when the husband suspects that his wife has “big money” and stops contributing to the family income, so that if the credit was to be intended for a micro business for generating increased income, the woman diverts a portion or 19. Economic empowerment: financial independence or access to recourses that allow decisions to be made about goods to be consumed. 20. Psychological empowerment: increase in confidence, self-esteem and self-determination. 21. Socio – cultural empowerment: improvement in social gender norms such as equality between men and women in marriage, or the role played by women in a society or community. 22. Informal institutions with a set of unwritten ground rules and standards of conduct implicit to a society’s, traditions and values.

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all the money to supplement what the husband has stopped contributing. In other countries like India there was an increase in domestic violence because the woman is seeking agency and the husband, feeling “threatened”, has recourse to violent means of maintaining his leadership. Therefore, the positive, negative or neutral effects in gender equity derived from access to financial services are, in the last instance, based on socio-cultural factors. If these are “pro” women, they operate positively, while if not then they will hurt even more, as in the case of domestic violence. Nevertheless, not all is lost for microfinance because if it does not have the ability to directly modify social behavior that is adverse to gender equity, it may have an indirect effect when accompanied by non-financial services consisting of educating and sensitizing women, their husbands and the community in general, in matters of rights and equality. Moreover, the impact on women and human capital of children is not automatic if women do not have adequate guidance on what is a healthy diet and hygiene in the home, so that those MFIs that manage to complement their services with information, advice or training in human development issues (hygiene, health and nutrition), literacy, or even micromanagement, are more likely to have impact on gender. [ILO, 2008: 3], [Sugg, 2010:25].

6.2. M ain results on the gender focus in SPI evaluations Analysis of the ninety SPI-CERISE evaluations analyzed by FOROLACFR was extended to the study of gender by the arguments that have been exhibited in this chapter and because 61% of the Latin American MFI declared, the empowerment of women as a goal; these are efforts that would address nearly nine million women, representing approximately 63% of MFI clients in the region, according to statistics from the Mix Market 2010. Thus, just as presented by the Seal of Poverty, there were interesting results that contributed to a definition of the need for a Seal of Gender. Similarly this information helps to delineate the institutional profile that will further approach these objectives.

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Figure 8. Results of SPI evaluations of MFI in Latin America with a gender perspective

47%

RS comunidad y medio 44% ambiente

65% RS clientes

74%

RS funcionarios 61% 63%

80% 70% 60% 50% 40% 30% 20% 10% 0%

Capital social/empoderamiento 51% 39% clientes 33%

51%

55% 47% Focalización individual 48% 27% Metodologías propobres 63% 42%

Gama se servicios tradicionales 56% 60% Calidad de los servicios 55% 67% Servicios innovadores y

clientes

50% 49% para los c lientes 49% 48%

IMF-GEN

As we saw in the case of poverty, the institutions with gender focus (MFI-GEN) and those that have another focus (MFI-OE) saw a global performance regarding women clients that was somewhat mediocre, when it was to be expected that the institutions that declared a special focus of attention to women would obtain far more striking results. It is observed that in the case of SPI studies on the approach to poverty, MFIs that declare a certain approach have advantages of a sociological type, i.e. fail to define good selection mechanisms to identify the target population and geographic regions where they are, worry about applying methodologies of adapted awareness. Their vocation is clear, emphasizing social responsibility towards their customers and communities. However, financial issues, lack of customized products and services, leave little capacity for innovation and diversification. In contrast, the MFI-OE are precisely characterized by the contrary; they have greater financial capacity but they stumble in social areas. This is a constant contrast in microfinance, and is perhaps the greatest challenge that lies ahead for microfinance; to achieve balance between social and financial missions, whatever particular focus is given to the MFI. Financial performance must not go in the opposite direction to social performance. However, the methodologies that interweave the two goals are not trivial, but are part of a necessary institutional transformation in which an MFI, at the moment of tracing or reforming its policies, constructs a logical framework consisting of its entire activity, thus threading together aims-objectives-strategies-actions.

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6.3. T he model of intervention, standards and indicators of the Seal of Gender Based on the above, the Seal of Gender is designed to meet the following objectives: i) To assess and differentiate the social function performed by MFIs with a gender equity approach. ii) To verify the positive changes in terms of empowerment and improvement in living conditions. iii) To promote continuous improvement through the progressive adoption of principles, rules and related good practices, both financial and non-financial. The criteria that will be utilized for monitoring and evaluating the fulfillment of the above objectives and making the MFI worthy of a seal in social performance with a gender perspective are set out in Table 9, and are directed conceptually to cover the ambits sketched out in the figure below: Figure 9. Model of intervention promoted by the seal of Gender Equity

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These include a set of standards, indicators, assessment and evaluation (partial and global). Uniform criteria for measurement, evaluation and interpretation of results are deepened by regulation. Table 9. Standards, indicators and criteria of evaluation of the Seal of Gender SEAL OF GENDER STANDARDS

FORMULA

REACH AND FOCALIZATION a. Outreach to poor women

a. Greater than or equal to 70%

b. Women’s savings

b. Greater than or equal to 50%

c. Women’s credit

c. Greater than or equal to 50%

d. Ratio average amount

d. Greater than or equal to 10%

Does the institution prioritize the financial inclusion of poor women?

Outreach to poor women

Greater than or equal to 30%

Does the institution prioritize the financial inclusion of women who did not complete their school education?

Outreach to women who did not complete school education

Greater than or equal to 40%

Does the institution prioritize the creation and sustainability of women’s economic enterprises?

