Microfinance Insights Volume 12: Panacea or Placebo, Evaluating the Impact of Microfinance by Microfinance Insights

Features TM

Vol.12, May/June 2009

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Investment Balancing Social and Financial Critique It’s No Magic Bullet Gender The Women’s Empowerment Myth Index Social Impact Tools

Panacea or Placebo? Evaluating the Impact of Microfinance

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l volume 12 l May/June 2009 Interview

The Proof is in the People: Impacting Women through Relationships and Trust 15 Ela Bhatt

Critique

It’s No Magic Bullet: Why Microfinance is Unlikely to Move People out of Poverty 22 Thomas Dichter

Credit: Russ Bowling

Cover Story

Mission (Im)possible:Can Microfinance Really Change the Lives of the Masses? In our cover story, Sam Dailey Harris, Director of the Microcredit Summit Campaign, takes on the quantity versus quality debate: does the number of clients reached matter more than the poverty reduced? While microfinance has often met with criticism, the fact that it is crucial to breaking the poverty cycle is too apparent to be ignored.

Regular Features News Board

Commentary

Global Viewpoints

Centerfold

Resources

Trends

A Double Bottom Line Vision for the Future Nigel Bigger and Jennifer Meehan Perspectives from Azerbaijan, the Philippines, Sudan and more An Index of Social Impact Measuring and Reporting Tools Recommended Readings and Calendar of Events Indicators on Global Poverty and the Microfinance Rating Industry

Survey

Books

Last Word

Microfinance and Social Impact Book Excerpt and Book Review A Dose of Realism: Tempering Expectations Vineet Rai www.microfinanceinsights.com

Research

Opening the Black Box: How the Poor Use Credit in India Alexandra Kobishyn

Randomized Experiments in Microfinance Jonathan Bauchet and Aparna Dalal

Basics

Social Performance Management in Practice 33 Frances Sinha and Ragini Chaudhury

Investment

The Challenge of Duality: An Investor’s Perspective on Balancing Social and Financial Goals Hugo Couderé

An Equity Investor Takes Stock: Integrating Social Performance Measurement and Microfinance Investment Paul DiLeo

Housing

Mortar and Mortgage: Low Income Housing Solutions for 39 Urban India Affordable Housing Team, Monitor Group

Human Resources

Altruism Reloaded: Seeking Work with Impact Sarika Bansal

Students

Credit for Credits: Student Groups Get Involved in Microfinance Ranjit Koshi

Results

Elusive Impact or Concrete Change: How Social Performance Assessment is Helping to Change the Face of Reporting in Microfinance Micol Guarneri

Back to Basics: Getting on Track after Mission Drift Cecilia del Castillo

Gender

The Women’s Empowerment Myth Radhika Desai may/june 2009

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readers speak

Features Risk & Reward Exploring Risk in Microfinance

Vol.11, Mar/Apr 2009

Critique Why Microfinance Needs Radical Change

Cover Price: US$12/EUR 8/INR 75

Politics Interference in Pakistan Commentary Dangers of Leverage

Global Crisis & Microﬁnance:

“Congratulations on the successful publication of your March/April 2009 edition. Thank you for the opportunity to contribute to the interesting discussion on the Global Financial Crisis. We have enjoyed reading the thought-provoking and very timely set of articles you put together and hope you continue to receive positive feedback.”

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Tough Times Ahead?

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Private Equity Investment Leveraging Microfinance

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Corrections: Microfinance Insights Vol. 11, Mar/Apr Issue While we spend a lot of time trying to ensure the accuracy of our publication, a few errors escaped our attention in the last issue. In the article by Milford Bateman, “Locked In,” we omitted the footnotes. To read the corrected version, please visit www.MicrofinanceInsights.com and search for Bateman.

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From the Editor TM

Panacea or Placebo?

Vol. 7, July 2008

Managing Editor Lindsay Clinton Editorial Team Aparajita Agrawal, Ranjit Koshi, Asako Matsukawa, Vibha Mehta Advisory Board Vineet Rai, Wim van der Beek Cover & Page Design ToonPillz Cover Photograph Herval Freire For editorial, contributions, subscriptions, advertisements and other queries, please contact:

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Dear Reader, What is that quote about that incorrigible beast with a powerful bite? “If you think you’re too small to be effective, you have never been in bed with a mosquito.” As several of my mosquito-hating friends would tell you, small interventions (positive or negative) can have a big impact. Microfinance is based on this premise: a little slice of something, like credit, can go a long way. Microfinance has brought women around the world together in harmonious groups. Transformed low-income men and women into wealth-creating entrepreneurs that control their own destiny. Put a roof over the heads of the homeless. Or at least that is what we’ve always thought. Did anyone bother to check? No one usually does when something is so small. However, in the past several years, as the sector has grown and matured, it has been subject to more scrutiny. Now, it is no longer a given that microfinance is a salve to the poverty stricken, nor can it be reliably thought of as a steroid to boost a borrower out of poverty. What we had hoped was a cure, may be merely palliative or quite possibly only a placebo. And that is what we chose to explore in this issue. Are women truly being empowered through the provision of credit? Because access to money is not in and of itself empowering, is it? Can we optimize financial return as we maximize social return? How do we balance the two, and are they mutually exclusive? If microfinance is indeed making an impact, what is the best way to measure it, and who should do so? If we provide 100 million people with microcredit, does it matter if none of them move out of poverty? Should we blame MFIs for not achieving poverty reduction, when really, their goal has initially been to create an environment of inclusivity? Or did these goals change along the way? Last week, I had a meeting with a social investor that struck me as a sign of the times. His firm, based out of Norway, has invested several million dollars in poverty interventions—from a solar lighting company to an NGO in India that is bringing women together in self help groups and giving them business skills. I use the word “invested” loosely, because his company is actually doling out grants. But, this firm views it as investing, because they are fastidious about calculating their ROI—in terms of jobs created, children educated, healthier lives lived, etc. However, the investor is hesitant about microfinance, because, he said, “With microfinance, we know the repayment rate, but we don’t know what value is created for the final recipient. We just don’t know the social impact of microfinance.” In this issue, we explore this conundrum. Is microfinance making a difference? We leave it to you to be the final judge.

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Enjoy the issue,

Lindsay Clinton

Managing Editor

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may/june 2009

microfinance insights

NEWS BOARD Intellecap Secures $9.87m Series B Funding for Bhartiya Samruddhi Finance Limited

April 30, 2009 - Bhartiya Samruddhi Finance Limited (BSFL), the flagship company of the Hyderabad based BASIX group, has concluded its Series-B funding of INR500m (US$10m) with investments from Lok Capital LLC, Aavishkaar Goodwell India Microfinance Development Company and Small Industries Development Bank of India (SIDBI). Intellectual Capital Advisory Services (Intellecap, the company that publishes this magazine) acted as BSFL’s advisors to the issue. With a loan portfolio of INR462 Crores (US$92.4m) and a customer base of over 1.5 million across BASIX and its affiliates for all services, BSFL operates in 15 states across India and expects to reach 10 million clients by 2014.

PlaNet Finance to Increase Action Against Malaria in Africa April 27, 2009 - PlaNet Finance will continue its fight against malaria in Africa and replicate its awareness-generation and prevention programs in West Africa. Besides its microfinance institution network in Africa, PlaNet Finance has been working on the field of health care for several years with micro-entrepreneurs. Supported by 15 Beninese microfinance institutions, this two-year program with entrepreneurs in rural and urban areas helped to sensitize over 120,000 people, customers of microfinance institutions and their close relatives, on preventive actions and practices.

Microfinance as a Poverty Alleviation Tool for Sri Lanka

April 26, 2009 - Microfinance holds the key to poverty alleviation in Sri Lanka. The Deputy Governor of the Central Bank, W.A. Wijewardena, at the “International Seminar on Microfinance for Inclusive Development and Sustainable Growth” said that poverty alleviation in Sri Lanka is the top priority. He said that although poverty in the country has dropped to 15% in 2007 from 28% in 2003, there is room for greater improvement. He cited Malaysia and South Korea as successful cases in microfinance where poverty levels dropped from as high as 50% to around 6% in 30 years.

microfinance insights

SFD-Yemen Targets Entrepreneurs by 2012

100,000

April 22, 2009 - The Social Fund for Development in Yemen has a strategic plan aimed at increasing its clients to 100,000 by 2012. The clients of their microfinance program are women, small farmers, and micro-entrepreneurs. SFD has started a number of MFIs with the objective of providing sustainable services that target different segments of entrepreneurs.

GreenMicrofinance™ Launches Online University Forum

April 22, 2009 –GreenMicrofinance™, a Pennsylvania based triple bottom line company, chose Earth Day, April 22, 2009 for the launch of its online climate change and microfinance university network, the GMf University Forum™, that mobilizes students, practitioners and activists who promote environmentally conscious microfinance. The Forum’s prime objective is to facilitate the exchange of ideas on international development, focusing on such topics as sustainable microfinance in relation to clean energy, climate change and social investing.

EIB, Gates, FMO Grant US$8.5m to AfriCap

April 21, 2009 - The European Investment Bank (EIB) is extending a EUR2m (US$2.65m) grant to support the AfriCap Microfinance Investment Company through FinTech Africa to fund capacity building for early-stage and greenfield MFIs across Africa. The EIB grant will be complemented by a US$5 million grant from the Bill & Melinda Gates Foundation to FinTech Africa and a further US$ 0.75 million grant from the Dutch Development Agency, FMO. The combined technical assistance funding will encourage the development of young MFIs.

Global Social Investors Help Launch Bank Andara

April 21, 2009 - Bank Sri Partha in Bali has officially transformed into Bank Andara after four international investors provided US$5m worth of additional capital. The investors, Mercy Corps, International Finance Corporation (IFC), the Hivos-Triodos Fund (HTF) and Cordaid, have contributed

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42%, 20%, 17% and 13% respectively. Bank Andara aims to help people access banking services. It is targeting to channel its credits through at least 200 out of 40,000 MFIs in Indonesia, especially in Java and Bali.

Recycle to Eradicate Poverty Launches One Million Cell Phone Challenge

April 21, 2009 - Recycle to Eradicate Poverty (RTEP), an initiative of the Chiapas Project, has announced its “One Million Cell Phone Challenge.” The Chiapas Project is dedicated to raising funds for MFIs in Latin America (LAC). The goal is to obtain 1 million used cell phones from the US by 2010. RTEP will use proceeds from recycled cell phones towards small business loans for poor women throughout LAC.

Obama Announces US$100m Microfinance Fund for Americas

April 18, 2009 - US President Barack Obama announced the creation of a US$100m Microfinance Growth Fund to help small lenders in the Western Hemisphere continue making loans despite the global recession. The fund will provide stable medium- and longer-term sources of finance to MFIs and microfinance investment vehicles to help rebuild their capacity to lend during this difficult period. The announcement was made while Obama was attending the Fifth Summit of the Americas in Trinidad and Tobago.

PE Players Support Microfinance

April 17, 2009 - Private equity players have made investments worth US$230m in the microfinance sector in the last two years

NEWS BOARD as it still stays relatively insulated from the global financial turmoil. According to data compiled by Venture Intelligence, a research service focused on private equity and venture capital, the microfinance sector witnessed as many as 14 deals worth US$230m between January 2007 and March 2009. In India, alone, there have been 11 deals, worth US$178m between 2008-9.

Micro Finance Interbank Money Market Brings New Hopes and New Challenges

April 13, 2009 - The launch of the microfinance interbank money market in Nigeria has created a new hope for the sector as well as increased the stakes for the competition for funds in the banking industry. The microfinance interbank market is expected to reduce the vulnerability of microfinance to any distress among universal banks as well as enhance its role in the Nigerian economy. Microfinance interbank market is spearheaded by Financial Derivatives Limited, in collaboration with Kakawa Discount House Limited.

Gradatim Explores Series A Funding

April 11, 2009 - Microfinance technology provider Gradatim IT Ventures is looking at raising Series A funding of US$3m by the end of June as part of its expansion plans. Gradatim’s founder CEO C.V. Prakash said the company has engaged in discussions with a few venture capital firms and strategic investors in this direction.

Small US loans are Catalyst for Iraqi Business

April 7, 2009 – Despite its massive oil reserves and large public corporations, small businesses comprise 90% of the sector in Iran. The Al-Baydaa Centre in Iraq has been very active in giving out loans to everyone from hairdressers and carpenters to fruit farmers and cell phone shop owners in the past two years, using the US$1m plus in start-up capital from different arms of the US government. The Al-Baydaa Centre in Balad appears to be operating smoothly but not every scheme is as successful. Analysts say that MFIs that rely heavily on international assistance would probably not surwww.microfinanceinsights.com

vive without the US’s financial and military backing. But the US hopes such schemes will contribute to wider change in Iraq.

Tufts Microfinance Fund Untouched by the Global Meltdown

April 6, 2009 - Even as the global economic downturn continues to affect the financial sector, the Omidyar-Tufts Microfinance Fund (OTMF) has maintained firm ground. Payouts to Tufts from the fund’s earnings totaled US$6.6m in 2008, significantly more than the US$2.63m and US$1.38m returned to the university in 2007 and 2006, respectively. Half of the returns each year are reinvested in the fund, and therefore the OTMF earned a total of US$13.2m in 2008, i.e., a 12% return rate. OTMF invests in a variety of asset classes and all of its investments directly or indirectly benefit microfinance initiatives.

FINO enrolls 5 Million unbanked Indians for financial services

April 5, 2009 – Financial Information Network and Operations Ltd. (FINO), engaged in providing financial, non-financial products and services to the unbanked rural masses in India has enrolled 5 million customers to provide them with basic banking and insurance services. FINO has reached out to the non banked sectors of the country since its inception and has played an important role in strengthening the banking sector of India. It is working with Andhra Bank, Corporation Bank, ICICI Bank, ICICI Lombard, Oriental Bank of Commerce, Punjab National Bank, State Bank of India, Union Bank of India, Sewa Bank, and other financial institutions.

Mi-Pay Launches Mobile Remittance Service in Sierra Leone

April 1, 2009 - International mobile money services provider Mi-Pay has announced that it will offer online and mobile remittance solution in Sierra Leone. This will be Mi-Pay’s first entry in West Africa. The service will allow customers in the Sierra Leone corridor to use their mobile phone or the web to send/receive money payments to and from friends and relatives abroad. The announcement follows the launch of Mi-Pay’s domestic mobile money transfer solution in Sudan,

which is undergoing roll out by agent-based Saraf Mobile across North Africa. It precedes the anticipated announcement of an East African mobile banking deal.

Mexico’s Microfinance Industry Undergoes Shake-Up

March 23, 2009 - Mexico’s microfinance industry is undergoing a shake-up as the global financial crisis spurs banks that had dabbled in the sector in recent years to pull out altogether. The crisis is also making funding scarce for specialized lenders. Mexico’s fifth-biggest bank Grupo Financiero Banorte SAB is shutting its microfinance arm Creditos Pronegocio after its losses widened to MXN120m (US$8.4m) last year from MXN30m (US$2m) in 2007. The unit was launched in 2005. HSBC Holdings PLC (HBC), which owns Mexico’s fourth-largest bank, sold its stake in consumer loan and the MFI Financiera Independencia SAB to the company’s controlling shareholders in November 2008. Banamex, the Mexican arm of Citigroup Inc., put the total number of potential microcredit clients in Mexico at around 18 million, of which only 11% are currently served by an MFI.

MIX Announces Release of Social Performance Indicators

March 25, 2009 - The Microfinance Information Exchange (MIX) has sent a questionnaire designed to evaluate social performance to over 1,300 MFIs, consisting of 22 core indicators covering topics such as client poverty level, progress out of poverty, product design, and institutional policies and procedures. The Social Performance Task Force will review all responses at its next meeting, scheduled for June in Madrid, and starting in Autumn 2009, MIX will weigh social performance reporting when determining the number of diamonds an MFI receives for transparency. n

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microfinance insights

commentary

A Double Bottom Line Vision for the Future “We always have these twin goals in mind, to be a sound, sustainable business and also provide a means of enabling people to lift themselves out of poverty...In order to do both of those things, you ultimately have to measure both. We can’t just go on telling stories about this. We have to be able to measure and demonstrate that we’re having both, a financial return and a social return.” Paul Maritz, Chairman, Board of Directors, Grameen Foundation

ust as a microfinance institution (MFI) cannot be profitable without sound management of its financial performance, it cannot achieve its social objectives effectively without the sound management of its social performance.1 For microfinance to maximize its outreach to and impact on the poor and poorest, both financial and social performance—a true double-bottom line framework—must be adopted by those institutions using microfinance as a means to a much larger end—global poverty reduction. A key stumbling block in the past for MFIs to regularly track, improve and report on social performance has been lack of easy, cost-effective tools to do so. Innovations in recent years and the development of new tools have provided a critical first step towards enabling MFIs to start tracking their social performance. But much more work remains. To truly succeed, a thriving, self-sustaining social performance ecosystem needs to be developed, as is described below. Why is Social Performance Important? If a microfinance institution’s mission is to address poverty, MFIs need to ask and answer the following questions: Are we reaching the poor and poorest segment of our populations? Are the poorest staying in the program through enough loan cycles to make a difference in their lives? Are they actually moving out of poverty? If so, is this related to the services provided by the MFI? In short, are MFIs accomplishing their social mission to serve the poor in the ways that would transform their lives? As Anne Hastings, CEO of Fonkoze (a Haitian MFI), put it, “We want numbers behind the promises we make to the poor.”

poverty through access to microfinance services. As in any ecosystem, the social performance ecosystem will struggle to survive without each functioning part, as outlined in Figure 1.

“Only when the social and financial performance results are tracked and understood will microfinance be able to manage its social and financial performance and this deliver on its promise of poverty alleviation” A key component of the ecosystem is the ability to measure poverty levels in an easy and verifiable manner. This enables MFIs to understand if they are even reaching the poor clients they intend to serve. Once MFIs determine that they are reaching their target population, another component is

Figure1: A Sustainable Social Performance Ecosystem Knowing Your Clients Effectively reaching poor and very poor clients using poverty measurement tools. • PPI • USAID Poverty Assessment Tool

Ensuring Impact Understanding if services result in poverty reduction. • Impact assessments by universities & researchers

What are the Key Components of a Healthy Social Performance Ecosystem? At the center of the social performance ecosystem is the poor client—the person we seek to enable to create a world without

microfinance insights

the development of appropriate products and services so that more of their clients are able to improve their poverty status. Finally, this information (on outreach and outcomes of microfinance) can be used by social investors and policy makers to make resources available to such double-bottom line oriented MFIs. When functioning well, all these different components will form a positive cycle as illustrated in Figure 1. Until recently the microfinance industry did not have many of these components in place. The sector has advanced, accurate and low-cost poverty assessment tools like the Progress out of Poverty IndexTM (PPITM) or the USAID Poverty Assessment Tool (PAT), that are enabling more and more MFIs to understand the extent to which they are serving their target clients. MFIs that are able to know and serve their clients (refer to Figure 1) use these

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Serving Your Clients Managing social performance to provide appropriate products and services that address client needs. • PPI

Growing Poverty-Focused Microfinance Using results to attract additional Investment and support • Social Investors • Benchmarking (e.g. MIX) • Raters • Regulators • Governments

commentary poverty assessment tools and SPM systems to ensure that they are offering appropriate products and services to different clients. Additionally, the growing body of data on poverty outreach, when cross linked with financial performance data, is enabling us to objectively understand if there is indeed a trade-off between poverty outreach and MFI profitability and if so, what is that trade-off? Grameen Foundation has been putting in place some pieces of this ecosystem by developing the PPITM, manuals to use the tool and frameworks for linking social and financial performance data that will lay the groundwork for MFIs to push the frontier on effectively measuring and managing their social performance. How Can we Establish an Effective Ecosystem? Much remains to be done and there is a role to play for all stakeholders. Social raters can

validate MFI social performance results to external stakeholders. Mainstreaming these ratings will help strengthen the ecosystem. The MIX is contributing by standardizing SPM indicators and developing best practices in SPM reporting; in the future, they may be able to provide doublebottom line benchmarks and rankings. Microfinance networks can play a key role in sharing lessons learned and spreading best practices. Academic institutions can bring cutting-edge analysis tools from different learning disciplines as well as continue, along with others, to undertake impact assessments to fully understand the scope and depth of microfinance in transforming the lives of the poor. These collective results can be used to influence policy-makers in both the developed and developing worlds.

Our Vision We imagine a day when social performance results are measured by and used to manage poverty-focused MFIs’ activities as readily as financial and operational data are used today. More broadly, we imagine social performance results being reported alongside financial and operational data to provide investors, particularly social investors, raters and other third parties the information required to make a holistic evaluation of poverty-focused MFI performance. Only when the social and financial performance results are tracked and understood will microfinance be able to manage its social and financial performance and this deliver on its promise of poverty alleviation. n

This article is contributed by Jennifer Meehan, CEO Asia Region, and Nigel Biggar, Director Social Performance Management Center, Grameen Foundation

C ongratul ations ! The winner of the lucky draw for an Amazon. com US$25 gift certificate for completion of the Microfinance Insights “Social Impact ” survey is Dibyajyoti Pattanaik, PEOPLE’S FORUM, India. In every issue, Microfinance Insights conducts an online survey to examine the perspectives of various stakeholders around the world on the latest issues and topics in the sector. It equips readers with fresh insights that are delivered right from the ground. Every person who completes the survey enters a lucky draw to win a prize. Turn to page 54 in this issue to find more about the highlights and analysis of the “Social Impact” survey. Full details of the survey results will be available to subscribers.

o by Lucky Bambo

rson Randen Pede

Interested in joining our survey mailing list? Please write to us at publications@intellecap.net to contribute your views and opinions to the sector!

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may/june 2009

cover story

Mission (Im)possible: Can Microfinance really Change the Lives of the Masses? Microfinance has its share of skeptics who criticize it for not being the panacea for poverty. While microfinance cannot always remove poverty, it is, if properly implemented, a powerful tool to help the poor begin their climb out of poverty. Proponents, for their part, focus on outreach and sustainability as indicators of success. The author, Sam Daley-Harris, Director of the Microcredit Summit Campaign, adds one more dimension to define success in microfinance – poverty reduction. It is, after all, the raison d’etre for the sector. financially sound, if there is little or no improvement in the lives of the clients?” I took this omission to heart and back to the Summit’s Organizing Committee. A quick consensus emerged, and we added a fourth core theme - ensuring a positive measurable impact on the lives of the clients and their families. With the Microcredit Summit Campaign’s announcement in January 2009 that we had surpassed our goal of reaching 100 million of the world’s poorest families with microloans in 20071, existential questions arose about the “quantity versus quality” debate. That is, does the number of clients reached matter more than the poverty reduced, is microfinance really having a social impact, and how to respond to critics who say microfinance is not working.

Credit: Russ Bowling

n 1996, I traveled the world speaking about the first Microcredit Summit that was to be held the following year in Washington, DC. I remember a particularly difficult briefing for development specialists in London that year that played a key role in setting the course for the Microcredit Summit Campaign on the issue of social progress. During that rough and tumble session I laid out the Summit’s goal to reach 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services by 2005. I also discussed the Summit’s three core themes: 1) reaching the poorest families, 2) reaching and empowering women, and 3) building financially self-sufficient institutions. The three core themes would soon grow to four, based

microfinance insights

on the heated discussion that day. People in the group were upset about a number of things, including concerns that 1) microfinance was too business-like and did not adhere to the proud charitable traditions of the UK, 2) microfinance would become the new darling of funders and push out muchneeded support for health and education, and 3) the goal of reaching 100 million of the world’s poorest families was too outlandish (read “too American”). One academic paper out of the UK that year talked about the “hard selling of a new anti-poverty formula” by the “microfinance evangelists.” But the criticism that rang truest was this one, “What difference does it make if you reach the poorest families, you reach women, and the microfinance institutions (MFIs) are

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Answering the Tough Questions I believe these questions are all interrelated. Let me start with my own personal heresy on the issue of microfinance impact. Do I believe that microfinance alone can end a family’s poverty? Absolutely! I have seen it and probably many readers have as well. Take the case of Sufia Khatum, the Bangladeshi stool maker from Jobra village (near Chittagong) who received a loan of less than US$1 in the mid-1970s from a young economics professor named Muhammad Yunus. Her income immediately jumped from two cents a day to US$1.25 a day as a result of this loan. But a string of simple anecdotes like this can be dismissed without concurring evidence from respected researchers. This forces me to ask a series of more important questions. Do I believe that microfinance alone can always end a family’s poverty? Absolutely not! Do I believe that we should have to demonstrate that microfinance alone ends poverty for the international community to redouble its efforts to extend its reach and impact? Absolutely not! Poverty is much too

cover story complex to always be cured by one intervention. We do not ask if basic education alone ends poverty. We do not ask if vaccinations alone end poverty. So why should microfinance be held to the standard of reducing poverty alone? This logically leads to a third question. Do I believe that if we cannot demonstrate that microfinance alone ends poverty, we should denigrate its importance as a financial and anti-poverty intervention? Absolutely not! When implemented well and focused on the poor, it is one of the most powerful tools we have to help a family begin a dignified route out of poverty – something that dozens of studies confirm.2 Even though I do not believe that microfinance alone can always end poverty, nor should we expect it to do so, I do believe that MFIs should find cost-effective ways to measure social progress in order to create a sense of accountability and set performance standards. Just as any credible MFI would track its financial health; it should also track the social progress of its clients if poverty reduction is one of its stated objectives. This discussion brings us to the “quantity versus quality” debate—does the number of clients reached matter more than the poverty reduced? I believe that they both matter, but “poverty reduction” matters more.

“Just as any credible MFI would track its financial health; it should also track the social progress of its clients if poverty reduction is one of its stated objectives.” Who is Poor? As a result, one of the Microcredit Summit Campaign’s two goals for 2015 is to ensure that 100 million families rise above the US$1 a day threshold. The Campaign has encouraged practitioners to use tools like the progress out of poverty index (PPI),3 a cost-effective way to determine whether clients move above the US$1 a day marker. Even simpler tools are available to track social progress, tools that do not link to an absolute measure such as US$1 a day. Grameen Bank’s 10 poverty indicators make tremendous sense for clients in Bangladesh, and similar indicators can be selected for other countries. Sample their simplicity: A member is considered to have moved out of poverty if her family fulfills the following www.microfinanceinsights.com

criteria: • The family lives in a house worth at least Taka 25,000 (US$370) or a house with a tin roof, and each member of the family is able to sleep on a bed instead of on the floor. • Family members drink pure water from tube-wells, boiled water or water purified by using alum, arsenic-free, purifying tablets or pitcher filters. • All children in the family over six years of age are going to school or have finished primary school. • Minimum weekly loan installment of the borrower is Taka 200 (US$3) or more. • Family uses sanitary latrine. • Family has adequate clothing for everyday use, warm clothing for winter, and mosquitonets to protect them from mosquitoes. • Family has sources of additional income, such as a vegetable garden, fruit-bearing trees etc., so that they are able to fall back on these sources of income if needed. • The borrower maintains an average annual balance of Taka 5,000 (US$75) in her savings accounts. • Family experiences no difficulty in having three square meals a day throughout the year, i.e. no member of the family goes hungry any time of the year. • Family can take care of health needs. If any member of the family falls ill, the family can afford to seek adequate healthcare. For other countries, these indicators would need to be adapted to local conditions by those who understand them. Is Microfinance in Ship Shape? What about those who say that microfinance

is not working? Over a recent four week period I have felt surrounded by some of those critics. One suggested, in an online debate, that MFIs rarely serve the very poor and another suggested there is very little change in clients’ lives. Let me begin by addressing the first charge. While I believe that many MFIs do serve those who earn less than US$1/day, I would like to see more do so.

“RESULTS has encouraged more than 1,500 members of parliaments from around the world to push successive World Bank Presidents to get more Bank microfinance funds to families living on less than US$1 a day, a clear area of failure for the World Bank.” From the very start, the Microcredit Summit Campaign took strong measures to work against that development tendency –not unique to microfinance— of directing resources primarily to the better-off poor and non-poor. The original Microcredit Summit goal was established to reach 100 million of the world’s poorest families precisely because of that failure of international development, a failure that begins with the bilateral and multilateral aid agencies. Clearly, by reaching that goal the community of microfinance practitioners, especially in Asia, have given some priority to reaching the very poor – particularly since 80% of the MFIs surveyed had their outreach to this group verified by a third party. But more can and must be done. That is why another of the organizations I founded, RESULTS, a citizens’ lobby committed to creating the political will to end

Critics charge that microfinance is for the economically active poor. But isn’t every family economically active?

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cover story global poverty, successfully lobbied to get a law passed requiring that half of US Agency for International Development (USAID) microfinance resources go to families living on less than US$1 a day. How is USAID doing in fulfilling this requirement? Not well at all.4 This is also why RESULTS has encouraged more than 1,500 members of parliaments from around the world to push successive World Bank Presidents (Wolfensohn, Wolfowitz and Zoellick) to get more Bank microfinance funds to families living on less than US$1 a day, a clear area of failure for the World Bank. So, do many MFIs reach the ‘upper poor’ in much greater numbers than the ‘very poor’? Probably, but not the largest MFIs in Asia and that is not the point anyway. I assume that one could find 1,000 MFIs with an average of 5,000 clients each and find that “most [of those] MFIs reach the upper poor.” But of what use is that information if BRAC Bangladesh, for example, has one million more clients than all of those 1,000 MFIs put together and is contributing (along with Grameen Bank and other MFIs in Bangladesh) to a profound reduction in that country’s levels of poverty? Should we not be focused on those successfully leading the way and push the others to reach that level of performance? In his book The End of Poverty, Jeffrey Sachs describes a visit with BRAC microcredit clients where he learns that the women had, or planned to have, no more than two children each. He wrote: “Perhaps more amazing than the stories of how microfinance was fueling small-scale businesses, were the women’s attitudes to child rearing...Here was a group where the average number of children for these mothers was between one and two children... This social norm was new, a demonstration of a change of outlook and possibility so dramatic that the late Dr. Allan Rosenfield [the Dean of the Columbia University School of Public Health at the time] dwelt on it throughout the rest of his visit . . . he remembered vividly the days when Bangladeshi rural women would

typically have had six or seven children [not one or two].5 This is a profound change. Of course, BRAC was not solely responsible for this change, but studies of Grameen Bank and BRAC found that they were more effective in reducing fertility rates than were family planning programs. Should we not be trying to figure out what BRAC and others in Bangladesh are doing right so that it can be emulated, rather than ignoring it or writing it off as a special case?

“Another misleading charge is that microfinance is not for the very poor, but for the economically active poor. In my mind, virtually every family is “economically active” – even begging is defined by some to be an economic activity.” When Microsoft Founder Bill Gates visited a group of BRAC microfinance clients he told a journalist, “It was like a religious experience.” Was Gates deluded or was he seeing something the researchers who denigrate microfinance fail to see? Another misleading charge is that microfinance is not for the very poor, but for the economically active poor. In my mind, virtually every family is “economically active” – even begging is defined by some to be an economic activity. If we feel an urgency about reducing extreme poverty, should we not put aside pointless debates and identify those MFIs that are targeting and benefitting the poorest, and then apply those best practices as widely and as quickly as possible? Good Borrowers Make Good Families Jamii Bora, which means ‘good families,’ is a case in point. This Kenyan microfinance institution has grown from working with 50 women beggars ten years ago to serving more than 200,000 members today. One of those entrepreneurs is Joyce Wairimu. Wairimu

1. See http://www.microcreditsummit.org/SOCRs/SOCR2009_English.pdf 2. For a summary of the findings of more than 90 studies completed through 2005, see “Measuring the Impact of Microfinance: Taking Stock of What We Know,” by Nathanael Goldberg, Grameen Foundation White Paper Series, December 2005. 3. For information about the PPI: http://www.progressoutofpoverty.org/ 4. For more about USAID’s compliance, visit: http://www.mrreporting.org/Pub/AnnualReports/Report2007. aspx) 5. Sachs, Jeffrey. The End of Poverty. The Penguin Press, pp. 13–14, 2005.

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was one of the 50 women beggars who started Jamii Bora with founder Ingrid Munro [who was interviewed in this magazine’s Nov/Dec 08 issue] in 1999. Munro calls Wairimu one of the fast climbers out of poverty. How fast? In ten years, Wairimu has built six businesses and employs 62 people. Munro started Jamii Bora 20 years ago when she and her husband adopted three street children. It was in the fertile ground of Munro’s relationship with the mothers of her sons’ friends in the streets—women who were beggars— that her profound insights would grow. When Munro, a Swedish trained architect and urban planner, retired from the African Housing Fund in 1999, she thought she would also retire from the little group of 50 beggar women with whom she had been working. But when the women pleaded with her not to leave them, Munro agreed to stay and insisted that they must lift themselves out of poverty. For Munro that meant the women had to start developing the discipline of saving on a regular basis. She had them come every Saturday with about 50 cents in savings. When they deposited their 50 cents she would give each of them two scoops of corn and one scoop of beans for free. She admits now that for those first two months she was tricking them into saving. After two months, the bags were empty, but the beggars continued to save. What is remarkable about Jamii Bora is its people: all MFI staff are former members, previously destitute themselves. Numbers and profitability matter, but poverty reduction matters more – at least to me, and it should to all those who have committed to halving the number of extreme poor by 2015. And while the critics are busy stirring up doubts, millions of microfinance clients are finding better lives for themselves and their families. n

Sam Daley-Harris is Founder of the Microcredit Summit Campaign which seeks to reach 175 million poorest families with microcredit (www.microcreditsummit.org) and of RESULTS which seeks to create the political will to end poverty (www.results. org). He can be reached at samdharris@microcreditsummit.org

interview

The Proof is in the People: Impacting Women through Relationships and Trust This issue explores one of the biggest mysteries of the microfinance sector: does it make an impact, and if yes, how much? But as skeptics argue about the lack of evidence and tangible effects, and investors demand construction of metrics to prove its impact, a set of changemakers, who see impact beyond measurement, quietly go about their work. Ela Bhatt, Founder of the Self Employed Women’s Association (SEWA) in Ahmedabad, India is one such visionary. In the 1970s, she realized the collective strength of independent women vendors and in a matter of decades transformed them into a force to be reckoned with—today over 1 million strong. Microfinance Insights had the opportunity to meet Ela Ben (as she is known in the community) and solicit her thoughts on impact. Microfinance Insights (Insights): You have always been a leader in your own right. You went to law school at a time when it was rare for women anywhere to attain advanced education. What in your background motivated you to strive for that level of education? Ela Ben Bhatt (Ela Ben): Actually, it was the atmosphere in the country when I was growing up, first there was a fight for freedom and when we got that freedom [1947], a need was felt to rebuild the nation. During my school days, my teachers encouraged me to go to the villages, live with poor people and work for their cause. Most of the people in my family are lawyers, and since I do not have a brother, it was almost certain I was going to be a lawyer. My grandmother was not very happy about my attending college, but my mother was a very ambitious lady. She had studied only up to sixth standard [age 11-12] and got married, but my father taught her at home. In fact, when I graduated from school, my mother got her BA (Bachelor of Arts) degree. I always had a fairly good idea of what I was going to do in the future and it was nothing short of rebuilding the nation. [Mahatma Gandhi] had shown the way, and we had no confusion in what to do and how to do it. Insights: After attending school, you got married and had children, but it didn’t take long before you started to work with women vendors. What drove you to leave home and do grassroots work? Ela Ben: We have to work. We can’t stay at home. With all the education and all that the society has instilled in us, we have to repay the society, doubly so. Since I was trained in law, I started working for the trade union of textile workers (Textile Labor Association, TLA).2 I joined their legal www.microfinanceinsights.com

department and while working, I started unionizing those who did not come under the umbrella of the employer/employee relationship; I call them self-employed. That trade union was unique and idealistic, based on the philosophy of “integrated economy.” And it did work, for the city, its economy, and the prosperity and upliftment of the workers.