Attention to self-employed women

Greater than or equal to 10%

Retention of women clients

Greater than institutional rate

a. Fair cost of credit

a. Rank defined by sector average (standard deviation)

Does the institution prioritize the financial inclusion of women? Does it ensure this access in balanced conditions? Focalization women

The institution prioritizes attention in its intervention to women clients, making sure to monitor its outreach to women in conditions of poverty and/or vulnerability

LEVEL OF REFERENCE FOR EVALUATION

CLIENT SATISFACTION Retention of women clients

The institution manages the retention of clients as a proxy indicator of the periodical monitoring of satisfaction

Quality of service

The institution makes an effort to satisfy its women clients through the opportunity, cost and adaptation of financial and non-financial services

Access to non financial services for women

The institution facilitates the access to non financial services that reduce vulnerability of their clients and promote their development

Does the institution strengthen the loyalty of its clients ? Does the institution provide services for its clients at a fair cost? Does the institution ensure that its clients know and understand the effective price they are paying for its services?

b. Transparent cost of credit

b. Higher than 80%

Does the institution ensure that its femeal clients have access to nonfinancial educational services that promote their social empowerment and leadesship?

Access and use of non-financial educational services

Greater than or equal to 60%

Does the institution ensure that its femeal clients have access to nonfinancial educational services that promote their social empowerment and

Access and use of financial educational services

Greater than or equal to 60%

Does the institution satisfy the financial and non-financial needs of women?

Index of client satisfaction

Greater than or equal to 70%

Client satisfaction

The institution monitors the degree of satisfaction of its clients with respect to its financial and non-financial services and respect in treatment of clients.

Overcoming of poverty

The institution monitors results of its financial services in overcoming the poverty of women

Have the institution’s clients overcome their levels of poverty?

Overcoming of poverty

5%, 10%,15%

Patrimony

The institution monitors results of its financial services in patrimony, demonstrating positive tendencies in this respect

Have the institution’s female clients’ patrimony increased?

Growth of patrimony

10%, 30%,50%

Savings

The institution monitors results of its services in the increase in its women clients’ savings and makes an effort to achieve positive tendencies.

Have female clients increased their savings?

Increases in savings

10%, 30%,50%

Autonomy

The institution monitors results of its services in the empowerment of women through monitoring changes in their autonomy to adopt entrepreneurial decisions

RESULTS IN CLIENTS’ SOCIAL AND ECONOMIC DEVELOPMENT

Personal development

The institution monitors results of its services in the personal development of women

Do female clients have greater autonomy in decision relative to the use and aims of credit? Do female clients have greater autonomy in decision relative to the use and aims

Do female clients show improvements in personal development?

a. Use and aims of credit b . use and aims of income

Improvements in personal development (participation and leadership, financial autonomy, vision of the future, social capital, affective development and self-esteem and management of business).

10%, 30%,50%

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

7. Seal in Rural Development The biggest challenges of microfinance lie in contributions to rural development, seen from the perspective of the economic performance of clients. When attention to poverty implies passing from an emergency to becoming involved in productive processes and the generation of income, the complexity multiplies for microfinance and its institutions because factors intervene such as the productive cycle, the profitability of the project, the size or scale of production, the risk of economic activity, among other variables that must be considered, which only some highly specialized MFI manage to handle with quality. Another feature of this challenge is to properly meet the financial needs for small-scale primary production. This is perhaps the most complex type of activity facing MFIs, for various reasons: the risk principle, low yields per unit of production, difficulty in accessing markets and the fact that some part of the production is for subsistence, so that microfinance has not been able to satisfy 100% the financial needs of the small peasant economy. Despite the possible complications, serving financial needs for the output of small producers is vital to the fulfillment of the social mission of microfinance and social performance, to speak in a robust way, because poverty and stagnation is deeper in rural areas where millions of households are living and working in the field. The population is also still living in the countryside for historical, institutional and cultural reasons; these people maintain their attachment to the land and therefore require participation in the economy in an equitable and dignified manner. With this in mind, this chapter will examine the links between microfinance and rural development, and then reflect on the obstacles and paths for microfinance in this area and examine how the Rural Development Seal may capture these abstract concepts and translate them into specific measurements, for MFIs to assess whether their activities successfully promote, encourage or influence the economic development of their clients.

7.1. Links between microfinance and rural development In order to analyze how microfinance contributes to rural development, it is essential to define what is meant by “rural”. For this a unique concept exists, as explained by Dirven [2007: 13]: “In the region five major types of criteria are used for defining the urban population census and, by elimination, that of the rural population. These criteria are: number of people per town (from 2,500 in Mexico and Venezuela to 500 in Cuba), number of contiguous houses (Peru), number of people per location and employment in primary activities (Chile), presence of utilities, and by administrative definition” [...] This makes what is considered as “rural” but in fact responds to different criteria, arbitrary and dichotomous. The “rural” description in Latin America is due to the proportion of the population that is categorized as “rural” at the discretion of each country.” Secondly, we need to specify what is meant by rural development, a concept that is often equated with agricultural development when in fact these are not equivalent concepts. Rural development is much broader; it encompasses, along with economic growth, a substantial im-

Microfinanzas con Resultados | Sistema de CertificaciĂłn del DesempeĂąo Social para LatinoamĂŠrica y El Caribe

provement in social and human indicators in the population, such as food safety, quality of housing, improvements in health and education, among other aspects of social welfare. In this analysis of the social performance of microfinance, the theme of rural development refers to the capacity of financial services to increase the possibilities of production in clients, in other words, to favor the development of activities that generate income. Thus, microfinance for rural development may face a wide range of economic activities and client profiles depending on the characteristics of the area, since this may be a region with distinct communities dedicated to primary activity, for example people in the Andean mountain heights, the Sierra Madre del Sur in Mexico or in the middle of the Guatemalan jungle, or a rural area that is urbanizing, in which there are productive activities related to the exploitation of natural resources: agriculture, livestock, fishing or forestry, or even non-agricultural economic activities such as trade, services or crafts. In any case the financial service directed at improving production aimed at improving the production can make a difference in enabling a rural family to overcome its poverty and escape a vulnerability trap, in other words insert itself into a process of accumulation and economic development. Credit, savings and other financial products are mechanisms that allow increases in input for production or in the marginal productivity of the factors of production. The former improves efficiency, the possibilities of production for a rural family and as such its income23; in other words, financial services provide possibilities for producing more with the same quantity of input and factors of production: manpower, land and capital goods; or else it permits expansion, increasing the scale of production. Thus, in terms of production, microfinance has great possibilities for innovation and potential for diversifying its products and service with impact on clients (see Figure 8), whether if it is a matter of activities that generate agricultural or non-agricultural income. Savings are still fundamental and can be used as collateral for productive credit, increasing the possibilities of both access to credit and obtaining greater credits. In this case the products of savings have less liquidity than pristine savings for the focus of poverty. For their part, credit products diversify according to the project: purchase of assets, of inputs or commercialization. Productive credits must be accompanied by assurance, precisely because this reduces the risk of economic activity, both for the client and for the MFI, so that the greater the range of life insurance, the more the debt balance and agricultural activity enhances the ROI. There is also a range of innovative products to suit the environment microfinance which have shown an ability to reduce transaction costs and trigger rural economic activities that are difficult to finance with credit; these products are micro-leasing and the micro-warrant.

23. Remember that the small peasant economy is a unit of both consumption and production, so that if it increases its production levels, consumption also increases, either by the sale of the produce or by internal consumption.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Figure 10. Products and financial service for the production in the rural medium

What is most important is to take into account is that the more comprehensive the vision adopted by the MFI regarding the customer’s productive need and need for finance, the better the impact on economic development. Due to the peasant family having multiple sources of monetary and nonmonetary income, which can come from the sale of primary production, self-consumption, agricultural daily wages, receipt of remittances or transfers from the government, crafts, petty trade, livestock, etc., in which different household members can participate, the complexity for financing economic activities urges the MFI to analyze household dynamics and the local context as a whole, regardless of which of its members is its direct customer. For example: if credit is granted for the purchase of inputs for planting, financing payment can come from other sources of income such as from government support or wages, and it is for this reason that the project can be profitable for the family and the economy; it may be generating cash income (food) to allow the family to eat well and be also more productive in addition to “saving” monetary income that can be invested in economic activities that are per se much more profitable. So, in the case of rural economic activities and specifically agriculture and livestock, the MFI must implement differentiated strategies that do not jeopardize financial viability, but manage to be inclusive for a general customer profile. So, a diverse range of products can address: 1. Families with subsistence agriculture: these have little land to work (backyards and small plots of less than 2 hectares), and are in a situation of extreme poverty and vulnerability; their production is for self-consumption.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

2. Small family agriculture: these units successfully manage productive resources, own more land or can access more land through sharecropping or rental contracts, but not enough to replenish capital. Therefore they are highly vulnerable. This kind of family agriculture has potential to grow profits, but lacks infrastructure, is not articulated with the market, or lacks the acquisition of productive assets (mechanization or technology) to make it more viable. Again the concept of gradualism and integrity is important because an MFI that serves a small producer, with subsistence farming or very low activities of profitability, should give priority to small credit unions, while credit should be strengthened in those activities more profitably. Both actions can be nested into a single family and create a virtuous circle of accumulation of assets, because small investment via savings achieved can trigger profitable activities that receive credit, and the latter in turn produce savings that strengthen unprofitable activities [IFAD, 2000: 5], which can symbiotically reduce poverty and generate economic welfare. In this point the financial analysis inserts into a social analysis in which to combat poverty and reach development there is no recipe with homogenous ingredients; the rural family is a mixer into which a certain amount of credit and subsidy is added to automatically provide sustained growth. As noted, these are processes that require care and understanding of the social, economic and institutional environment in which decisions are made. Therefore, the MFI that declares a rural development approach should have sufficient motivation and flexibility to study a customer, realize what his or her state of development is and where he or she wants to go.

7.2. Obstacles faced by the MFI to implement a focus of rural development 1. The first obstacle to rural development in marginal areas, not only in terms of microfinance but also of rural development policy and economic development, has been parameterized and develops agriculture as the only thing acceptable to the market - one which is extensive, with intensive use of capital and an agrochemical-type “green revolution”. This quasi-dogma, which is the only competitive model, pre-conceives and subdues the small peasant economy as unworkable, and is close to dismantling local production structures, skews public policy and subsidies to an export and industrial agriculture niche. It decides that the rural population should emigrate as low-skilled labor to meet the demand of a median industrialization in manufacturing. This view also permeates the financial sector in the region, and leans predominantly toward the creation of large agricultural banks or financing policies that establish profitability and production parameters that automatically selects a small group of large-scale producers. This vision, which ignores the existence of a small peasant economy able to supply the local and regional market, has only widened the gap of inequality and rural poverty, because industry and services have not been able to, or show no signs of being able to, absorb all the population growth, so that like an escape valve, the inhabitants of marginal rural areas have resorted to international migration. Nevertheless, this vision of green revolution has begun to disappear in Latin America and some countries, such as Brazil and Bolivia, have changed the model, and others will be forced to change given the changing conditions of the economic environment.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