What is the single most important tool for women’s empowerment? Ela Ben: For me, empowerment is not a noun, it is a verb. Empowerment is an ongoing process, it is not something that can be given and taken back. When you are weak, you have to come together and form a group, but this collective strength has to be value based.

Insights: You have been working to empower women for more than 30 years.

Insights: SEWA is restricted to women only. What is the reason for that? How

Ela Ben, Founder of SEWA, at work.

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interview do you think the organizational would change if you opened SEWA to men? Ela Ben: I wanted to include men in the organization when SEWA was losing certain battles because we did not have enough support of men in the same field. I brought up this issue twice or thrice in the General Body Meeting at SEWA, but the women present there were very clear that they did not want to have male members. They also say that men are not dependable when it comes to money. I have personally noticed that in presence of men, especially of their own family, women do not participate as much as they do otherwise. But I still feel that to win a big battle, you need both men and women, where women should act as the leaders. I have more faith in the leadership of women. A woman’s approach to work and her thinking is always very holistic. Women are also closer to nature, which is reflected in the way they sustain their livelihoods, perform their household duties, and forge and maintain relationships. Although they take more time at their tasks than men, they are futuristic and are better fighters against the wrath of nature. Insights: You have gathered over 1 million women in a collective and have gone against politically or financially powerful entities in the past. But perhaps critics look at SEWA and say, “Oh it’s just a group of poor women.” Have you ever doubted the impact SEWA is making? Ela Ben: There is a flaw in our perception of poor people. The poor are surviving because they are working. They have still not received due representation in various sectors despite the fact that they are economically active and have the potential to prove themselves. They deal with both large businesses and small enterprises as laborers, workers, producers, self employed vendors and service providers. They know how to deal with money and markets. And whenever they have been provided access to finance, they have proved that they are bankable and creditable. SEWA conducted a study on the contribution of the informal sector, which is composed predominantly of poor people, half of which are women, and the results point out to the valuable contribution they

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are making to the GDP of the country. The perception about the poor has to change, and fortunately it is changing, although slowly. Insights: There are a lot of people belonging to the new school of thought who believe that impact needs to be measured and that you need to have numbers/metrics to prove progress. Does SEWA measure impact? Ela Ben: At SEWA and SEWA bank, we have a long term relationship of trust with our clients. More than 53% of our depositors have taken loans from SEWA 15-20 times and that has helped them to grow. Some of them say SEWA is like their mother, others say it is like a village well where they can meet and talk. At SEWA, we have credit products for the entire life-cycle of a woman, to fill whatever gaps there are in the various stages of her life or wherever her income leaks. We also provide them with financial literacy that guides them on when to save and when to borrow. SEWA’s main thrust is on generating assets and making women the owners of their household assets and their means of production. For example, when a woman adds another floor to her house using a SEWA loan, we ensure that it is in her name, or when she recovers her mortgaged land using SEWA money, we see that she is listed as the title holder. They also own the entire bank and the union, and have the decision making power in SEWA. In terms of concrete impact, you see they have food at home, their children start going to school, they are graduating with SEWA Bank scholarships, they are linked with pension and insurance schemes, and they now have pucca houses (cemented brick houses) to live in, and all this is visible. What better proof do we need? Insights: There is growing criticism of the notion that many microcredit borrowers use their loans for consumption purposes rather than starting an enterprise. Do you see this as a problem? Ela Ben: I believe that when you lend, you see the borrower’s capacity to repay and then trust that she will use the money wisely. She has the basic education and the right values; just give her the power

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to make her own decisions. Insights: International investors have become captivated by the ability to make strong financial returns from microfinance investments; some view this as the rich building their wealth on the backs of the poor. How do you react to this? Ela Ben: I am a believer in Swadeshi,3 and think that Indian banks have enough money and the necessary policies to reach the unreached. They just need to free the money off their tight clutches. Also, there are many MFIs that have the required money, we just need to enable them to take savings. MFIs should be balanced enough to set appropriate interest rates that will allow them to cover their expenses and become sustainable, individually and institutionally. The challenge is in expanding at the grassroots, facilitating and supporting SHGs, making small SHGs come together and create their own federation, building capital at that level and linking them with the main markets. We may take outside support for skill development and linking with the global market to make women understand the world of finance which is changing so fast. Insights: Working as you have, at the helm of a trade union, there is inevitably some engagement required with the government. In fact, in the late 80s, you served in the Indian Parliament. How did your perspective change by being “in the system?” Ela Ben: I was in the Upper House of the Parliament, the Rajya Sabha. Since I was nominated by the President of India, I did not belong to any political party. There are always some advantages and disadvantages of being in political power. Whatever issues I brought to the table, some of which were probably coming out for the first time, were heard with great seriousness by both the ruling and the opposition parties. But since I had no political backing, I could not bring any clear change. But whatever we are doing is political action in itself. Changing the balance of power in favor of the poor and women, standing firm in the mainstream market, and competing with others as equals does create an impact and people do give weight to what SEWA does. Insights: You have brought together an

interview incredibly strong and large group of empowered women. Have you ever thought of training them to run for office or be involved in politics? Ela Ben: At the grassroots level, i.e., at the Panchayat4 level, we have more than 500 SEWA members, elected by consensus. It is generally the villagers who collectively decide to elect a person for the outstanding work she has done for the village. Some of those elected join the party, most of them do not. SEWA’s constitution clearly states a member should remain outside the political environment. In the Indian culture, if you are apolitical, you carry more respect and credibility. But our work is actually a political action, and whatever opposition we face, I see them as a part of the game of balancing the power. Insights: The people you have worked with all your life have been called “the poor, but the many.” Do you see that as a strength or a double challenge? Ela Ben: Strength. Because in a trade union, it is the number that counts. The more organized the group is, the stronger it is. But in organizations, a large numbers is not the only factor deciding their strength. Organizations need to have networks, and the capability to organize across borders, markets and issues. You need an organization to have roots, but for bringing change and spreading new ideas, you need a movement. And as your movement gains momentum, you set up another organization. There is always a balance between the two. In my vision, it operates on a banyan tree model. As it grows, its branches go down to the ground, take root and become independent trees themselves. It is not like an edifice, if you take out one brick out of the edifice, it may fall. But this is a tree; with the winds, it may sway, but it stays grounded because its roots are strong. Insights: There is an overwhelming disparity between the rich and poor in India. Do you think it will ever change? Ela Ben: In India, the poor have not become poorer, but they indeed have be-

come more vulnerable to various factors/ forces, as have the rest of us. The world is changing so fast that their traditional wisdom, knowledge and skills are getting lost, and the very base of their community is shaking. They know how to deal with natural disaster like famines, floods, and earthquakes. But they don’t know how to deal with the kind of disasters we are seeing now; for example fast growth of urban cities.

“The five primary needs; food, clothing, shelter, primary education and health care have to made available to people within hundred miles of their stay.” I think in times to come, everyone will be poor. I am not very proud of my generation. We have left nothing for you. We are eating up the earth, exhausting all our resources, without still seeing a paradigm shift. The solution lies in decentralizing and localizing resources and power, particularly those pertaining to decision making. We have to see that everyone has enough to eat, has access to primary health care and education and to ensure that, I follow the principle of 100 miles. The five primary needs, food, clothing, shelter, primary education and health care have to be made available to people within

hundred miles of where they live. I am not saying we have to go back 50 years to make that change happen. Knowledge should flow like oceanic circles, with local and global components overlapping with each other. Knowledge and people must come closer, while being strongly rooted. Until that exchange happens, disparity will remain and all that we are going to be left with is hunger and violence. Insights: In a previous interview you did, you were quoted as saying, “I never had goals. I do not think there are achievements against objectives. That is not how I look at work.” How do you know you have been successful? Ela Ben: I believe that every success has seeds of failure and every failure has potential achievements hidden somewhere. What is important is how you do your work. You must correlate the impact of your work to your own self, to the society and the universe. That is the vision with which we work. We know we are never going to reach the vision, it is like heaven, but so long as we are on the right track, I will feel good. I am not in a hurry, but I want to do things that are creative and constructive. n

Measuring Impact the SEWA Way

SEWA is an organization of poor, self-employed women workers who earn a living through their own labor or small businesses. SEWA’s main goal is to organize these women workers for full employment, enabling them to achieve work security, income security, food security and social security. To measure the social impact of their work, the following 11 questions serve as a tool for all members, group leaders, and committee members. SEWA uses this checklist to monitor its progress and the relevance of its various activities to members’ priorities. Have more members obtained more employment? Has their income increased? Have they obtained food and nutrition? Has their health been safeguarded? Have they obtained child-care? Have they obtained or improved their housing? Have their assets increased? (e.g. their own savings, land, house, work-space, tools or work, licenses, identity cards, cattle and share in cooperatives, all in their own name) Have the worker’s organizational strength increased? Has worker’s leadership increased? Have they become self-reliant both collectively and individually? Have they become literate?

1. Anasuya Sarabhai worked extensively to organize Ahmedabad textile mill workers into trade unions, along with Mahatama Gandhi. 2. Mahatma Gandhi, referred to with respect. 3. Swadeshi is that spirit in us which requires us to use things produced in our neighborhood/country in preference to those more remote. 4. ‘Panchayat’ refers to an assembly of five wise and respected elders chosen and accepted by the village community to settle disputes between individuals and villages

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global viewpoints

As the microfinance sector forges ahead, creating milestones, and reaching out to more and more people across the globe, we pause for a moment to think about what all this means, and turn to the MFIs, the investors, the practitioners, to find out more about their thoughts on social performance assessment – the need for it, and the tools used to measure it, and how it can change their operations. We also spoke to a few naysayers - those who believe that MFIs should focus on their primary business line, and leave the assessment of their work to other players. From Azerbaijan, India, Mexico, the Philippines and Sudan, our interviewees share their points of view. You can also read more Global Viewpoints from Jordan and Singapore on our website www.microfinanceinsights.com

Stay Simple, Stay Committed As of 2007, total investments into microfinance by government-owned international financial institutions and commercial microfinance funds amounted to US$3 billion and US$3.7 billion, respectively. In tandem with the growing interest in microfinance investment, the demand for more clarity in social return on investment has heightened. Microfinance Insights reached out to Mr. Vincent Rapisura, co- founder and CEO, Social Enterprise Development Partnership. Inc (SEDPI) and SEDPI Capital, about how they monitor the social impact of their investment. Profile

Vincent Rapisura, President and CEO, Social Enterprise Development Partnership. Inc Philippines Can you tell us about your evaluation criteria for potential investees? What social dimensions do you look at? Rapisura: We look at three areas when evaluating MFIs – financial sustainability, organizational stability and social impact. The social performance rating we designed uses the following parameters: percentage of female clients, depth of outreach (amount of loan extended to clients in relation to the Philippines’ gross national product per capita), percentage of clients with low educational level, poverty level of the areas where an MFI operates, number of financial and nonfinancial products that intend to address development agendas such as education, health care, environment and/or gender empowerment to name a few. The process of implementing it was, however, challenging. It was difficult because we

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had to work with limited data and because of the lack of funding that is required to conduct rigorous research. Do you think MFIs should not work on social performance management because that is not their main competency? Rapisura: I do not deny that social performance management is very important for MFIs. However, I do feel that social impact measurement is best left to external agencies or professional researchers, given the challenges MFIs inevitably face, such as adequate data sampling and collection, and the high costs involved. MFIs are already doing what they are supposed to do: providing financial services to the poor and the marginalized. Let us not complicate microfinance operations by giving them responsibility over social impact measurement. Do you think pressure to yield financial return for investors could derail an MFIs’ commitment towards social impact? Rapisura: No. Financial return and social im-

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Total investment in the Filipino microfinance sector totalled US$6.7 billion in 2007

pact should co-exist and complement each other. MFIs without sound financial performance will not be able to sustain their services to the poor, while MFIs without a social focus in their operations are mere financial intermediaries. Is microfinance making a difference in your view? Rapisura: Of course, studies we have conducted since 2005 show concrete evidence. SEDPI is going to write a book based on the findings and publish it from Ateneo de Manila University.

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Reality Check The rapid economic growth in the last few years has lead to a few instanceswhere Azeri MFIs experienced a 200% loan portfolio increase in 2008. High growth often leads to the “mainstreaming” of the sector, often associated with “mission drift.” We spoke to an MFI in the country to find out more about their use of social performance metrics and the benefits accrued from them. Profile

Mr. Agharazi Babayev Marketing and Product Development Manager, Vision Fund AzerCredit Baku, Azerbaijan In your opinion, do you think microfinance is making a difference to clients? Babayev: Yes, indeed. We have hundreds and hundreds of examples from Vision Fund AzerCredit’s (AzerCredit) experience. Single mothers, physically disabled people, internally displaced people and refugees have been at the bottom level of the so-called poverty pyramid. While quite a few of our clients are enjoying an absolutely different life now, it is fair to say that although microfinance doesn’t completely wipe the poverty off the globe, it has a considerable impact on people’s lives if applied correctly. Why did AzerCredit decide to implement a social performance diagnosis? What social performance metric do you use? Babayev: Since AzerCredit has been

growing very fast over the last few years, increasing in staff strength to over 200, the danger of the organization becoming strongly profit-oriented and ignoring the social aspects of its operations has grown. Actively seeking a way to continue mainstreaming, but with social performance in mind, we undertook a Social Audit using a QAT (Quality Audit Tool for managing social performance), a tool developed by the Microfinance Center for CEE & NIS). How often do you undertake social performance reporting? Have you made any significant change to your MFI’s operations as a result of you’re the social performance diagnosis? Babayev: The QAT has been implemented at AzerCredit only once so far. One of the findings of the social audit was a gap in AzerCredit’s poverty outreach identification. Previously AzerCredit used average loan sizes as a way to identify the served target client. As this was unclear and uncertain, we have now developed a poverty scorecard to identify the poverty level of a cli-

Although microfinance doesn’t completely wipe poverty off the globe, it has a considerable impact on people’s lives.

ent at the beginning of the first loan cycle and later. Currently, the poverty scorecard system is in the pilot/ test process. Do you think social performance measurement practices help the industry focus on its “mission” or do you think there is too much importance given to measuring progress? Babayev: If an MFI grows fast and becomes a mature institution, it starts slipping away from its mission and becomes more concerned with financial results. And here is where Social Performance Management comes in. It not only helps you focus on your mission, but also improves your profitability as a result.

Proving Improvement In Mexico, the growth of the population has exceeded the capacity of companies to offer jobs, and therefore, people have started their own micro-enterprises to sustain their livelihoods. Compartamos, one of the largest MFIs in Mexico with 1.16 million clients and US$42 billion in loans at the end of December, reaches a clientele that is largely comprised of women (98%). Carlos Labarthe, the Co-Founder of Compartamos, reveals the social impact of their microfinance programs and what prevents some MFIs from measuring their social performance. Profile

Carlos Labarthe, Co-founder and Co-CEO Banco Compartamos, Mexico

not always able to change our client’s lives, but we are able to provide an opportunity for them to change their own lives. We are convinced that this is worth doing.

Do you think microfinance is making a social impact? Labarthe: Absolutely. The mission that drives Compartamos is the creation of opportunities for those who have been excluded from them. We maintain that microfinance builds social capital, and that is the greatest opportunity we offer, and our clients value that. So at the end of the day, we have come to understand that we are

Compartamos has been ranked as one of the top performers in Latin America. How much emphasis do you place on social performance measurement with respect to financial performance measurement? Labarthe: The only reason Compartamos has been able to create economic value is because of the social value we add to our clients. Therefore, if we fail to create social value in the lives of our

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More than 98% of Compartamos’ clients are women

clients, we would be unable to create economic value for investors and shareholders. We are currently working on a social impact study of our products; it will take another couple

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microfinance insights

global viewpoints for years, but we think it will give us some interesting results. At the same time, we are deciding which methodology of SPM will be used in Compartamos and we will announce it soon. With so many different social impact assessment tools, how should an MFI decide which tool to use? Labarthe: One thing that Compartamos has noted is that, even in Latin America, each country has a lot of unique features that have

to be taken into account in order to understand and decide which SPM tool is to be used. We think that the following three aspects are very important: • The reputation of the organization/institution • Which SPM methodology fits the products and operations of the MFI better • How difficult is it for the MFI to collect the data for SPM If social impact measurement attracts more social investors and donors to an MFI, what

factors prevent most MFIs from undertaking impact studies? Labarthe: I think that there are two main challenges to undertaking SPM. Firstly, the cost of implementing impact studies is quite high and there is always a trade-off between doing other things with that money, like continuing to grow the client base and using it for an impact study. Secondly, it is a huge institutional effort to do an impact study. So the MFI has to put a lot of time and talent to do it.

No Conflict of Interest For more than 20 years, Sudan has been plagued by internal conflict, political instability, prolonged famine and an extremely weak legal and regulatory structure. These conditions make it seemingly impossible for microfinance institutions to take root in the country. Sudan Microfinance Institution (SUMI) embarked on its unprecedented venture with financial and technical support from USAID in 2003. Mr. Yengi Lokule, Managing Director of SUMI shares his observations on the impact of microfinance in post conflict areas and his concerns about impact studies. Profile

Yengi Lokule Managing Director, Sudan Microfinance Institution Sudan What sort of regulations and supervisions do you think would help your MFI have a wider social impact? Lokule: The microfinance industry in Southern Sudan is still in its infancy and so is the regulatory framework. In order for the industry to mature, the regulators should support the development of a healthy environment where new players and innovations can fuel the growth of the sector. For example, there should be a regulation on interest rate caps or registration requirements. To this effect, the Microfinance Association of Southern Sudan (MASS) in collaboration with the Southern Sudan Microfinance Forum is in close contact with the regulators to ensure that we can participate in the process of regulation drafting so that our voices are heard.

Could you tell us reasons why you have not yet conducted an impact study, apart from the fact that you are relatively new institution? What are main concerns? Lokule: Our main concern has been financial. Impact assessment is a costly exercise and we would need to hire an expert, which SUMI has not been able to afford in the past few years. There is, however, hope that SUMI will secure enough funds for an impact study this year. As we don’t have the expertise, we plan to use an external researcher who will have professional ‘eyes’ to look at the situation.

southern Sudan is not yet stable. Thus we need staff who know what life here is like.

What are main concerns and problems you are anticipating in carrying out the study? Lokule: SUMI operates in a post conflict environment where the community is used to relief aid. Every time such a study is conducted, people assume that it is to receive more funding, which usually does not trickle down to them. Therefore, it is necessary to let people who participate in the study understand its purpose. The cost is also an issue, but above all, security and infrastructure in

Is microfinance making a difference in your view? Lokule: Microfinance is definitely making difference in Southern Sudan. In 2003 when we started operations, the community was reliant on relief and handouts. Five years later, people have graduated from the relief mindset to more a developmental one. One of the positive impacts is that almost 65% of our clients invest in building assets such as housing or land.

SUMI’s clients have been able to cope with economic difficulties thanks to microfinance

Measuring Impact Without the Use of Impact Measurement Tools Microfinance institutions around the world struggle with the dilemma of making an impact and proving it. Growing Opportunity, an NBFC and a part of the Opportunity International Group, empowers entrepreneurs in South India to positively transform their lives. Today, Growing Opportunity has provided more than 17,500 poor entrepreneurs with loans ranging between INR2,000 (US$40) and INR20,000 (US$400) to successfully run their businesses. James Reiff, Managing Director of Growing Opportunity discusses what has prevented them from carrying out an impact assessment study and what tools their organization employs to assess social impact.

microfinance insights

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global viewpoints Profile

James Reiff, Managing Director, Growing Opportunity, India Do you think microfinance is making a social impact? Reiff: Yes, microfinance makes a social impact. It provides an opportunity for the economically active to access financial services that otherwise would be less available to them. For example, in Albania, about 10% of our client base was from the “gypsy” community – traditionally looked down upon. We were the first organization in Albania to provide loans to this segment, and soon various banks followed our lead.

Is measuring social performance important? Who is driving the social performance measurement mandate? Reiff: Measuring social performance is important; however there is a trade-off that needs to be understood by all parties. If it is not well understood and implemented, it very can become a cumbersome and costly affair, not only in monetary terms, but also in terms of time, energy, and morale of staff and clients. Typically the social performance is driven by stakeholders. Some expect more, while others have lesser expectations. The levels really vary depending on the motivation of the stakeholder.

Reiff: This is our first time. Often social impact is a lengthy process and takes considerable time and effort. It takes time to collate and synthesize the data. Further, often we forget that about the client’s time. Clients are running families, businesses and are often active in their communities. The second area would be the monetary aspect of time. If our staff is involved in carrying out an impact study, it is a loss of business productivity. But without some staff involvement, the process would be extremely difficult. Further, while we do carry out some assessment, we still are working to find a tool or process that meets the needs of management, staff, and clients.

What constraints have prevented you from undertaking social performance studies?

Serve Sustainably Despite the growing hype around social impact management, tangible benefits that work as a strong incentive for MFIs to incorporate Social Performance Management (SPM) in their business strategies may not be very clear. Successory Nigeria Ltd, a Nigerian consulting firm has included SPM in their business strategy and capacity building consulting. Mr. Ogidan from Successory speaks of the value of integrated impact assessment. Profile

Mr. Stephen Olusengun Ogidan Managing Consultant, Successory Nigeria Ltd. Nigeria Do you see a positive relation between social impact and an organization’s business growth? Ogidan: Yes, there is remarkable business progress and growth when we make a conscious effort to build social impact measurement into the services we render. It gives our staff specific direction, and helps in client management. We use it to evaluate our effectiveness in achieving a double bottom line. How do you utilize data and the results of your impact study? Ogidan: The data we gather is used for three purposes: internal learning, management and fund raising. It helps us ensure that our services are leaving a positive impact on clients. At the very least, it helps us ensure our services do not have any negative impact. The data is also used at the management level to improve operational efficiency and product design. Finally, to prove and present social impact data attracts donors’ interests. www.microfinanceinsights.com

What are your main concerns in conducting an impact study? Ogidan: Our main concerns are the cost and credibility of results. It is important that the assessment process, systems, and analysis is adequately designed and accurately executed so that it produces accurate results. We are currently using a mix of methods and triangulating information in order to enhance the credibility of results as well as to lower costs. Not all MFIs are concerned about tracking social impact. Why is your firm committed to social impact management? Ogidan: Tracking social impact is embedded in our business plan. We believe that what gets measured is executed and what gets rewarded is repeated. MFIs that make poverty reduction an explicit goal and make it part of their organizational culture are far more effective at reaching poor households than those that value finance the most. If MFIs do not track social impact, they are most likely to be moving fast in the wrong direction. We are committed to the measurement of social impact as a deliberate policy for process improvement and continuous reengineering.

Ogidan: “Impact assessment provides crucial understanding which is indispensable...”

Is microfinance making a difference in your view? Ogidan: I argue that microfinance can serve the poorest while maintaining its sustainability. Impact assessment provides crucial understanding which is indispensable in developing appropriate products and lending strategies that respond to targeted clients’ real needs and capacities. This exercise helps MFIs reduce costs and gain client loyalty. n

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critique

It’s No Magic Bullet:

Why Microfinance is Unlikely to Move People out of Poverty

he few critics of microfinance, of which I am one, have hardly been heard. Every year, new microfinance programs begin and are funded, and more and more influential people believe in them as a solution to poverty. There are at least 10,000 microfinance institutions (MFIs) out there today, perhaps many more. And because only 3 to 4% of all the world’s poor are reached by microfinance, the assumption is made – a wrong-headed one in my view – that there is a huge unmet demand for more microfinance. No respectable institution or Hollywood star can afford to be seen as unsupportive of this movement. This is too bad, because as this steamroller continues, more real, more solid, and more thoughtful avenues to dealing with mass poverty are avoided. There are two kinds of poverty: mass poverty and what the West likes to call— whether on the streets of big cities or even in whole regions—“pockets” of poverty. They are very different. In Western “pockets” the poor have clean water, access to health care, drive on good roads, and live in systems where their legal and human rights are secure. In contrast, there is mass poverty (instances where the vast majority of people are poor) and we see this in countries like Haiti, Guinea, Niger, and parts of South Asia. And significantly, in such places, the poor do not necessarily share things like clean water and rights with the rich.

“In short, poverty is not a virus that can be ‘attacked,’ nor a criminal enemy that can be ‘arrested.’” In the OECD1 nations, there is no mass poverty anymore. Significantly mass poverty in those countries was not solved by a single outside technique or direct intervention. There has never been a magic bullet for poverty, nor can there be. And that includes microfinance. Mass poverty is solvable, however, but only with time, and especially with indirect interventions; ones that take place beyond the level of poor people’s daily lives. These are changes in policy and governance, investments in infrastructure and education, and finally

microfinance insights

There has never been a magic bullet for poverty, nor can there be, says Dichter. Credit: www.photos8.com

slow and subtle changes in social structure and culture. We all know by now how important policy and governance are. We know that widespread corruption prevents equitable development, as does lack of property rights. We know how important education is. And we know the important role of trade policy. These are already fairly complex issues. We are less aware of the role of social structure and culture in preventing equitable development. Much of poverty in the developing countries is not so much about people’s condition as it is about their “position” in society. And the degree to which changes in their position are possible is related in complex ways to culture and social structure. Understanding how complex and intertwined all these issues are helps explain why certain countries with decades of seemingly successful microfinance programs still suffer from mass poverty (e.g., Bolivia, Bangladesh). In short, poverty is not a virus that can be “attacked,” nor a criminal enemy that can be “arrested.” But even if we dreamed that microfinance had the potential to be such a magical solution, there are reasons why, when taken on its own terms, microfinance can do little more than provide occasional symptomatic relief for

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relatively small numbers of the poor. If microfinance made the modest claim that some poor people’s lives are made easier by smoothing out the bumps in their cash flow, or enabling women to feel more empowered, or improving children’s nutrition, this discussion would not be necessary. For we would be talking about poverty alleviation, literally “lightening” the burden of poverty. But here the subject is entirely different. We are asking whether microfinance can result in a genuine crossing of the poverty line, where the majority of the poor are for the first time able to move forward in life with enough sense of security to look beyond the next meal. In this sense, the vast majority of the poor who are microfinance clients remain poor, even if they may have experienced some small improvements in their condition. Behind the belief that microfinance can solve the problem of poverty are two unfounded assumptions: first, the belief that the poor are repressed entrepreneurs and simply lack formal financial services to see that potential unleashed. And second, related of course to the first, is the assumption that widespread access to financial services is a key to economic growth. A bit of the history of microfinance can tell us whether these assumptions make sense.

critique For roughly the first two decades of microfinance (from the late ‘70s to the late ‘90s), the microfinance movement was essentially focused on microcredit and aimed at the informal sector in the poorest countries. Many of the best practices of the “successful” MFIs were honed in high density informal sector environments, where many clients were reachable at once; clients whose regular cash activities permitted weekly loan collections, and relatively low transaction costs for the MFI. These programs became increasingly professional and finely crafted, with high loan recovery rates. But even with these best practices, and growing outreach to the poor, there is virtually no rigorous research showing long-term impact on poverty eradication as a result.

“By encouraging more and more people to engage in the same low-barrier-to-entry activities, microcredit helps to keep the informal economy in this infantile state.” The first reason is that in the poorest countries most of the economic activity of the poor, beyond subsistence agriculture, takes place in the informal economy, and the existence of a large informal sector economy is evidence that the larger economy is not in good shape. For those poor who cannot leave to work abroad, there are few other options but to engage in informal sector activity. The typical informal economy in the poorest developing nations (and even in transitional economies like some in Central Asia) suffers from a series of disabling lows: low capital, low knowledge, low skills, and low technology. Since these barriers to entry must be low enough to allow anyone to engage in trade and services, there can be little or no movement towards quality and thus little competitive advantage. Such an economy has literally no place to go: there is little chance to break into a larger marketplace, much less global markets. Everyone thus gets a smaller and smaller piece of the action, to the point where the gains to be made for each individual enable survival, but not growth. And in these situations, ironically, microfinance can become a disabling factor.

By encouraging more and more people to engage in the same low-barrier-to-entry activities, microcredit helps to keep the informal economy in this infantile state. Furthermore, we have learned that while poor people can pay back loans, this does not mean that their activities are destined to become real businesses. In fact, the distribution of entrepreneurs is pretty much the same everywhere: most people are not entrepreneurs, and the few who are, do not need microcredit to get started. Formal financial services were never a key to business development for poor people. In fact, most successful businesses in the past and still today, virtually everywhere, start up with informal finance – the use of one’s own resources and/or borrowings from friends and family. This is true of shop owners and small production facilities in Africa and Asia, and it is true of recent legends like Bill Gates and earlier ones like Walt Disney, who began by borrowing money from his uncle in 1923.2 The vast majority of the poor who take microcredit loans are engaging in income generating activities that have little potential to grow into real businesses. As for savings, a growing component of microfinance, the motivation in poor countries is the same as in other places: putting something aside for a “rainy day,” not as potential business capital. In short, financial services and business development are not as tightly related as microfinance proponents would like us to believe. We have also seen that not all poor people want microfinance, especially loans. The poor have long experience with debt and understand the risks involved. That is why they have for generations evolved their own forms of rotating savings and credit schemes, in which money is pooled and each member of the group in turn receives a lump sum, to do with as he or she wishes, without the need to repay, since the sum has, in a sense, been “pre-paid.” Many poor are justifiably afraid of debt, and so the belief that the total number

of poor people in the world is equal to the potential (or unmet) demand for microfinance is unfounded. As for the belief that access to financial services is a key to poverty reduction, the economic history of the developed nations shows that access to formal financial services (credit and savings) occurred as a response to growth in wage employment and the production of consumer goods. Widespread access to financial services was a response to development and not its cause. Moreover, when the masses did begin to avail themselves of formal finance, they used the money for consumption, not for investment. The late British development economist Peter Bauer put the role of money in its proper place. Money is not, as microfinance advocates would have it, the engine of development. Instead it is the result of development.3

“As for savings, a growing component of microfinance, the motivation in poor countries is the same as in other places: putting something aside for a ‘rainy day,’ not as potential business capital. In short, financial services and business development are not as tightly related as microfinance proponents would like us to believe.” A truly novel approach to poverty would be to stand back and take a long look at why people are poor in different places in the world. The reasons are not all the same; the matter is complex and it would take an investment in serious research, including long term anthropological and sociological studies, to understand the multiple and often hidden reasons behind why so many people remain poor. Only then will we be able to replace unfounded assumptions – of the sort that underpin microfinance – with well-founded ones that can point the way to real solutions. n

For more than 35 years, Thomas W. Dichter has worked in the field of international development, managing and evaluating projects for nongovernmental organizations, directing a Peace Corps country program, and serving as a consultant for such agencies as USAID, UNDP, and the World Bank. Dichter is currently works on behalf of the CATO Institute.

1. Organization of Economically Developed Countries 2. Dichter, Thomas and Malcolm Harper, editor. What’s Wrong With Microfinance?, London, U.K., Practical Action Press, 2007, chapter 16. 3. P.T. Bauer. The Development Frontier, Essays in Applied Economics, (Cambridge, Mass.: Harvard University Press, 1991), 39- 43.

microfinance insights

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research

Opening the Black Box: How the Poor Use Credit in India

The images have graced countless brochures and magazine covers. A grinning, middle-aged woman seated beside a basket overflowing with fresh vegetables and fruits that she is about to sell at a bustling local market. Women gathered together in a small room, fingers aflutter as they stitch fabrics and make intricate handicraft items. Almost universally, microfinance is portrayed as synonymous with micro-enterprise with the implicit assumption that disbursed credit is used for starting or expanding a small business. Alexandra Kobishyn of the Centre for Microfinance, explores this assumption.

hile the image of the micro-entrepreneur is indeed compelling, research into precisely how microfinance clients and in general the poor use credit tells a more complicated story. The Centre for Micro Finance (CMF), has surveyed thousands of poor households and microfinance clients to understand the way microfinance impacts the poor. In addition to the search for impact, CMF’s research uncovers detailed household information including data on consumption and expenditure patterns. Specifically, threads running through many of the project’s studies focus on credit use - and the results are intriguing. There have been few, comprehensive studies on how the poor use loans, creating a black box within a fairly credit-fungible environment. Contrary to popular conception and the marketing mantra of microfinance institutions (MFIs), CMF data reveals that credit use among India’s poor includes a wider scope of activities beyond just entrepreneurship. The studies highlight broader, and somewhat intuitive, financial and lifecycle needs amongst the impoverished that have important implications for microfinance product design. The research also raises questions on how to conceptualize productive loan use and how to evaluate loans used for consumption; the data suggests more expansive approaches may be needed. The following sections weave together research from CMF projects in Hyderabad, Orissa, Tamil Nadu and Karnataka and present snapshots of credit use both prior to the introduction of formal microfinance and after its introduction. It is important not to combine the observations into a single portrait, as each project occurred within a unique context and involved distinct populations. However, taken together, the results help answer

microfinance insights

These women in Kutch, Gujarat, are but a handful of the millions of women across India who meet regularly to repay their loans.

the larger puzzle of how microfinance interfaces with the many dimensions of poverty. Informal Credit in Hyderabad’s Slums In late 2005, CMF conducted a baseline survey in the urban slums of Hyderabad. The study was initiated in partnership with MIT Professors Esther Duflo and Abhijit Banerjee to study the impact of formal micro-credit on the slum-dwellers. However, before formal micro-credit was introduced by Spandana, a partner MFI, a baseline survey canvassed 2,800 randomly selected households from 120 slums located in or around the city.1 Although Spandana had not yet entered the slums 1,897 households, approximately 70% of those surveyed, already had outstanding credit, which most had taken from informal sources such as moneylenders, friends or relatives. Roughly 40% of households reported more than one loan outstanding with just over one fifth of households reporting three or more loans (the median loan size was INR10,000 (US$200). Of the approximately 3,300 loans recorded, close to one

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fifth were used for health expenditures for a household member, which might include a doctor’s visit, the cost of medicine or a medical procedure. Close on the heels of health was marriage at approximately 12% of loans, temporary difficulties such as an unexpected family function or financial loss at around 12%, with regular consumption at 10%. Home construction and home improvements were cited around 10% and 7% of the time, respectively. Starting a new business hovered at 7%, while investments in existing business were even lower; 1% of loans used to acquire new assets and just less than 1% going to purchase stock. Interestingly, though roughly one third of households ran at least one micro-enterprise, less than 10% of the credit went to fund existing or new businesses. Additional infrequent usages were repaying old debts, travel expenses and funerals. Finally, at least 10% of loans were used for multiple purposes. After this baseline was conducted, Spandana launched its micro-credit program into roughly half of the slums, setting the stage for a later impact evaluation (more on this discussed later).