In principle this is because the competitivity of the countries is not based on paradigms of cheap labor that favored rural-urban migration. Also, the exhaust valve representing migration to North America during the nineties has decreased after the terrorist attacks of 9/11 in the U.S. and the currently prevailing insecurity in the passage through Central America and Mexico towards the north. On the other hand, in the year 2007, the crisis in food prices reversed the trend in “cheap” food, a situation that made visible meager food production within the countries of the region and the need to expand the national supply of local production which also showed the fragility of many countries by revealing unsuspected rates of food insecurity. These structural changes reassessed the importance of funding for agriculture and smallscale and labor-intensive farming. A successful example of this is Brazil, which has placed emphasis on microfinance as a means of financing family agriculture; this country has taken a leading role in the development of the domestic market. In Brazil, the local production of food is an essential part of the policy of fighting hunger and poverty. That is why the Zero Hunger program has full integration with financing programs for food production in smallholder agriculture – for example Agroamigo and Pronaf - where the Brazilian Central Bank and the Bank of the Northeast both channel subsidized credit to cooperatives and other MFIs, which in turn fund small family farms with rates of between 2 and 5 percent annually. This which has improved food as a means of income for poor families as well as a supply capable of keeping up prices of local food, even when abroad they are rising. Marketing is also guaranteed, either through support to supply the regional market or through government procurement that provides food to soup kitchens open in marginalized areas in Rio de Janeiro, Sao Paulo and Brasilia. With these strategies it is not surprising that Brazil was the first Latin American country to overcome the shock of the global financial crisis in the years 2009-2010, as well as being credible that 30 million Brazilians have overcome poverty. 2. A second obstacle to the development of microfinance in favor of rural development is that the family needs to forge a capital base through savings, either to be used as collateral or as part of investment, making viable both economic activities and the financial operation of the IMF. However, fund raising from the public is still limited for microfinance in much of Latin America. This limitation is a barrier to the creation of a sustainable supply of financial services [Roesch, 2012]. 3. Another barrier that impedes the full intervention of microfinance is the fact that the market for microinsurance is little-developed and is limited to dealing with small rural producers, which makes it impossible to diversify risk with emphasis on agricultural and cattle-raising activities. The inexistence or fragility of an insurance market for small production means that microfinance concentrates on activities with lower risk such as commerce or crafts, leaving aside agricultural production. Nevertheless, ways exist to mitigate agricultural risk through microinsurance, as carried out by the Supportive Network of Rural Microinsurance (AMUCSS) in Mexico, where the law of Funds of Agricultural Assurance exists, although it is only operated in regions with agriculture for exportation or agro industry, for which reason this Mexican Network has adapted and negotiated, with the federal authorities, the creation of a fund of agricultural assurance with producers in high marginalization zones and small production scale, which has functioned successfully since 2011. 4. A fourth barrier is that formed by the scarcity of human capital that remains in the MFI with the capacity for evaluating productive projects and generating adapted financial options. The

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funding that will be directed to productive activities requires not only the design of credit products (preparation, finance, acquisition of machinery), but also its being adapted to the seasonal nature of the agricultural activities or production cycles; differentiating whether it is a project that requires short, medium or long-term funding, as well as also checking whether the rate of profitability of the project overrides the cost of the funding, without mentioning innovation in financial matters that are required, such as micro-warrants or micro-leasing. These analyses require specialized human capital, which is not easy to find in Latin America and which, if it exists, is difficult to adapt to the MFI workforce, in such a way that institutions invest resources to train staff with a high risk of losing their investment, since human capital, once formed, raises its reserve salary and tends to move towards better-remunerated markets. The MFI, which seeks a focus of specialization for rural development, faces this problem. For example, the Fund of Local Development (FDL) in Nicaragua is one of the regional leaders in the process of productive credit for all types of products and of agricultural products. Human capital would not be a difficulty here given that FDL emerged as part of the Research and Development Institute NITLAPAN of the Universidad Centroamericana (UCA), which gives it significant academic support.

7.3. Conditions necessary for favoring a focus on microfinance in rural development For positive growth in a microfinance rural development approach a key player is the state, because it has the means to create a financing policy that generates sufficient incentives for financial institutions to bid sustained and adapted services to marginalized rural areas. It also has the wherewithal to make the regulatory and legal framework guaranteeing the proper functioning of the market. Moreover, the state has the authority to develop the microfinance market in order to improve conditions for access to credit and other financial services. In the case of small farming, because the rates of return are usually less than the cost of funding, the state is the entity that has mechanisms to discount interest rates, assign venture capital or public guarantee funds that are specifically created to subsidize this type of primary activities with high social returns but low financial returns. The task of the state also covers the possibility of integrating public policies with financial service for the economic development of rural areas. Thus it can increase the probabilities of success for the projects and the recuperation of the credits. The comprehensive public policies of investment in infrastructure of communications, technical assistance and transfer of technology, as well as providing facilities for the collection and commercialization of family production, permits the integration of farmers into small value chains, achieving country-city interaction so that rural areas might add to the dynamics of regional growth and improve the yield of financial activity. With respect to MFIs, isolated financial services will have little impact; therefore, as in the case of the Seal of Poverty in Figure 6, it shows the issue of financial education and counseling as a cross-theme to any financial service offered by the institution. Financial education is a first step for the customer and family to enjoy optimal management of their personal finances, but in

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

the case of the rural development approach, customers require specific advice on the productive project because this heightens the probability of success in economic activity, to the benefit of the client, but also of the MFI improving the probabilities of recuperation of the credits. Added to the above, the majority of productive projects in rural areas face difficulties not in production, but in access to the market, so that an MFI that along with its client resolves the issue of commercialization will mark an important difference.

7.4. R esults of SPI evaluations with MFI that declared a focus on rural development In the ninety evaluations carried out in Latin America, there was analysis of the focus of rural development. The MFI that declared this was their focus proved to have more than 30% of rural clients (MFI-RUR), while the other focus Institutions (MFI-OE) had a percentage of rural clients lower than, or equal to, 30%. As was mentioned, the institutions seeking the economic development of its customers, when integrated effectively with this vision, are highly specialized and show more consistency, both in their processes and their products. Figure 9 shows the results of SPI between IMF – RUR and IMF-OE, where it can be seen that the former perform better in a global social sense than the latter. Figure 11. Results of the Systematization of SPI evaluations in MFI with focus on rural development

61% 40% RS comunidad 50% 40% RS clientes 80% 73%

Focalización individual 39% 45% Metodología pro-pobres 60% 52% Gama de servicios 61% 52%

RS empleados 66% 54% Capital social/empoderamiento 53% 46%

Calidad de los servicios 60% 56% Servicios innovadores y

32%

53% 44%

29% 52% 45% para los c lientes IMF-OE IMF-RUR

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

These are institutions that show a satisfactory balance to serve rural clients in their specific needs. Firstly because they make a better selection of focus areas and have positive results in their social responsibility to customers, employees and community as in the financial sector, in which they are also outstanding for their quality of service, diversity and methodologies of attention. On the other hand, as seen in the graph, the targeting of rural clients in MFIs-RUR has a small lag compared to MFIs-OE. At this point, it should be noted that this is probably due to the difficulty of defining rural population profiles, as there are many types of customers that make it difficult to locate the market niche(s): laborers, artisans, traders, small/ medium/large farmers, ranchers, poultry farmers, foresters, beekeepers, perennial vs. cyclic crop producers; i.e. there is a vast range of customer profiles where each economic activity represents a universe, so it is possible to infer that these institutions need to refine their mechanisms of selection. Also analyzed were different characteristics between MFI-RUR where we found interesting results that are consistently the framework for behavior that marks MFIs under certification with the Seal of Rural Development. So the MFI-RUR, with more than 30 thousand partners, showed themselves to have decentralized activity, small loans and alliances with other types of organization to complement their financial services. On the other hand, we observed that the institutions that work individually with credit are loans less well adapted to productive needs, and this goes hand in hand with attractive interest rates, although they suffer from non-financial services and do not specialize in small credits, so there is the suspicion that they will not be giving attention to the lower scale of producers. In a complementary way, the MFI-RUR that are financially sustainable show behavior similar to those that work with individual credit, although they also carry important social investment, as well as co-responsibility with the community and its inhabitants. However their clients are not among the poorest, nor are they women, for which reasons they are not inclined to grant credits with social guarantees. In the case of non-profit MFI-RUR, these show a diverse range of products and customized services, their staff are specifically trained in social performance, but they do not perform a good monitoring of impacts. This behavior is similar to the MFI-RUR, whose clients are mostly rural poor, which provide small loans to women - although it is observed that there is job security for employees. Therefore, even though globally and on average, MFIs-RUR have a socially acceptable performance, a detailed review by the institution’s characteristics, reveals the persistence of dichotomies in which, as an MFI evolves internally and is financially more robust, its customer profile also moves away from low-income social layers towards a sophisticated client, more than enough reason to find a Seal definition that incorporates MFIs RUR, both in terms of medium and large producers and those that are small-scale and low income.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

7.5. The model of intervention, standards and indicators of the Seal of Rural development Analogously to the other two Seals presented in the matter of rural development, the system of evaluation focuses on measuring the results of focalization, satisfaction and results on clients. The model of intervention that the Seal proposes is described in the following graph. Figure 12. Model of MFI intervention with focus in rural development

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

These include a set of standards, indicators, assessment and evaluation (at partial and global). Uniform criteria for measurement, evaluation and interpretation of results are deepened by Regulation Table 10.Standards, indicators and criteria of evaluation of the Seal of Rural development Seal of Rural Development Standards

indicators Reach and focalization Does the institution prioritize the financial inclusion of rural clients?

Rural focalization

Attention to the productive sector

The institution’s intervention prioritizes attention to rural clients. This is shown through a portfolio of predominantly rural clients, attention to rural/remote areas and a rural portfolio compatible with this focus.

The institution prioritize the productive sector in order to promote the economic development of their clients

Level of reference

a. Attention to rural clients

a. Higher than or equal to 50%,

b. Rural savings

b. Higher than or equal to 40%

c. Rural portfolio

c. Higher than or equal to 40%, Higher than or equal to 50%,

Does the institution prioritize attention to rural areas?

Presence in rural areas

Does the institution prioritize the financial inclusion of poor rural clients?

Attention to rural poor in Rural portfolio

Higher than or equal to 10%

Does the institution prioritize the financial inclusion of women in rural areas?

Attention to rural women

Higher than or equal to 30%

Does the institution prioritize the attention to agricultural, forestry and fishing sector?

a. Attention to agricultural farmers

a. Higher than or equal to 30%

b. Agricultural portfolio

b. Higher than or equal to 20%

Does the institution prioritize attention to productive chains?