research Dairy Farmers in Rural Orissa Along the eastern coast of Orissa, CMF is conducting a field experiment to evaluate the impact and benefits of tailoring loan repayment schedules to the needs of the rural dairy industry. In conjunction with the KAS Foundation and Harvard Professor Sendhil Mullainathan, the project uses a randomized design to measure whether farmers who have flexibility in their loan repayment schedule are better off than those who do not.2 Though dairy farmers in rural Orissa represent an entirely different demographic than slum-dwellers in Hyderabad, preliminary data on their loan use reflects some common patterns. Fourteen months after the disbursement of KAS credit, in either INR4200 (US$85) or INR6200 (US$125) parcels, CMF found that close to 40% of clients surveyed reported at least one additional loan outstanding. Most of these additional loans, close to 80%, had come from informal sources such as moneylenders, friends and relatives. When all non-KAS credit is combined, roughly 36% of loans were used for consumption purposes, among other things, followed by health expenditures at 26% of loans. Seventeen percent of loans were used towards purchasing land or plots, while just under 10% were used for marriage events. Combined, just over 3% of loans were used for home construction or home repairs and even fewer loans were used towards a family member’s education. Two percent went towards repaying an old business debt or investing in a current business, and another 2% of loans were used to start a new business. Credit from informal sources went primarily to regular consumption and health events, while credit from formal sources, such as banks and cooperatives, went primarily toward health events, temporary difficulties, marriage and purchasing land. Mature SHG Members in South India In the rural villages of Tamil Nadu’s Kancheepuram and Karnataka’s Chitradurga districts, CMF conducted a short-term study to understand the way that members of mature self-help groups (SHGs) saved and spent their loans.4 These SHGs had all successfully operated for at least five years and their members www.microfinanceinsights.com

worked primarily in the agricultural sector or as day labourers. Just over two hundred SHG members from 69 mature groups, promoted both by MYRADA or Handin-Hand, were randomly selected and interviewed for the study. These women had experienced several loan cycles and were on average 7.4 years older than when they had received their first SHG loan.4 SHG loan use among the members was diverse; 18% of SHG members’ last loans were used on business investment, with 23% on investment in agriculture, totaling 40% of loans on production-oriented activities. Members used SHG credit for consumption 25% of the time and for health and education (combined) 17%. Even among mature microfinance clients, consumption remained a sizable proportion of loan use, though there was a mix between business-oriented and consumption-oriented activities. The study briefly focused on differences between fledgling and mature SHG members; while credit use patterns were relatively stable, older members tended to spend more on purchasing assets, agriculture and livestock and slightly less on consumption. Overall Observations How can we reconcile such diverse observations on how the poor use loans? One observation is that credit use highlights a variety of financial needs amongst India’s poor. In developed countries as well as for the middle and upper classes in India, diverse financial needs are mirrored in a diverse set of financial products. Education loans are designed for undergraduate and graduate degrees, with repayment hinged on the assumption that the education will equate to a high-paying job. Housing loans, car and vehicle credit, among other products, along with their repayment schedules are all tailored to the well-worn rhythms of clients’ lifestyles. Additionally, health insurance, life insurance and a plethora of savings facilities are all available for most members of the middle class and above. And almost all households have multiple sources of credit, savings, and insurance, including home mortgages, auto loans, multiple credit cards, fixed deposits, pensions, student savings accounts, health and life insurance policies, and often much more.

Yet for the poor, formal microfinance consists almost exclusively of rigidly dispensed, small amounts of credit and these studies demonstrate how it might serve as a proxy for other unmet needs and nonexistent products. At least 12% of loans in Hyderabad were used on marriage and related activities, and in Orissa, at least 17% of loans went towards either a temporary difficulty or marriage expense. Could these patterns communicate a lack of a savings facility? CMF has recorded anecdotal evidence that women sometimes ask for loans from moneylenders rather than save because of the difficulties in saving and the ease of door-to-door service.5 Additionally, as mentioned earlier, close to one fifth of loans in Hyderabad went towards health expenses, as did over a quarter in Orissa and a sizable percentage among mature SHG members. Without safety nets to deal with inevitable health shocks, associated expenses can push a household further into poverty. Virtually none of the Hyderabad households had purchased health insurance, and credit had been substituted in its absence. What are the implications of this gap between financial need and existing financial products? If a microfinance client uses a loan for a health event and not on a “productive” investment, will there be a greater chance of default? Indeed, CMF’s studies raise normative questions about how the industry should define “productive loan use.” Microfinance practitioners might frame “productive” as an activity which yields tangible financial returns while clients and others might widen the scope by framing it as any activity that raises household welfare, or has the potential to mitigate future income losses. Interestingly, when a Kancheepuram SHG client was asked why she chose to spend her loan on consumption over a business investment, she responded that “weddings cannot be postponed but business can.”6 The poor might not even differentiate between consumption or “productive” loans, but rather give priority to loans satisfying an immediate need over others. Furthermore, a sizable percentage of loans in Orissa and Hyderabad were used for multiple purposes, demonstrating that one loan simultaneously addresses multiple needs. Microfinance practitioners

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microfinance insights

research should not fear that loans used for consumption are an inevitable precursor to default. For example, for some households an investment in healthcare or consumption may be the most “productive” use of their money if it staves off future health shocks or missed work in the future. At the same time, if consumption equates to goods that add little value to overall household welfare such as alcohol and tobacco, default might be more likely. Additionally, the source of credit appears to influence the way it is spent, as informal loans in Orissa and Hyderabad were spent on different types of activities than those spent on formal loans as observed in another study of Village Welfare Society (VWS) clients in Kolkata, India. Recent CMF research results bring fresh insights and perspectives to the debate over consumption and productivity. CMF returned to the slums of Hyderabad in the fall of 2008, two years after the aforementioned baseline study and over one year after Spandana had launched its micro-credit program. Recall that when the baseline was administered, Spandana had not entered and most respondents were using informal credit. Also, remember that Spandana and CMF had agreed to expand micro-credit into only half of the baseline slums, so that subsequent research could pinpoint the impact of Spandana’s loans. The research followed up with households in the baseline slums, including many in the Spandana areas who had not even taken up the formal credit product. Preliminary data shows that formal credit might shift household priorities for the better. Specifically, households in Spandana slums consumed an average of INR500 less of “temptation goods” such as alcohol and tobacco than those in slums where Spandana had not entered. Additionally, in Spandana slums’ households

spent INR1200 more on durable assets, one third of which went toward their business; this was especially pronounced among households which already ran an enterprise. One interpretation is that the availability of formal micro-credit increases the “seriousness” with which households approach their consumption. Thus, even if formal micro-credit is sometimes spent on consumption, the type of consumption may well help the household climb out of poverty. Additionally, the mere presence of Spandana in a slum resulted in a 30% increase in new business creation there, compared to where Spandana was not working. Finally, loan use among first-time Spandana clients echoed patterns among VWS clients, with at least 30% of loans spent on new businesses, among other things, and 22% of loans spent on stock for existing businesses. More definitive results are forthcoming but this preliminary data illuminates the potential of formal microcredit to create new businesses and replace wasteful habits with good ones. Loan Size and New Businesses The Hyderabad baseline data showed a mismatch between the number of households engaged in micro-enterprise and the percentage number of loans invested in business activities. One aforementioned interpretation could be that credit is allocated by households based on immediate needs such as health shocks or marriages. A supplementary factor could be that loan amounts are insufficient to jump-start a business or expand an existing enterprise. Indeed, the largest average loan amounts taken by SHG members in Tamil Nadu and Karnataka were for their businesses, INR6,051, as opposed to consumption at INR2,293.7 Corroborating this interpretation is a CMF study conducted in Andhra

1. For access to the Spandana baseline data and this study, see http://ifmr.ac.in/cmf/research/ieumc.html 2. For more on the KAS study, please visit the CMF website http://ifmr.ac.in/cmf/research/ifrs.html 3. Gadenne, Lucie and Veena Vasudevan. “How do Women in Mature SHGs Save and Invest their Money?” November 2007. 4. Gadenne and Vasudevan, pg 23 5. Alcala, Esly and Elizabeth Koshy. “What Savings Products do People Want? Short Exploratory Study in Tamil Nadu.” June 2007. 6. Gadenne, pg 19 7. Gadenne, pg. 22. 10.Krishnaswamy, Karuna. Competition and multiple borrowing in the Indian microfinance sector. Centre for Micro Finance. Published September 2007 (pg 38).

microfinance insights

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Pradesh to understand the extent of and dynamics behind microfinance clients who borrow from multiple sources. Out of a database of nearly 500,000 clients, a small sample of those identified as multiple borrowers was identified and interviewed. Close to three quarters of the multiple-borrowers stated that they took on one or two additional loans because they needed more capital to start or expand businesses. The study also observed that some loans were taken out simultaneously to reach a pre-determined level of investment to start a business.8 In other words, a single micro-credit loan may not be sufficient to start a micro-enterprise. Additional research is needed to understand the dynamics behind micro-entrepreneurship. Conclusion If microfinance aims to alleviate poverty, it must recognize the multidimensional needs of the poor and design products and interventions accordingly. Simply put, CMF research reaffirms what many suspect – that the poor use credit for both entrepreneurial and non-entrepreneurial activities. Much as the world’s middle classes need and use a variety of financial products and services, poor people’s needs merit just as much variety. Whether the industry will adapt products to these contours is yet to be seen, though some practitioners are experimenting with innovative products. The projects discussed in this article also challenge conventional wisdom regarding productivity and consumption as well as formal microfinance’s potential to transform household behavior. Additional research will only unearth more such information that will help the industry to serve the poor. n

Alexandra Kobishyn heads the Knowledge Management Unit at the Centre for Microfinance, at the Institute for Financial Management and Research in Chennai, India. She recently graduated with a Master’s degree in International Devleopment and International Business Diplomacy from the Edmund A. Walsh School of Foreign Service at Georgetown University, where she concentrated on economic development.

research

Randomized Experiments in Microfinance Randomized experiments help practitioners, donors and academics evaluate the impact of microfinance interventions. The simple and adaptable methodology can accommodate variations to test different impacts. While randomized experiments have a unique ability to measure the impact of microfinance programs, they are not without challenges for the implementing institution. Jonathan Bauchet and Aparna Dalal from the Financial Access Initiative discuss the merits and limitations of randomized experiments for microfinance evaluations.

hen medical researchers want to prove the effectiveness of a new cardiac medicine or nutrition protocol, they set up randomized trials. The idea is simple and clean. The researchers form a list of patients requiring treatment and randomly choose recipients of the new treatment and those who will receive the standard treatment. Random selection ensures that the new treatment is not diverted to the most promising patients, and the study can yield a reliable measure of efficacy. The same approach is increasingly popular among evaluators of development interventions, including microfinance. Donors, academics and practitioners are turning to randomized experiments to address the fundamental challenge in impact evaluations - the need to clearly establish that the intervention caused the impact. Imagine that we are a farmers’ cooperative that wishes to measure the impact of a new loan product designed to help farmers buy fertilizer. We could compare the income of farmers before and after receiving the loan. But we would worry that changes in income might not be wholly attributable to the new loans. What if, say, the farmers experienced a good monsoon or if prices of their produce happened to rise? Surely these factors had an effect on their income. To assess the real impact of the loan, we would need to separate the effect of these environmental factors from that of the loan. Ideally, we would want to compare the farmer’s actual income to what his income would have been had he not borrowed at all (the “counterfactual”). But this seems impossible. Our farmers did borrow, so how can we measure the counterfactual? A common approach is to compare www.microfinanceinsights.com

Microfinance institutions can use randomized control trials to find out if their customers, such as farmers, are truly benefiting from their loans. Credit: The International Rice Research Institute

the average income of farmers who received the fertilizer loan (the treatment group) to that of farmers who did not (the control group). The reasoning is that farmers in the control group are susceptible to the same environmental factors, hence their income is representative of our borrowing farmers had they not borrowed. This comparative technique works if the two groups were similar before the introduction of the loan. It would be unfair, for example, to compare the income of farmers who own large tracts of land to that of farmers who rent small patches, or the income of veteran farmers to that of inexperienced ones. In evaluation terms, we want to measure the unique impact of the fertilizer loan on income, net of the effect of land ownership, abilities and such other confounding factors.

“Practitioners, donors and academics are turning to randomized experiments to address the fundamental challenge in impact evaluations - the need to clearly establish that the intervention caused the impact.” In microfinance, it is difficult to assume that the treatment and control groups are similar at the start of a program. Individuals who choose to borrow and are approved by an MFI are undoubtedly different from those who chose not to borrow or are denied credit. Borrowers and non-borrowers may differ based on observable characteristics like education, health and pre-loan income. They may also differ on unobservable characteristics like entrepreneurial ability or innate motivation. Failing to account for these characteristics could lead to overestimating or underestimating the impact of the loan. This error in attribution

is called “selection bias.” Fortunately, statistical techniques make it possible to isolate the confounding effect of measurable characteristics such as age or education. We have limited tools, however, to isolate the effect of unobservable characteristics such as motivation. Randomized trials can help us do so. Eliminating Selection Bias Randomized experiments solve the selection problem in a simple, yet powerful way. In a randomized experiment, the two groups (borrowers and non-borrowers) are selected at random. Hence, with a sufficiently large sample, one is certain that the two groups are similar in both observable and unobservable characteristics, since chance assigned individuals to each group. As a result, access to the intervention in question (e.g., being randomly chosen to get the new fertilizer loan) is the only systematic difference between groups, allowing us to conclude that it must be the cause of any difference in the average outcomes in each group. The Mechanics Implementing a randomized impact evaluation is a complex operation. In Figure 1, we provide a basic outline. As in the fertilizer loan example, the institution first identifies the intervention (program or product) they want to evaluate. This could be the fertilizer loan, a new savings device, a financial literacy program, etc. Randomized evaluations can also test variations in existing programs, such as marketing strategies, loan terms, interest rates and their impact on the take-up, repayment rates and profitability. As the second step, the lender identifies a set of potential clients for the loan. This set could consist of existing clients

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research of other products and/or potential new clients. Third, a baseline survey of these potential clients is conducted to measure characteristics that might influence the outcomes of interest. Fourth, some of the potential clients, usually 50%, are randomly selected to receive the new loan. The rest must wait until after the study to be eligible for the product. By offering the loan only to the treatment group, the lender is randomizing access to credit. If the lender wished to randomize the use of credit, he could offer the loan to the entire set of potential clients, and only randomly select who actually is assigned a loan from the group of individuals who applied. Randomizing access to credit or the use of credit matters for the lessons that can be drawn from the evaluation. Does the lender want the results to apply to all potential borrowers (access), or only to those who apply for the new loan product (use)? The fifth step is for the lender to perform the intervention, in this case to make the fertilizer loans. Last, after a period of time judged necessary for the loans to produce impact, the outcomes of interest are measured by conducting another survey of individuals in both the treatment and the control groups. At the core, the analysis involves nothing more than comparing the mean of the outcome in the treatment and control groups. More elaborate techniques are occasionally necessary, particularly when the evaluation includes complex randomization schemes or design elements. In all cases, the analysis must be done by comparing participants based on their initial assignment into the two groups, and not based on their actual participation, becausethe latter would reintroduce a selection bias. The Decisions and Challenges Institutions need to make a number of key decisions and face several challenges when designing and implementing such an experiment. The first decision pertains to the the sample size. While larger samples are more expensive and time consuming, they yield a more reliable measure of impact. This is referred to as the “power” of a study, and can be determined arithmetically. Second, institutions must consider the level of randomization. For instance, institutions can randomize at the group level (and not at the individual level) by assigning village banks, villages or other groups to selectively receive an intervention.

microfinance insights

Figure 1. Five Steps in a Randomized Evaluation 1. Identify the intervention (fertilizer loan) 2. Identify potential clients 3. Conduct baseline survey 4. Randomize Treatment and Control 5. Perform the intervention (provide fertilizer loans) 6. Conduct follow-up survey (measure impacts) Assuming all other design elements as fixed, group-level randomization requires a larger sample to maintain power. Third, institutions interested in using randomized impact evaluations must be willing to temporarily exclude clients from benefiting from its services. This could represent a departure from the institution’s mission or strategy, and can sometimes raise ethical questions about who gets access to new products and services. The greatest practical challenge in randomized experiments is to enforce the initial random assignment. Randomness is the source of our ability to claim that the intervention caused the observed outcomes. Three common threats to maintaining the randomness in participation are: • Non-compliance: Members of a control group assigned not to receive a loan might obtain loans from other lenders, or members of a treatment group can change their mind and not borrow after all. • Attrition: Individuals in the experiment may drop out of the program or move away so that surveyors can’t measure the outcomes. If those that can’t be surveyed did better (worse) than those who can, the impact of the loan will be underestimated (overestimated). • Spillovers: Participants assigned to the treatment group might influence the outcomes of those in the control group, e.g., during a business training program, members from the treatment group might share insights from the training with neighbors in the control group. These events can be mitigated with careful design and implementation. Non-compliance

can be reduced by training bank staff carefully, and ensuring that they maintain the integrity of the groups. Attrition can be addressed by monitoring groups, and employing persistent surveyors. Spillovers are more difficult to deal with. One way to minimize this complication is to adjust the level of randomization. It may make sense to randomize larger groups into treatment or control bins rather than randomizing across individuals. The Limitations Randomized experiments are implemented by a specific organization in a particular setting, and therefore, provide limited support to generalizing the findings across other settings. The best way to overcome this limitation is to replicate the evaluations in various settings before drawing any major conclusion about the intervention. Randomized experiments provide an estimate of the average impact of an intervention, but they do not tell us about the distribution of impacts. For example, if the fertilizer loan makes certain types of farmers much better off and all the others a little worse off, a randomized experiment (and most other evaluations) might yield the result that the average impact was positive if the positive impact is large enough to offset the sum of negative impacts. Sub-group analyses can be conducted to measure the impact for each type of farmer, but this exercise requires a sufficiently large sample in each sub-group. As the debate on the impact of microfinance continues, randomized experiments serve as an effective tool to generate highly reliable information on the effect of programs and products. While they are demanding for its designers and implementers, they should be viewed as investments that help donors and policy makers channel resources and help institutions design better programs and products that can increase both their financial standing and social impacts. n

Jonathan Bauchet and Aparna Dalal work at the Financial Access Initiative. Through consortium member Innovations for Poverty Action, FAI is supporting randomized experiments to evaluate the effect of microfinance interventions in fifteen countries. A complete list of projects and publications are available at www.financialaccess.org and www.poverty-action.org. To access a list of readings related to randomized trials, please see www.microfinanceinsights.com.