Specific credit for productive chains

Higher than or equal to 10%

Does the institution promote the development of rural business?

a. Attention to rural companies

a. Higher than or equal to 10%

b. Attention to new rural business

b. Higher than or equal to 15%

(higher of areas with high incidence of poverty in the country)

Satisfaction rural clients

Retention of rural clients

The institution manages the retention of clients as a proxy indicator of periodic monitoring of client satisfaction

Does the institution strengthen the loyalty of its rural clients?

Quality of service

The institution makes an effort to satisfy its rural clients, through the opportunity, cost and adaptation of its services

Does the institution provide services at a fair price to its clients? Does the institution ensure that its clients know and understand the effective cost they pay for its services?

Facilitation of non-financial services to rural clients

The institution facilitates, directly or through nonfinancial service alliances, reduction of the vulnerability of its clients and promotion of its development

retention of rural clients

Greater than the institutional retention rate

a. Fair cost of credit

a. Range defined by sectorial average (standard deviation)

b. Transparent cost of credit

b. Over 80%

Does the institution ensure that its clients have access to non-financial education services oriented toward strengthening its entrepreneurial and productive capacities?

Access to non financial education

Higher than or equal to 40%

Does the institution ensure that its clients have access to educational and financial services?

Access to financial education

Higher than or equal to 70%

Does the institution facilitate micro insurance to rural clients to reduce their vulnerability?

Access to microinsurances

Higher than or equal to 30%

Does the institution satisfy the financial and non-financial needs of its rural clients?

Index of Client satisfaction

Higher than or equal to 70%

Client satisfaction

The institution monitors the degree of satisfaction of its clients with respect to its financial and non-financial services and respect in personal dealings

Income through sales (main activity) of the economic unit

The institution monitors results in the income of the client demonstrating positive tendencies in this sense.

Have rural clients of the institution increased the income from their economic activity?

Main Income increase from economic activity

10%,30%,50%

Patrimony of economic unit

The institution monitors the results in the patrimony demonstrating positive tendencies in this sense.

Have rural clients of the institution increased their patrimony’

Increase in patrimony

10%,30%,50%

Adaptation and improvement of productive practices

The institution monitors results in improvements in practices showing positive results in this sense

Have the institution’s rural clients shown improvements in productive practices?

Improvement in productive practices

10%,30%,50%

Generation of employment in economic unit

The institution monitors the generation of employment in economic units

Have the institution’s rural clients shown generation of employment?

generation of employment

10%,30%,50%

Results in social and economic development of rural clients

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Conclusions The construction of the System of Certification of social performance led by FOROLACFR means, without any doubt, one of the most important challenges taken on by the networks, which differs from other initiatives by directly involving the operators’ perspective (more than 80 MFIs surveyed in the standards definition), the dynamics of the regional context and its focus on facing questions and results to differentiate/highlight the role that microfinances maintain through their mandate to become client development tools. The process has been complicated by involving regional participatory processes, the need to promote the strengthening of local capacity, deepening networks of theoretical and practical links between microfinance and the areas evaluated by the 3 Seals. The levels reached are significant and the challenges for the FOROLACFR relate to the definition of the institutional mechanism for implementation (a proposal to be evaluated by strategic levels of partner networks), and the establishment of autonomous platforms accompanying institutions in the certification process. At the level of the national networks, the challenge focuses on the contextualization of the rules in national dynamics, strengthening internal capacities (human resources, information systems) to manage local certification and the recognition and use of standards as an input to guide interventions by government and other stakeholders. Without a doubt the evaluation of results in clients is the highest challenge at the level of the institutions that incorporate themselves into the process of certification. To support them, regional training and the development of cost-effective management systems are planned, which aim at excellence in every field to be evaluated. Finally, the success of this initiative and the reaching of the result expected at the level of improvements in the social function of the microfinance in direct benefit to the clients will require the support and coherence of all the actors involved.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

Microfinanzas con Resultados | Sistema de CertificaciĂłn del DesempeĂąo Social para LatinoamĂŠrica y El Caribe

Contributions to the process 1. The SPI tool as a basis for the diagnostic of social performance 2. Institutions consulted in the process of the definition of rules

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

1. Social audit SPIThe measurement and promotion of social performance 1. M easuring social performance of microfinance: origin and evolution of the SPI Today Microfinancial Institutions (MFI) want to show - and must show - that they are not only viable, but that they also have real social utility for their clients. As microfinance has grown, criticisms of the sector have intensified. The recognition and improvement of social performance have become decisive for the credibility and sustainability of the sector. In an ever more competitive environment, MFIs are conscious that strong social performance can improve the situation of the clients and those of MFI themselves. Indeed, improving customer relations and achieving well-adapted products may limit defaults and their solution, as well as attracting new investors and partners. The question of impact and of the social mission is central to the accompaniment of MFI and of the political and financial support brought to that sector. CERISE24, a network of interchanges on practices in microfinance, works with several organizations committed to promoting a more ethical and more responsible sector. CERISE participates in the production of lighter knowledge and methods that are simple to implement, and allows integration into MFI management of social performance analysis with tools and actions to improve service to vulnerable clients, ensuring a better impact. The SPI tool, Indicators of Social Performance (SPI), permits completion of the MFI financial evaluation through a social audit (with a questionnaire and accompanying guide). SPI is a tool created collectively following a process that is open, concerted and transparent. It was created in different phases: ´´ Phase 1 (2001-2003): Conceptual research, development of a pilot matrix of indicators, first tests and adaptations. ´´ Phase 2 (2004-2005): Test with a diverse panel of 25 MFI partners, debates, adaptations and finalization. ´´ Phase 3 (2006-2008): Extension and strengthening of the process (training, interchanges and consultancy) ´´ Phase 4 (2009-2011): Work on the improvement of the practices and audit of funds (SAM – Social audit tool for Microfinance investment vehicles/MIVs), adaptation of SPI to the standards of the sector (social indicators of the Mix, protection of the client/Smart Campaign, etc). 24. http://www.cerise-microfinance.org/-impacto-y-desempeno-social-

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

´´ Phase 5 (2012-2013): Standards of SPI use, wiki page as a guide, certification of SPI auditors to improve and guarantee the quality of the SPI results. SPI as the sector tool of reference for the social audit permitting MFI to locate with respect to the international references of responsible finances, social performance, protection of the client and seals. CERISE works through the ProsperA Network: with the aim of broadening and making perennial a process of collective work initiated with the SPI tool. This alliance of actors committed to social performance in microfinance was created as a platform for the users of SPI (MFI, national and regional network, operators, investigators, donors and social investors). ProsperA was formalized in April 2007 in Mexico and has the objective of supporting itself through the experience and actions of its members, developing the culture and practices of social performance through the strengthening of MFI capacities and those of local networks. ProsperA coordinates common interchanges and actions from the SPI tool and the initiatives of its members, particularly in governability, impact and evaluation of social performance.

2. C onceptual and practical contribution of the SPI to social performance in microfinance SPI, as an audit of social performance for microfinance, uses a questionnaire to make evaluations through principles, actions and the corrective measures implemented by the MFI, to reach its fundamental objectives on the basis of 4 dimensions: Dimensions

Criteria Geographical focalization -

Focalization on poor and excluded

Individual focalization Methodology for the poor Diversity of services

Adaptation of service

Quality of services Auxiliaries and non-financial service s Economic benefits for clients

Benefits for clients

Participation of clients Social capital / Empowerment of clients Social responsibility towards personnel

Social responsibility

Social responsibility towards clients Social responsibility regarding the community / environment

SPI is a tool recognized in the sector, and is adapted for its users. SPI benefits from the support of several important networks and MFI since it permits: ´´ Accompaniment to its efforts to improve social performance: identification of strengths and weaknesses, identification of priorities and plans of action. ´´ Fomenting of internal dialogues on this matter (at level of the counsel of administration, with the manager, with the different levels of the MFI, and potentially with its clients): tables of monitoring, meetings and internal seminars, collective drawing-up of plans of action.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

´´ Increases in its transparency and improvement in its credibility as seen by clients, investors and donors: SPI summaries, social indicators of the Mix, etc. ´´ Reinforcement in its system of governability and the knowledge of its activities: social information interchanged with administrators and clear integration of the social mission in the strategy of the MFI. ´´ Improvement in its financial performance through its social performance: studies are beginning to show that DF and SP are not necessarily antagonistic and that synergies can be constructed. ´´ Recent econometric analysis25 based on results from 295 institutions indicates, for example, that there is a commitment between proactively selecting the poor individuals and higher levels of operating expenses. The financial and non-financial service that complements savings also induces additional costs. However, other social and economic aspects converge; adapted service, reasonable interest rates in particular, favor the operative efficiency of an MFI, the quality of its portfolio and its financial sustainability. Research also makes it evident that the participation of the client in the taking of institutional decisions, and social responsibility towards employees, are two factors that strengthen productivity and the financial sustainability of the MFI. ´´ Self-differentiation from the competition, explicitly positioning oneself according to a social focus. The advantages of SPI: ´´ It is standardized and always compatible with recent initiatives in the sector: Smart Campaign for the protection of clients, social indicators of the MIX, seals of certification (Seal of Excellence for poverty and transformation, Seals of Gender and Rural Development designed by the Latin American network), Universal Standards of the “Social Performance Task Force”, Microfinance Transparency, etc. This effort of alignment with the standards of the sector facilitates the work of the MFI and permits easy comparison with different benchmarks. ´´ It adapts to the diversity of the contexts and of the MFI but remains easy to use - in particular, allowing internal self-evaluation by the MFI. ´´ It permits a report of the data from the Mix Market (social indicators) in a very simple and automatic manner. The Mix evaluates the quality of the data that comes from an SPI audit. ´´ Its results give a clear representation of the social performance of an MFI and can be compared with that of other institutions (see graphic). ´´ SPI is available free of charge and can be downloaded directly from the CERISE website: www.cerise-microfinance.org and the SPI Wiki page

25. C ombining social and financial performance: a paradox? (November 2011) http://www.globalmicrocreditsummit2011.org/userfiles/file/Workshop%20Papers/C_%20Lapenu%20-%20Combining %20Social%20and%20Financial%20Performance%20Paradox.pdf