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Index: Social Impact Measuring and Reporting Tools A growing number of measurement tools and reporting formats have been developed to keep up with demands for MFI social performance ratings. Regardless of organizational form, size, operating policies and business strategies, microfinance institutions have the opportunity to choose the most appropriate tools for their needs. Since the sector is in a state of constant flux, this list will only give you a snapshot of currently available impact assessment tools. Some of them may soon undergo modifications, or lose their relevance. Today, many social impact assessment tools not only look at results and impact but also analyze an MFI’s internal systems and processes by which impact is created. Some evaluations focus on systems and procedural compliance, while others look at changes at the client level to assess the extent to which an MFI meets its social objectives.

Tools to Evaluate Institutional Processes and Internal Systems Intent and Design

Internal Systems and Activities

Outputs

ACCION SOCIAL | ACCION International www.accion.org ACCION SOCIAL is a framework developed out of other mainstream assessment tools and surveys on the information demands and practices of socially responsible investors. It looks at five dimensions: Social Mission, Outreach, Clients, Information Transparency, and Association with the Community and Labor Climate, to examine how successful an MFI is in achieving its stated social mission. Combined with ACCION’s financial assessment tool, CAMEL, it provides a comprehensive picture of an institution’s social performance. Besides social performance self-assessment tools, ACCION’s social performance audit team provides a detailed audit service which results in a social audit report and social performance score card. CERISE Social Performance Indicators (SPI) | CERISE www.cerise-microfinance.org CERISE SPI is a simple questionnaire which can be easily and cost effectively administered internally. It evaluates whether actions and strategies are in line with social objectives. It produces results in visual images. Standardized data, yet adaptable to local contexts for a variety of MFIs, allows easy comparison with other MFIs. The latest version 3.0, released in 2008, has integrated up-to-date issues within the sector and is compatible with MIX market indicators. FMO Environmental and Social Risk Audit | FMO www.seepnetwork.org FMO’s Environmental and Social Risk Audit tool is a practical guide that can be integrated into an MFI’s loan cycle. By setting certain clauses in the loan appraisal process, such as defining activities that are not to be financed, the audit addresses potentially negative social and environmental impacts of microenterprises and sensitizes clients on these issues. It allows MFIs to create a social and environmental risk management system www.microfinanceinsights.com

Outcomes

Impact

and monitor how negative social and environmental impacts of clients’ business were prevented/reduced. Global Reporting Initiative (GRI) and Transparency in Sustainability and Finance (TSF) | GRI www.globalreporting.org | www.tblmicrofinance.blogspot. com This pioneering and most widely used global sustainability reporting system is based on the triple bottom line principle. The format consists of core and optional indicators to report on the level of compliance for six dimensions of social performance – environment, human rights, labor practice and work place, society, product responsibility, and economic impact. In order to improve the report’s relevance for MFIs and help them adopt sustainability reporting, Triodos Bank and the GRI have started the Transparency in Sustainability and Finance Project (TSF). The aim of the project is to develop a system for MFIs so that they can produce a report in a standardized format. Quality Audit Tool (QAT) | Microfinance Center & Imp-Act www.mfc.org The QAT looks at process management and evaluates an MFI’s effectiveness in achieving their stated social objectives. The tool is primarily for internal review and reflection because results show strengths and weaknesses that can be immediately translated into action plans for everyday management. While the procedure consists of four steps and involves a series of interviews and focus group discussions with various stakeholders, the assessment takes approximately six days. USAID Social Audit Tool (SAT) | USAID www.microlinks.org The SAT has adopted “process auditing” to see if an institution’s internal systems and processes are effectively aligned with its stated social goals. Process auditing examines six dimensions may/june 2009

microfinance insights

index that are critically linked to the MFI’s social performance: mission statement; management and leadership; hiring and training; incentive systems; monitoring systems; customer services; and strategic planning. Further, SAT includes evaluation of an MFI’s

social accounts, in other words, sets of information to monitor social performance. SAT can be used either as a self-assessment tool or implemented by external researchers.

Tools that Assess Impact and Changes at the Client Level Intent and Design

Internal Systems and Activities

Outputs

FINCA Client Assessment Tools (FCAT) | FINCA www.villagebanking.org FCAT consists of a short survey which can be administered during the loan application. The survey monitors household wellbeing through food security, health care, housing, education, empowerment and social capital. FINCA introduced a handheld digital device (PDA) loaded with FCAT software to enter and manage data. The device automatically calculates social metrics and scores. It reduces time and cost required for poverty

Outcomes

Impact

assessment drastically. CGAP Poverty Assessment Tool (CPAT) | CGAP www.microfinancegateway.org/section/resourcecenters/ clienttargeting/povertyassessment This is an extensive assessment tool used by external researchers. Based on a survey of a randomly selected group of 200 clients and 300 non-clients, it provides a rigorous and statistically proved multidimensional poverty index. It presents the relative poverty level of a targeted community, thus it is not comparable to international or national poverty levels. Time and cost requirements could be an issue. Food Security Survey | Freedom from Hunger http://ff htechnical.org/innovations/performancemanagement The Food Security Survey questionnaire consists of nine questions measuring the level of food insecurity of a household. It results in an interviewee being put on a scale of 0 to 9 to determine status of food security/insecurity. Housing Index | CGAP/CASHPOR www.cashpor.in/housingindex.htm Since housing is the most important household asset which requires significant amount of investment, conditions for a building itself can be one of the indicators to assess household wealth. Variables for measurement vary from organization to organization: for instance, CASHPOR includes the size of house or compound, the material used, the number of rooms, the presence of running water and bathroom facility. TSPI in the Philippines uses size, structure and roof, while SHARE in India takes size, structure, roof, wall, electric supply, water supply, house ownership, toilet, cooking fuel, radio/tape recorder ownership, vehicle ownership, electric fan ownership, and possession of a government ration card, into consideration. INAFI Oxfam – Novib Ordina Social Impact Tool | International Network of Alternative Finance Institutions (INAFI), Oxfam Novib and Ordina www.inafiinternational.org/index.html Building on the field experience and expertise within MFIs, this tool aims to refine bottom-up participatory techniques of household surveys. It has created a set of internet-based social indicators that are applicable across member countries (Africa, Latin America and Asia). These indicators are designed to be

Credit: Lainey Powell

microfinance insights

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index aligned with the Millennium Development Goals and cover wealth, social welfare, female empowerment, social capital and the environment. Internal Learning System (ILS) www.microfinancegateway.org/content/article/detail/3318 ILS is a participatory impact assessment and learning system for community development. Through close and successive interactions between community members and program staff, they can track changes in their lives and analyze a correlation between the program design/implementation and impact. This methodology which encourages the full involvement of the community and utilization of their knowledge, can be empowering for those who are illiterate and/or poor. Further, this method allows program staff to see both internal (such as program service and processes) and external determinants (such as environmental, demographic and economic factors) for assessment of social impact created by a particular program. SEWA has implemented this system. IRIS USAID Poverty Assessment Tools (PAT) | USAID under contract with the IRIS Center at the University of Maryland www.povertytools.org The PAT is a set of country specific surveys based on multiple statistical methods to predict prevalence of extreme poverty among clients and is less appropriate for the assessment of poverty level on an individual basis. Automated steps for data processing and calculation reduce errors. As of today, the tool is certified for 25 countries. Besides occasional regional workshops, USAID offers online training in PAT implementation. Means Test www.microfinancegateway.org/section/resourcecenters/ clienttargeting/targetingtools/means/ This is a set of a small number of indicators to determine the poverty level of a household and screen out potentially better-off families. While this test is primarily for client targeting, periodic surveys serve to monitor social impact. Indicators are generally asset based such as land ownership, livestock ownership, ownership of household items such as radio, TV, etc. Indicators should be designed and selected according to national or regional contexts and poverty level. In fact, there are numerous variations

in indicator selection from MFI to MFI. Participatory Wealth Ranking | Small Enterprise Foundation www.sef.co.za Unlike other tools that apply externally-defined indicators, this methodology includes the voices of communities and makes best use of their own knowledge for the assessment of a household’s poverty level in a community. Through focus group discussions, people in the community themselves define conditions of poverty and determine which family in the community is in extreme poverty or is relatively better off. This method is the culmination of decades of experience in participatory appraisal techniques. Progress out of Poverty Index (PPI) | Grameen Foundation, CGAP and Ford Foundation www.progressoutofpoverty.org The Progress out of Poverty Index is based on a simple questionnaire with 5 -10 questions that define the likelihood that clients will fall below the national poverty line. Indicators are statistically proven to generate accurate and credible data on the poverty level of clients. A scorecard for each country is designed according to the country’s level of income and expenditure, household surveys or the country-specific World Bank Living Standards Measurement Survey so that the data is country-specific, yet comparable across the world. Easy, quick and cost effective administration makes the PPI easy for MFIs to measure and monitor clients’ poverty status. Scorecards have been developed for 21 countries to date. SEEP/AIMS tools | SEEP Network and USAID AIMS project www.seepnetwork.org/content/library/details/646 This set of five client assessment tools helps MFIs stay informed of the state of their clients and the appropriateness of their products and services for clients’ needs and demands. They include impact survey, client exit survey, and tools that calculate the use of loans, profits, and savings over time, client satisfaction, and client empowerment. These surveys are administered through in-depth interviews or focus group discussions. Although it can generate informative qualitative data, it often requires considerable time and trained human resources compared to a structured simple questionnaire method.

Further references for social performance measurement tools and reporting formats: • Microfinance Gateway; http://www.microfinancegateway.org/resource_centers/socialperformance/_mfis/assessing • Imp-Act, SPM guidelines and practice notes Downloadable at http://www2.ids.ac.uk/impact/index.html • Social Performance Map 2008, The SEEP Network Social Performance Working Group , April 2008 • “A Review of Impact Assessment Tools”, Acton Simanowitz, Imp-Act Guidelines 2, September 2001 • Social Performance Progress Brief, SEEP Network • “Evaluating MFI Social Performance: A Measurement Tool,” Gary Woller, microREPORT #35, 2006 www.microfinanceinsights.com

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index

Tools for Both Internal Systems and Client-Level Changes Intent and Design

Internal Systems and Activities

Outputs

M-CRIL Social Rating | M-CRIL | www.m-cril.com M-CRIL pioneered social ratings of MFIs and has built its reputation across Asia and Africa with the completion of 480 assessments in over 25 countries. The main purpose of rating an MFI is to assess “the likelihood of it achieving its social mission in line with accepted social values.” They offer both comprehensive (looking at both internal systems and clients’ level changes) and basic rating services (focused on internal systems). Rating criteria include clarity of mission and values, alignment of internal systems, analysis of portfolio quality and client level information. Results are presented on a standardized rating scale which is comparable across MFIs and serves as a benchmark. M-CRIL’s Social Rating has been used by the following MFIs in Asia: BASIX (India), Activists for Social Alternatives (India), Ennatien Moulethan Tchonnebat (Cambodia), Cooperative Rural Bank of Bulacan Inc. (Philippines), etc. MicroFinanza Rating | MicroFinanza Rating www.microfinanzarating.com MicroFinanza Rating provides objective and accountable assessment of an MFI’s “institutional capacity to put its social mission in practice and achieve commonly accepted development goals.” Their rating is based on an audit of the social performance management system in place, as well as an assessment of social results. They also offer a basic audit which focuses more on the institutional level of systems, and a comprehensive audit which involves extensive field research on client level data through a survey, focus group discussions and interviews. They offer customized services to meet the demands of various stakeholders in the microfinance sector. Their main markets are Latin America, Eastern Europe and Central Asia. MicroRate | MicroRate www.microrate.com/ MicroRate’s social rating is an assessment of “the level of social return from the investment from an MFI.” Its assessment is based on social performance and social commitment. Social performance measurement looks at social results through various indicators and the institution’s capacity, efficiency and consistency. Indicators include outreach, depth and variety of services, cost and sustainability, and social responsibility. Social commitment is a risk assessment – assessing the probability that an MFI will deviate from its social mission in the future. This risk is evaluated through the institution’s internal process and systems; mission; communication, and management leadership; strategic planning; customer service; monitoring; recruitment and training; and incentive systems. Their main clients are largely concentrated in Latin America.

microfinance insights

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Outcomes

Impact

MicroSave Social Management Toolkit | MicroSave www.microsave.org This tool assesses the alignment of an MFI’s social mission with its management of information systems, processes and human resource management systems, and thus its ability to meet the needs and demands of the clients they intend to serve most effectively. Besides measurement of outreach, this client-driven tool is focused more on providing critical information for MFIs to improve their business performance by tailoring their products and services to be suitable and useful for their clients. Some of the tools contained in this social management toolkit include Microsave’s market research tools that look at outreach, client demand and changes at the client level using a questionnaire, checklists, focus group discussions, and participatory rapid appraisals. The entire tool takes about five days to implement. MIX Market Social Perfomance Standards Report | MIX Market & Social Performance Task Force www.themix.org MIX Market announced that they would add social performance indicators in their MIX market data starting in Fall 2009 and released a social performance reporting format developed in collaboration with the Social Performance Task Force. The first part of the format consists of 13 indicators to look at an MFI’s mission and internal systems (mission, products and services, social responsibility to clients and staff, and outreach). The second part includes six indicators that examine employment outreach, social responsibility to the community and environment, and children’s education. The third part monitors the poverty level of clients. Although parts two and three are still undergoing pilot tests, the whole reporting format is designed to assess the entire process by which social impact is created. GIRAFE Framework | Planet Rating www.planetrating.com Planet Rating uses its uniquely conceived rating framework called GIRAFE (Governance, Information, Risk management, Activities and services, Financing and liquidity, Efficiency and profitability) in all their rating services. It is designed to complement an MFI’s institutional and financial report and present a comprehensive picture of the organization. Its standardized reporting format meets information demands from various stakeholders. For social rating, it evaluates the following four areas: institutionalization of social mission, outreach, service offering, and social responsibility. Some of their clients are MicroInvest (Moldova), XacBank (Mongolia), CRECER (Bolivia), and Benefit (Bosnia Herzegovina). n

basics

Social Performance Management in Practice Social Performance Management (SPM) is a new area of microfinance management that introduces a social dimension to strategic decision-making, monitoring and analysis. Pioneering work, including training modules, practice guides and mentoring guidelines for SPM has been undertaken by the Imp-Act consortium.1 Frances Sinha and Ragini Chaudhury from EDA Rural Systems Pvt Ltd, a South Asia member of the ImpAct consortium have been working with MFIs in India and other countries of the region to promote SPM. Here, they introduce readers to the concept and key elements of SPM. What is SPM? The starting point of any discussion regarding Social Performance Management (SPM) should begin with the premise that microfinance is not merely financial intermediation, but a social enterprise that is driven by the “double bottom line” principle. The industry has made tremendous progress in the last decade in terms of managing its financial bottom line. For social performance, however, reporting has been largely anecdotal, or has relied on complex and costly impact assessment studies that try to “prove” the impact of interventions. Given a fast changing environment2 and frequently-raised questions around hype and credibility in microfinance interventions, there was a need to unpack the social values inherent in microfinance, and bring out practical tools for assessing, monitoring and managing the social performance of MFIs.

“Given a fast changing environment and frequently-raised questions around hype and credibility in microfinance interventions, there was a need to unpack the social values inherent in microfinance, and bring out some practical tools for assessing, monitoring and managing social performance of MFIs.” Social performance is defined as “the effective translation of an MFI’s social mission into practice in line with accepted social values.”3 SPM looks at the alignment of missions and internal systems, measures progress and improves operations, in the same way that financial performance is managed. Social performance might have been seen as complex, difficult to quantify or ‘soft,’ but not any longer. Recent social performance initiatives have developed clear concepts and relevant tools. MFIs need to clarify three key questions www.microfinanceinsights.com

Only when MFIs measure their impact, will the real value of microfinance in poverty reduction be revealed. Photo credit: Saquan Stimpson

at the outset of SPM: Who are your target clients? How will you ensure that you meet your clients’ needs? What changes and impact are your services designed to reach? SPM is about addressing these questions, and being SMART4 about them. Who are your clients? MFIs may describe their clients as poor, low income, disadvantaged, poorest of the poor or the unreached. These terms, however, are seldom clearly defined. Client profiles that MFIs usually collect through loan application forms are not usually effectively used, and many MFIs often assume that smaller the loan size, poorer their target group is. This confusion is partly caused by the absence of a practical tool to measure poverty levels. A response to this problem is the Progress out of Poverty Index (PPI) that has been developed as a practical tool to measure a household’s poverty level. The PPI consists of 10 simple, observable indicators benchmarked to the national and international poverty lines.5 It is a robust and cost-effective tool for client targeting as well as monitoring changes in poverty level over time. EDA has been working

with seven MFIs in India to disseminate the tool. The initial results are encouraging; the PPI has proven to be simple to implement and MFIs have found it interesting to see the degree of their real poverty outreach.

“SPM looks at the alignment of missions and internal systems, measures the progress, and improves operations, in the same way that financial performance is managed.” Are you meeting clients’ needs? By simply reaching target clients, MFIs are not necessarily meeting their needs. The growth of the Grameen and Self-Help Group (SHG) models was largely facilitated by quick replication of approach and product features. The standardized product design is not sensitive to client’s needs and capacity. In order to develop loan products that are more client-centred, SPM involves regular client feedback and exit rate tracking. Regular feedback from clients provides inputs for improving products and services. And client retention is one indicator of the value of services. Exit monitoring enables MFIs to

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basics understand who leaves when and why. Client protection is another important aspect of SPM. The elements of client protection are transparency, effective communication of terms and conditions of services, fair pricing, avoidance of over-indebtedness, privacy of client information and effective mechanisms for addressing client complaints. The concept of a ‘code of conduct ’ has gained ground as these elements have been defined, together with operational procedures and effective compliance.

“Client profiles that MFIs usually collect through loan application forms are not usually effectively used, and many MFIs often assume that smaller the loan size, poorer their target group is.” What changes do you want to make? SPM involves being SMART in defining social objectives in a specific and measurable way, and tracking them over time. The SPM approach is to integrate a small number of social indicators within routine operations and track them over time (often makng use of information that may already be collected.). Thus, SPM moves away from costly impact assessment exercises towards integrated data

systems to provide ongoing and up to date information for management. Twofold challenges Currently, the level of maturity of social performance management is perhaps equal to that of financial performance management a decade ago. The sector had to make a huge investment in attitudinal changes, skill development and information systems design and development to improve financial reporting standards. This investment was driven by sector-wide incentives of increased funding sources and capacity-building grants to MFIs. In contrast, SPM focuses on an institution’s own mission achievement. Thus, in theory, it should not require external reinforcement. In reality, however, SPM requires buy-in within MFIs and understanding from other stakeholders such as investors and bankers. At the macro-level, tangible benefits for SPM in microfinance are not yet in sight. At the micro-level, MFIs

often face technical issues such as adapting the MIS, allocating staff and resources, developing appropriate skills to analyze new types of data, and supporting SPM across departments. Ultimately, in the “double bottom line sector,” equal effort and rigor is required for both, social and financial performance. And there is a growing interest in doing so as seen in the Social Performance Standards Reporting introduced in the MIX Market this year, and the development of Social Ratings to complement financial performance ratings. The complementarities are beginning to appear: Just as good financials can support social outcomes such as greater outreach, dynamic products, lower costs and effective linkages, good social performance can enhance financial performance through client retention and stronger public reputation resulting in continued growth and investor interest. Integrating social aspects into management is the future of microfinance as a genuine social enterprise. n

Frances Sinha is the Managing Director and EDA Rural Systems (EDA), a leading development consulting firm. Ragni Chaudhury heads the training division of the organization. Based in Gurgaon, India, they conduct various research and capacity building services for MFIs and microenterprises globally. For more information about the organization, please contact: training@edarural.com

1. The ImpAct Consortium is a glocal group of institutions working to promote and support the integration of social performance as part of management by MFIs. 2. From, for example, the State action against MFIs in Andhra Pradesh to the IPO of Banco Compartamos. 3. Social Performance Task Force, 2006 4. SMART is an acronym of Specific, Measurable, Achievable, Relevant and Time bound. 5. Based on robust national data sets. For India the PPI is based on data of the National Sample Survey Organization.

Intellecap and IAMFI Microfinance Private Equity Investment Forum May 21st, 2009 New York City, NY, USA 8:00 AM – 10:00 AM This forum will bring together microfinance investors for a breakfast meeting to discuss the current economic crisis, and the current outlook and expected trends over the next year. Preceding the Forum, Intellecap and IAMFI will conduct a targeted survey of microfinance investors, including Limited Partners, to better understand their perspectives. The findings of the survey will be presented at the Forum and within the July/August issue of Microfinance Insights focused on Private Equity.

Participation is by invitation only. If you would like to take part in the survey or attend the event, please email Lindsay@intellecap.net or Jfilko@iamfi.com microfinance insights l may/june 2009

investment

The Challenge of Duality An Investor’s View on Balancing Social and Financial Goals MFIs constantly balance the boat in meeting the dual goals of financial and social performance. While financial sustainability is often the only way they can ensure future growth, social performance is their reason for existing. It is important to engender initiatives that bring social performance to the fore. “Good” Intentions at the Start Microfinance institutions (MFIs) most often start with funding from a private (non-governmental) or public development initiative. As a consequence, the financial objective is not defined as a certain return on investment, but as operational and financial sustainability. For some MFIs, 100% financial sustainability, with a margin of, perhaps, 10% is the goal. For others, this “sustainability” can be much higher, leading to internal rates of return far beyond financial sector standards. This can adversely impact elements of the MFI’s social performance. In order to reach these high levels of sustainability, costs have to be reduced (no remote rural clients), income maximized (high effective interest rates) and risks minimized (no agricultural credit).

Magnifying Lens: Social Investors There are different types of social investors. Depending how broadly you define this category, private as well as public investors can be included. Public “social” investors are the national and international financial organizations with a clear development objective (e.g., the regional development banks, KfW, FMO, BIO, etc). Private social investors often have some “social” roots, in the sense that they were initiated by NGOs, cooperatives, religious organizations, etc. Another segment comprises the foundations originating from family fortunes (e.g. Ford, Argidius, Gates, etc.). They all are “social” in the sense that they have shareholders or patrons who set up the investment funds with objectives other than mere profitability. There are, however, considerable differences in these different social investors. Some of them run along the lines of NGOs, while others adopt a stand that equals the most profit-oriented private investor. www.microfinanceinsights.com

Financial Sustainability – Catch 22? This high financial sustainability objective is often based on the fact that for many MFIs, a high return is the only way to finance their growth, i.e., outreach to more clients. Their legal status or the national microfinance regulation does not allow external capitalization, and debt funding is only possible if they can keep their capital leverage under control. When external capitalization is possible, some other dynamics come into play that pressure the MFI for high sustainability (read: high return on investment). An “interesting” pattern we have observed is that some social investors, who were the first to provide external share capital for MFIs often came in with a mandate from a profit-seeking private investor. This might have been necessary to guarantee the sustainability of the organization, but at the same time, it created an environment where local management prioritized return, while neglecting social objectives and social performance. The stress on (potential) high returns on investments in the microfinance sector cleared the path for highly rewarding IPOs such as the one from Compartamos. Now, the mainstream financial sector perceives microfinance as a promising asset class—potentially good for MFIs and for sector growth, but it also increases the risk of MFIs drifting away from social objectives.

Bringing Social Performance to the Fore In the drive to develop “best practices” and “sustainability,” social objectives have often been pushed to the background. Thanks to organizations and networks such as the Social Performance Task Group,1 SEEP network, Imp-Act, CERISE, and others, the social objective, in the form of social performance, has been put back on the agenda. The social analysis model for MFIs is commonly2 represented by the illustration in Figure 1. On the basis of this model (or some of its predecessors), different social performance measurement tools have been developed. Most of these tools concentrate on the first three phases or dimensions. The “Social Performance Standards Report” (SPSR) was made available in April 2009.3 This report is the format that will be used by MFIs to report on their social performance to the Microfinance Information Exchange (MIX). The SPSR collects information on 22 core indicators selected by the Social Performance Task Force. This report goes beyond the first three dimensions of social performance and includes, on a pilot basis, elements of “outcomes” or measurements for “social and economic improvements” of clients. Hopefully, this initiative will stimulate more standardized reporting on social performance. Different stakeholders (including social investors) require such reporting, and greater

Figure 1: Social Performance Dimensions Intent and Designs

Internal Systems/ Activities

Outputs

Outcomes

Impacts

Intent and Design: What is the mission of the institution? Does it have clear social objectives? Internal Systems & Activities: What activities will the institution undertake to achieve its social mission? Are systems designed and in place to achieve those objectives? Output: Does the institution serve poor and very poor people? Are the products designed to meet their needs? Outcome: Have clients experienced social and economic improvements? Impact: Can these improvements be attributed to institutional activities?

may/june 2009

microfinance insights

investment standardization will stimulate MFIs to develop such reports. Concurrently, including social performance reporting on the MIX signifies that mere financial reporting ignores the original premise of microfinance. On Profit… Alterfin is a social investor, which means it has a mix of financial and social objectives. Our financial objectives, oriented towards sustainability, include a healthy credit portfolio, a sound balance sheet, and efficient and profitable operations. Over time, it has become clear that the profitability objective is strongly influenced by social concerns. There is, however, no unequivocal definition of socially acceptable profit. Two factors determine profit: return on investment offered to the shareholder (investor), and the level of reserves and/or internal capitalization within the organization. At Alterfin, there is a general consensus that shareholders should expect to get a return at the level of the inflation rate. This means that their investment keeps its real value.4 Reserves are kept at a high level.5 In that sense, shareholders of Alterfin swap return for security. Defining the financial objective in this manner helps Alterfin offer interest rates slightly below market. Interest rates can be further reduced by developing into a lean, but efficient organization with good risk management. Setting the Context for Social Performance Measurement As a social investor, AlterFin, uses measurement tools to determine how an MFI is performing, and how its clients are performing. Cleverly standardized social performance reporting is important, but it should not make us forget that rightly interpreting social performance and understanding social impact can only be done in a contextualized way. Whether social performance will eventually lead to a positive social impact on the lives of clients will depend on the environmental conditions and on the clients’ capabilities, as depicted in Figure 2.

Figure 2: Environment and Client Capabilities Determine Social Impact Organizational Dimensions

Social Performance

Environmental conditions relate to the economic, political, socio-cultural and ecological conditions in which the client is living and operating. These environmental conditions can be more or less conducive for the use of the MFI’s services by the client. Though the MFI can barely influence these conditions it is important to take them into account. Alterfin, as an investor, will not work in countries or regions where conditions make it almost impossible for a client to make good use of MFIs’ services. At the MFI level, it is important to see how it interacts within this environment. Therefore, Alterfin assesses how the MFI relates to other organizations such as microfinance networks, local and central authorities, farmers’ associations, etc. The client’s capabilities to make good use of the MFI’s services are, to a large extent, determined by her/his resource capital, social capital, and technical and entrepreneurial capacities. The resource capital refers to the property, infrastructure and equipment that the client has as a base for running his/her economic activities. Social capital refers to how the client is connected with other clients, with the markets and with the authorities. Finally, the clients’ ability to make optimal use of the MFI’s services is determined by her/his technical and entrepreneurial capacity. For the social investor, the clients’ capabilities remain a black spot. It is possible, though, to assess the extent to which the MFI is conscious of the importance of the clients’ capa-

Environmental Conditions Clients’ Capabilities

Social Impact

bilities. Does the MFI take into account the resource capital of the client? Does the MFI value how the client interacts with other clients, with the market, with local authorities? Has the MFI certain minimum requirements with respect to technical and entrepreneurial capacities of the client? Does it organize or facilitate training for the clients? These questions form part of the “social due diligence” assessment Alterfin does at the start of every investment. For this assessment, it uses a questionnaire that includes the questions above as well as other indicators that relate to social performance, namely, intent and design (policies), systems and activities, and outcomes (mainly different aspects of outreach). Once a year, a social performance data sheet is completed, in order to monitor important elements of the MFI’s social performance. On the basis of this data, a yearly social performance report is published on our website www.alterfin.be . Social performance data can also be found in the so-called “social ratings.” These ratings however, are a difficult exercise. Ratings assume that you have optimal standards and benchmarks. For social performance (contrary to financial performance), it is difficult to create general standards as context plays an important role. Nevertheless, we think that social ratings, together with the initiative to put social performance information on the MIX market, are important initiatives that will help put social performance back where it belongs at the center of the microfinance model. n

Hugo Couderé is the Managing Director of Alterfin (www.alterfin.be). He holds a Ph.D. in applied economics and is active in microfinance since 1993. He can be reached at hugo.coudere@alterfin. be. Alterfin is a Belgian co-operative society (1995) set up by NGOs and banks to contribute to the development of local financial institutions in the global South that are oriented towards poor people. Since its inception, more than 1,200 private shareholders have joined the co-operative.

1. Promoted by CGAP, Ford Foundation and Argidius Foundation 2. Foose, L. and Greenberg A. “The Double Bottom Line: Evaluating Social Performance in Microfinance” MicroBanking Bulletin, Autumn 2008, 12-16. 3. The SPSR is an excel workbook, available in Spanish, English and French. The first worksheet explains the framework of the report; other worksheets give the different indicators that have to be filled in. The workbook also includes a glossary and a calculator to calculate effective interest rates. More information can be obtained from the ProsperA alliance: contact@prospera-microfinance.org 4. However, this consensus is often challenged at general meetings. Some shareholders do not require a return and they aim at keeping their investment at nominal value. Nevertheless offering a return at the level of the inflation rate facilitates mobilising (social) capital in the market. 5. At December 31, 2008 total reserves and provisions reach 8.49% of total portfolio, while PAR 30 days is below 0.10%.

microfinance insights

may/june 2009

investment

An Equity Investor Takes Stock: Integrating Social Performance Measurement and Microfinance Investment Many socially-minded investors believe that integrating social performance into the investment process can help preserve the character of double-bottom line institutions. For Grassroots Capital, social and financial performance, rather than distinct or conflicting goals, are intertwined into the company’s day-to-day activities. In fact, Grassroots has created its own framework for evaluating the social impact of current and potential investee MFIs.

t Grassroots Capital, we believe that more often than not, microfinance institutions (MFIs) that excel at creating social value for clients will also be those with the best knowledge of their clients’ needs, and will, therefore, be best-positioned to adapt and innovate in response to changing market conditions, competition and technological change. Because social performance is integral to successful microfinance from financial, moral and capital markets standpoints, integrating social performance into the investment process from the start is paramount. There are multiple ways to do so: performance measurement at both the intermediary and client levels, linking to the broader social investment community, and exploring structural elements that can help preserve the character of double bottom line institutions.

“Grassroots believes that more often than not, microfinance institutions (MFIs) that excel at creating social value for clients will also be those with the best knowledge of their clients’ needs, and will, therefore, be best-positioned to adapt and innovate in response to changing market conditions, competition and technological change.” For several years, Grassroots has used an in-house social return metric to help bring a consistent approach to its evaluation of MFIs. Like most such frameworks in use, the focus had originally been on the intermediary MFI rather than end-clients, and relied on indicators that provide mostly indirect evidence, such as loan size and mission statement, to determine its success in reaching and benefiting the www.microfinanceinsights.com

target population. With the launch of the Global Microfinance Equity Fund in 2008, Grassroots updated and enhanced its social impact tool, and has been testing the revised version on its portfolios. The changes in the tool incorporated the results of important work underway in the industry that has recently become available. Building the Framework First, consistent with increased emphasis by many participants in the microfinance industry, Grassroots has incorporated indicators of a robust consumer protection process in MFIs developed as part of the Campaign for Client Protection being promoted under the auspices of the Center for Financial Inclusion and CGAP (www.campaignforclientprotection.org). These indicators include the existence of truth-in-lending policies, grievance procedures and monitoring of collection practices, among other features. Second, Grassroots has incorporated client-level impact data generated by poverty scorecards such as the Progress Out of Poverty Index (PPI) into its framework. Poverty scorecards, which emerged from work by the Grameen Foundation, Ford Foundation and CGAP, and tools developed by Prizma (Bosnia), Microfinance Centre (Warsaw), ASA (Bangladesh) and others, support meaningful targeting, product development, market research and peer group comparisons. This in turn can help MFIs to identify opportunities to develop their financial offerings, and measure changes in poverty status over time relative to the general population. They are designed to add negligible cost and little burden to the MFIs’ processes. Since the redesign, Grassroots has been testing the tool on its portfolio, and is gradually rolling it out to include

all portfolio companies and new investments. Overall, the MFIs tested to date are found to be transparent, employ truth-in-lending strategies, and have begun to utilize tools like the PPI to better understand their clients. Some of them also conduct market research to inform the development of new products, offer innovative products to promote clients’ financial inclusion, and collaborate with other non-financial initiatives to further enhance social impact.

“While improving metrics specific to microfinance remains a priority, Grassroots also sees the need to incorporate these into a more general framework for social performance evaluation, since many social investors have multi-sectoral interests.” Social Capital Markets While improving metrics specific to microfinance remains a priority, Grassroots also sees the need to incorporate these into a more general framework for social performance evaluation, since many social investors have multi-sectoral interests that may, for example, encompass the environment or gender issues, in addition to the eradication of poverty. In this regard, Grassroots is working with B Corp (www.bcorporation.net) to help develop transparent, comparable and comprehensive social and environmental impact standards across sectors. Grassroots is participating in a working group to develop specific ratings to measure the social impact of financial services businesses - lenders, private equity/venture capital fund managers and investment advisors – a singular challenge because

may/june 2009

microfinance insights

investment Grassroots Social Impact Indicator Descriptions Category

Outreach

Scale

Consumer Protection

Innovation

Financing

Indicator

Description

Weight

New Market

Entered a rural, urban, or overall new market over previous 12 months

Depth of Outreach1

Under development; Poverty Index Score of Clients indicates > 80% of clients in bottom two quintiles of income distribution.

Initial Loan/GDP per Capita

Size of the initial loan as a percentage of GDP per capita

Rural/Agricultural

Distribution of portfolio in rural or agricultural loans

Coordinated Services

Non financial services projects - education, market linkages, etc.

Absolute Size

Top 20% of MFIs in microfinance industry based on the number of clients

Market Share

Top 20% of MFIs in region based on the number of clients

Mainstream Collaboration

Financial collaboration with insurance co., service company model, etc.

Truth in leanding

Transparency in loan rates, tenure, collection procedures

Monitor Collection Practices

Collection procedures clearly defined and well-supervised

Monitor Over-indebtedness

Procedures to screen out over-indebtedness are in place and periodically tested

Reasonable Pricing

Under development; loan rates are within defined range of regional average and/or base rates

Grievance Procedure

Well-publicized client ombudsman or equivalent system in place to collect and investigate complaints.