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

3. Uses and functions of the SPI Today it is used by more than 500 MFI around the world; this tool is the first instrument of an audit on social performance for institutions committed to improving the wellbeing of their clients. SPI is a tool that supports the strategy of promotion and management of social performance in the microfinance network (FOROLACFR, RFR, Finrural or Amucss, for example, in Latin America, but there are also networks in Africa, Asia and Europe), of social investors (Oikocredit, Kiva, Grameen Crédit Agricole Microfinance Foundation, Sidi, AFD-Proparco, etc.) and of support operators (Sos Faim, Trias, Iram, Gret, Plan International, Planet Finance, Entrepreneurs du Monde, etc.) The SPI audit permits an analysis designed to highlight good practices and strengthen weak points. The results of the SPI audit produce interesting data in the practices implemented by the MFI and help in identifying improvement in the management of social performance. 3.1. Examples of uses 300 MFI in Latin America have utilized SPI, the majority of them with the support of FOROLAC. Certain institutions, such as CRECER in Bolivia, went still further and developed a system of social performance indicators, ISP-CRECER, a tool for adapted and evolutional internal monitoring that was developed to periodically monitor the social performance of CRECER26. It was established to be incorporated into the processes and internal systems of monitoring as a tool for management processes aiming at continuous improvement of the social function. ISP-CRECER offers a global vision of the route to social performance taken by CRECER, that of focalization on the target client and the socioeconomic impact of the operations, without forgetting the social responsibility of the institution. For networks such as the Financial Rural Network in Ecuador, or Finrural in Bolivia, the application of SPI to members permits the initiation of improvement plans in certain areas of work, besides clearly identifying the current practices of social performance that links to functionaries, clients, partners and the community in general. In this way the network can later work with its members to reinforce social management.

26. CRECER, CERISE, September 2012. Indicators of social performance: of the evaluation of the continuous improvement of practices. The case of CRECER, Bolivia, http://www.cerise-microfinance.org/IMG/pdf/Case_study_CRECER_2012-09_FINAL.pdf

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

The national network has also fomented agreements with governments and regulatory authorities, which recognize the role of the sector in exchange for greater transparency regarding their social utility. They have established systems of accounting that have responded to local preoccupations and have made visible the contribution of microfinance to public wellbeing. So, in the light of government reports and declarations on the limits of rates of interest, RFR has brought intense negotiations with the government to ensure that these ceilings can be applied gradually. Finrural in Bolivia has also worked with social data to improve regulation for its members so as to facilitate the savings, for example. 3.2. Conditions of use With an increasingly high volume of users, it is very important to maintain profound quality control in each case. Besides, the microfinance sector has developed; scandals and growing criticism have placed it under the scrutiny of media of communication, governments, institution regulators and the broader public. The MFI must be more transparent and improve its practices. The SPI tool created by CERISE and ProsperA was created with this end, but the quality of the evaluations must be assured. SPI now includes Standards of Use and a process of Certification for trainers and auditors. The Standards of Use, which were defined by consensus with the users of the tool, allow a formalization of the conduct of SPI audits. They report on each phase of application of the SPI tool: the preparation of the audit, the administration of the questionnaire, the verification of information, the presentation and use of results. Whether in self-evaluation or external audit, the Standards of Use define the optimal conditions in which to use the tool and strengthen quality control. The Standards and the guide to use are available (in English and French) on the SPI Wikipage. The certification is necessary for recognition as an external auditor and training of other organizations in SPI. The certification points to: ´´ The avoidance of inefficient or inadequate uses of the SPI tool (implementation without the agreement of operators, untrustworthy information, mistaken interpretations). ´´ The assurance of quality control and potential benchmarking between the SPI users, guaranteeing trust in the process used for the audit. ´´ The avoidance of inappropriate use of the tool by third parties (freeloaders that use the SPI with commercial ends, creating unnecessary loads for the MFI). ´´ The assurance of trustworthy reports reaching the MIX. Since 2011, several organizations collaborating with CERISE have had success completing or initiating the certification offered by CERISE, resulting in an important network of external auditors for the MFI to validate its SPI results. ForoLacFr and some of its members, such as Financial Rural Network in Ecuador or Finrural in Bolivia, are finalizing the process for certification before the end of 2012.

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe

4. Perspectives SPI sustains the evaluation of social performance in microfinance by means of: ´´ The promotion of a common vision among the operators committed in favor of social performance and with other actors in the social performance Task Force. ´´ Support for the MFI in its efforts to improve its social performance through the creation of complementary tools and a accompaniment adapted for each organization. ´´ The work through ProsperA for the promotion of social performance in a collective vision. In 2013, CERISE and ProsperA will develop a new version of SPI that will be perfectly compatible with the new Universal Standards for the Management of social performance27, the social indicators of MIX, the final principles of protection of clients of the Smart Campaign and the seals of certification developed for poverty (Seal of Excellence of the Microcredit Summit, Seals of Gender and Rural Development designed by the Latin American network in the SEEP framework), rural intervention and women’s empowerment (Networks of Latin America). SPI (version 4) will have a “light” version aimed at investors for the phases of “due diligence”, and a complete version of the social audit intended mainly to identify and prioritize actions for an efficient improvement of MFI social performance. So, SPI will be the tool of multifunction and multi-player social evaluation, always accessible for all, and simplifying the landscape of audit and social reporting for more credibility, more transparency and more systematic improvement in practices, but with less administrative effort for the MFI. The SPI, aligned on the standards of the sector, responding to the needs of its users can now be considered as “the” microfinance social auditing tool. CERISE Contact tel : 00 33 (0) 1 40 36 92 92 www.cerise-microfinance.org cerise@cerise-microfinance.org We thank the CGAP and the Argidius Foundation, which began this initiative in 2001, for their human and financial support during these years of SPI development; the Charles Léopold Mayer Foundation, Swiss Cooperation, MIL/LED (Liechtenstein Microfinance Initiative), Oikocredit, Kiva, Foro Lac Fr, CIF, Grameen-Crédit Agricole Microfinance Foundation, Groupe AFD, etc.

27. http://sptf.info/images/sptf%20usspm_final%20spanish.pdf

Microfinanzas con Resultados | Sistema de Certificación del Desempeño Social para Latinoamérica y El Caribe