Protection of Privacy2

Safeguards in place to protect confidentiality of client data

New Products

Introduction of new products over previous 24 months

Non-credit Products

Offers non-credit FS- savings, insurance, remittances

Market Research

Systematically conducts market research on client needs, satisfaction

Employee Equity Ownership

Employee stock ownership plan

Local Ownership

Equity ownership structure incluedes domestic participants

Public Deposits3

Voluntary savings are source of funding

Notes: (1) Score currently indicates whether Progress Out of Poverty Index (PPI) or similar tool is being implemented to measure poverty rates of clients. In future, will track where MFI clients are with respect to the poverty lines. (2) Currently not incorporated into MFI scores but is in testing (3) Is not incorporated in scores for MFIs where the collection of public savings is not an option, e.g., India

it requires data regarding who is being served by the financial services product and how effectively they are being served. The goal is to promote the flow of institutional and high net worth capital into the impact-investing marketplace by creating comparable impact-reporting standards for financial services intermediaries. Institutional Character Finally, Grassroots also hopes to be able to draw on the work of B Corp and others in the US to devise features that can be incorporated into the charters or by-laws of MFIs to enable them to preserve their double-bottom line character even as they grow and access capital markets. Such features could enable MFIs to consider the interests of stakeholders, in addition to that of shareholders, in managing the company and generating liquidity for investors. While they are not appropriate to all MFIs and investors, Grassroots believes that the development of such features will

microfinance insights

give different types of investors a clearer understanding of what they are investing in, and reduce conflicts as MFIs develop and grow. Grassroots Social Impact Indicator Descriptions The challenges of developing and incorporating meaningful sector-specific social impact metrics into investment analysis and reporting remain daunting; and generalizing them to apply across sectors is even more so. Grassroots, however, believes that over the past twelve months the many years of dogged effort by sev-

eral industry participants is starting to bear usable fruit, and the momentum towards moving social reporting from an aspiration to a requirement has grown. Grassroots hopes that its commitment to using and developing social metrics will contribute to the emergence of broadly recognized industry conventions, in the belief that these will be an important step towards substantially increasing and facilitating the flow of capital into the social investment space. n

Paul DiLeo is the co-founder of Grassroots Capital and a Managing Partner, alongside SV Prasad and David FitzHerbert. Paul has more than 10 years experience investing in microfinance equity investment, beginning with pioneering investments in India and Bangladesh and work on what would become ShoreCap International, and an evaluation of ProFund, the first microfinance equity fund. As co-creator and Chief Investment Officer of the Gray Ghost Microfinance Fund; he has, over the past five years, launched a range of initiatives intended to broaden and deepen private investment in microfinance institutions (MFIs) while assembling a portfolio of equity investments in 50 MFIs around the world.

may/june 2009

housing

Mortar and Mortgage:

Low Income Housing Solutions for Urban India In 2008, the Monitor Group put out a comprehensive report on the state of the housing market, particularly in urban India. In this article, Monitor’s Affordable Housing team outline findings from that report, and discusses the potential social impact a new financing model can have.

onsider this: housing finance in urban India has grown at over 36% over the past decade. Yet, an overwhelming majority of Indians - 21 million - living in cities cannot afford to own a home. Over 80% of urban households in India earn less than INR11,000 (US$220) a month, with as many as 14% earning less than INR2,500 (US$50) monthly. A household earning INR11,000 per month can just about qualify for a loan of INR450,000 – the thumb rule is that an individual is entitled to a home loan of up to 40 times his/her monthly income or 3.5 times the annual income – which means that it cannot afford even the smallest urban house currently available on the market— typically 450-500 square feet priced above INR500,000 (US$10,000). India, however, is not alone. In much of the developing world, millions of people struggle to find adequate urban housing facilities. Market-based solutions may offer a way to empower and enable low income households to realize their dreams – that of owning a home. A project by the Monitor Group for National Housing Bank (NHB), the principal agency that promotes Housing Finance Institutions in India, with active support from the World Bank, explored the commercial opportunity to serve the low income housing market. The project recognized that current models are not working for the lower income segments and hence conducted extensive field research across urban India and involved international and local experts to develop innovative solutions. The work included interviews with over 1,000 potential customers, 50 developers, 20 financial institutions, 10 microfinance and specialized lending organizations and a broad range of over 100 stakeholders. The Who’s Who of Housing Finance One of the key learnings from the project was that at current land prices and www.microfinanceinsights.com

Monitor is creating innovative housing solutions for low-income customers in urban areas like Mumbai.

construction rates, it is possible to build housing that even lower middle income urban customers can afford. Several developers in cities such as Ahmedabad, Jaipur, Mumbai, Hyderabad, and Kolkata that Monitor spoke with, confirmed that they could build flats in smaller formats, if financing was available. From interviews with customers it was clear that they could afford the type of housing described above. However, crucial to turning their aspirations into reality is making financing available at competitive mortgage rates. While financial institutions such as banks and housing finance companies (HFCs) do recognize the potential of this segment, most of them are wary about handing low-income households’ housing loans. Their primary concern is the high costto-serve ratios and the potential credit risk attached with this segment. Similar reservations are also common among Non-banking Finance Companies (NBFCs), since they can not legally recover mortgaged property without going to court. Among microfinance institutions (MFIs), although interest is high, most of them are constrained by the amount and tenure of funds available for housing loan products. For the MFI, housing finance products

offer great value in terms of product diversification and cross selling. A product that has great potential and could have major positive fallout on the urban economy is a housing loan. Home loans with their long tenures of between 10 to 15 years offer a great retention tool to MFIs. The product typically has generated tremendous loyalty and goodwill amongst the customer segment and by its very nature offers terrific cross-selling opportunities for insurance products as well as durable goods and consumer finance products to begin with. While most MFIs would have a constraint in terms of the amount and tenure of funds available to lend under this category, others have made the necessary arrangements to offer this product. Monitor Models Monitor has developed a set of new and innovative business models that address the concerns of different stakeholders and enable easy access to credit for lowincome households. The first model is aimed at organized sector employees and uses the employer to aggregate customers and facilitate processing including payroll deduction. Employers have shown strong interest in doing this as it helps with retention and performance improvement.

may/june 2009

microfinance insights

housing This model finds interest with financial institutions such as banks and HFCs as the target sector are viewed as inherently low risk and can be served at a lower cost. The second model is analogous, except that it targets the informal sector and proposes an innovative approach by using the MFIs to do the aggregation and screening of customers as well as the early stage collection, thereby achieving the required lower cost ratios. It also leverages the MFI field staff and their understanding of the customers, thus ensuring good credit selection. In this model, the actual loan is provided by a financial institution such as a bank as it has access to the appropriate funds and the bank is also responsible for “hard collection” processes, in case of default. This model also uses an external guarantee, possibly by a donor agency, to reduce risk for financial institutions and make the customers more attractive. While a lot of banks/traditional HFCs that Monitor spoke to were interested in participating in such a model, aligning MFIs’ incentives with their own was a prime concern. They clearly want to avoid situations where MFIs bring in customers who are high credit risk, a concern that was appreciated by MFIs who are ready to align incentives. A possible incentive alignment mechanism could involve forfeiture of MFI fees by banks if the customer brought in by the MFI defaults on payments. From the MFI perspective, this model can have several variations, depending on the nature and level of services provided by MFIs. An MFI’s participation could be limited to sharing a list of ‘good’ customers with banks, i.e., customers who have regularly paid their dues and displayed good credit history. A second variation is where MFIs do the customer aggregation by speaking with individual customers, educating them about the financing options available, and then screening the right candidates. Alternatively, MFIs could simply offer to facilitate the document-filling and document-collection process or play a role in “first level” collection only, i.e., sending friendly reminders to customers that their payments are due. Depending on the level of services provided and the role played by MFIs, a suitable incentive

Monitor’s Housing Finance Model: How the MFIs Factor In Credit Guarantee

Cons tructi on Fi nance Developer (Small and medium) Affordable (small) units, good quality, no delays

Upfront, financed, aggregated customers

Customers

Financial ebt dd Institution f ba s o ate sion able r ses d s r o • Aggregated o • Financial Rep t aff customers na return with a o L • Potentially alligned low risk incentives • Low cost to serve • Aggregated customers • Use of tools such as rolling guarantee to reduce rist • Credit check collection , consumer education

and compensation structure (whether flat fee or percentage-based fee or a combination) can be negotiated and agreed upon between the individual bank/FI and the participating MFI. The third business model is for financial institutions that have customers in this target segment (or which focus on new customers in this segment), and again uses an external guarantee to reduce risk for the lender. This model has inherent potential as it combines the advantages of the bank/traditional HFC and the MFI in one entity. This ‘targeted’ lender, typically set up legally as an HFC, can get appropriate funds – both in magnitude and tenure – obviating the need for the bank/traditional HFC, and can adopt (with modification) approaches used by MFIs to lower cost. A number of smaller FIs/entrepreneurs have recognized the opportunity in this space and have or are in the process of starting companies that will focus on this segment. A specific initiative taken by Monitor is the incubation of the Micro

microfinance insights

Housing Finance Company (MHFC), India’s first HFC dedicated to providing home loans to low-income individuals belonging to the informal sector and who traditionally have had no acess to finance from established banks and financial institutions. But will it work? To test its models, Monitor is facilitating a series of pilots in Ahmedabad and Mumbai. In each case, Monitor is identifying a interested developer and supporting him through the entire process – from getting customers to helping the developer secure construction finance. It is important to keep in mind that an amalgamated entity such as proposed above depends largely on the stage of evolution that an MFI is in. The best way forward would be for MFIs to gain experience by initially playing intermediary roles in conjunction with traditional housing finance players, and later consider expanding their service portfolio. n

This article was written by the Affordable Housing team of Monitor Group’s Inclusive Markets practice in India. Monitor Group is a management consulting and merchant banking group started by Professor Michael Porter and a group of his colleagues at Harvard Business School. Recognizing that India’s biggest challenges are in the area of social inequity and given its commitment to India and global experience in social change, Monitor has made this a strategic focus area.

1. Data from Monitor’s study for the NHB and Monitor research (including interviews with industry experts)

MFI

may/june 2009

human resources

Altruism Reloaded: Seeking Work with Impact

The social sector is seeing a renaissance of sorts – there is an influx of professionals who are turning away from the lure of the private sector to embrace a social cause. What motivates them to do so is interesting, and very relevant, especially in the context of the impact this trend will have on the sector as a whole. Sarika Bansal, Senior Manager of New Initiatives at Fullerton India Credit Company, reports.

Talent from “mainstream” consulting and business sectors see new opportunities to make waves in the social sector. Credit: Chris Gladis

epending on your perspective, Sarayu Natarajan either had an impressive or underwhelming first day as a management consultant with McKinsey & Company. As she entered the marble-tiled office, she was escorted to the IT room, where she was given a laptop and related accessories. She was then provided with a bank account, where her healthy salary would automatically be deposited every month. She was introduced to her mentor (“Development Group Leader” in McKinsey-speak), who promised her an intellectually rewarding career, while gently warning her of the potentially erratic hours. She even met the travel team, who would book business class flights and five-star hotels for www.microfinanceinsights.com

her whenever required. By conventional standards, Sarayu had “made it” in the post-college, professional sense of the phrase. After excelling at one of India’s top universities, she had been recruited by a prestigious multinational firm, a path that was understood and respected by her peers. So why did Sarayu – along with a growing number of talented consultants, investment bankers, venture capitalists and other professionals – decide to give it up? Why are individuals moving from a plush professional life to careers in the social sector, which are, by definition, not as glamorous or as remunerative?

The Many Roads that Lead To Rome Understanding professional motivations is tricky, especially when it involves drastic industry shifts. Humans rarely have a sole driving factor behind career decisions, and choosing to work in the social sector is no exception. More importantly, there is tremendous diversity within the expanding group of professionals who move from the private sector to the social sector. While some have an abiding interest in the sector, others come in with little or no prior knowledge. Some, like Monika Shah, see the social sector as a long-term career plan, but believe that the private sector is well-suited to building certain professional skills. Monika had

may/june 2009

microfinance insights

human resources dabbled in the non-profit space as a college student, but decided that for her first full-time job, management consulting (she worked with Bain) would offer better overall training. Three years later, she was confident that she had learned enough to significantly contribute to a field she had always found “fascinating and exciting,” and subsequently moved to The Acumen Fund. Others, like Gaurav Gupta, weave their social sector interests into their corporate lives. Gaurav knew he wanted to enter the development field before entering the work force. He worked at BCG for two years (again, for “good training ground”), and was considering moving on, when he realized he could pursue his interests within the management consulting world. He began a different path within BCG that allowed him to work on social issues about which he was passionate, although it implied a salary cut.

“Many former corporate professionals are beginning to think quite pragmatically about remuneration – a sensitive subject in an industry that exists to ‘do good.’” Still others, like Srikrishna K. R., “fall into” the social sector with limited intention or prior experience. Srikrishna joined the startup team at Ujjivan after several years of private sector experience (with organizations like Citibank and Bank Muscat), and had limited knowledge of urban microfinance at the outset. Ujjivan’s social sector orientation was not “top of mind” for Srikrishna when he made the shift, as his primary goal was to be part of a start-up. Four years later, he is still working in the field, and “has grown to love the space” in the process. Altruism Reloaded Regardless of the circumstances that led these individuals to where they are now, what are the basic motivations underlying the desire to move away from the private sector? Is it sincere altruism, as extreme idealists would have us believe? Perhaps the financial rewards associated with the corporate sector do not help individuals “maximize their utility” across other areas of life. On the other hand, joining the social impact space could be an inherently self-serving decision. A short stint with an NGO might look great on a business

microfinance insights

school resumé, or perhaps it helps individuals feel less guilty about not having given back to society earlier in life. Surprisingly, few professionals interviewed for this article listed altruism as a primary motive for entering the industry. Most cited a broader sense of social responsibility that also represented an area of personal interest. Monika Shah, for instance, believes it “was always ingrained that we all have a responsibility to improve things, however one chooses to do that.” Similarly, Ankur Puri, a former McKinsey consultant who now works at the Public Health Foundation of India, describes his “altruistic” motivations when he says, “I don’t believe in a charity model, in which I am simply doing good for others. I instead entered [this space] because I think everyone will benefit from it. There’s a nuanced difference between saying that others will benefit and saying everyone will benefit…. In this case, I am also taking something from the process.” As the social sector is evolving, so is the ability to exploit this “give and take” relationship. Professionals could “take” different benefits from this relationship ranging from intellectual satisfaction and a heightened sense of responsibility to some degree of monetary comfort. Many former corporate professionals are beginning to think quite pragmatically about remuneration – a sensitive subject in an industry that exists to “do good.” For example, Jack McCambridge believes that “the definition of altruism doesn’t have to imply losing a moderate level of comfort.” Instead, he believes in forming ecosystems where “incentives are aligned across levels.” Although his shift from Bessemer Venture Partners to SKS Microfinance did imply a difference in remuneration, he describes his salary as “sustainable.” Adds Sarayu Natarajan, “Unless you’re Mother Teresa, altruism isn’t going to stick forever. If you’re looking at this as a long term career option, it is important to be earning a sustainable salary.” Beyond being sustainable, certain subsectors within the industry may even tend towards the lucrative. The nascent social entrepreneurship space is probably the best example, as it provides an opportunity to “do good” while still conforming to proven market-based approaches. It also makes the space

may/june 2009

Stint in the Social Sector Ringside View You should think how much of your time you’d like to commit to this. I don’t think you should come in for less than 2-3 years. If you’re just interested in a one year thing, realize that it takes quite some time to learn. If that’s the case, you may learn but you may not contribute very much. I think things become much more meaningful for you when you can contribute. – Srikrishna KR, Unitus Do your research. I’ve been terrified at the lack of depth of understanding at the areas people express passionate interest in….. Recognize that you’re not going to have the same level of understanding as someone who’s been working in the space for a while, but still do your research. – Jack McCambridge, Business Development, SKS There are a lot of challenges and you’ll face a lot of obstacles. Know going in that it’s hard and that a lot of people come in expecting to have huge impact. We have to be humble in what we expect. Come in expecting to work hard and for there to be challenges, but that it’s still worthwhile. – Monika Shah, Investment Analyst, The Acumen Fund Your remuneration and the amount of ground work are usually inversely proportional. – Ron Abraham, State Manager, Pratham Figure out whether you like the team, and whether the people are right. Particularly with the social sector, incentives are yet to be figured out and people don’t really know what gets people to stay. – Sarayu Natarajan, Investment Analyst, Unitus Equity Fund

human resources more attractive for individuals who have set financial responsibilities (children, graduate school loans), concerns about retirement savings, and reluctance to compromise on their lifestyle. Social entrepreneurship can also yield other benefits to individual business owners. Gaurav Gupta, who founded and currently directs The Climate Project India (TCP), is thrilled by the level of influence his organization has wielded in a relatively short time. He says, “My main reward right now is basically influence. The money is a good bonus that allows you to dabble in other projects. But underpinning that is the basic notion that you can influence something you care about. TCP, for instance, is a small organization that is really punching above its weight.”

“In response to this influx, the industry is either replacing traditional NGO employees with this fresh blood, or incorporating this talent pool by creating positions that did not previously exist.” All in all, it would be difficult to classify the above motivations as either altruistic or selfserving. The idea of “giving back” seems to be vital to this class of professionals, but not at the cost of individual success. How Sustainable Is It? Though industry watchers may debate the genuineness of the shift, they cannot deny that private sector professionals are moving into this industry in unprecedented numbers. In response, the industry is either replacing traditional NGO employees with this fresh blood, or incorporating this talent pool by creating positions that did not previously exist. This begs an important question, one that lies at the core of most social sector work: how sustainable are these approaches? Does it make sense for the social sector to rely on individuals who may demand higher pay packages, be less willing to get their hands dirty, and eventually return to the corporate high life? Will these professionals ask the same questions that NGO-trained individuals would? Or is the infusion of well-trained, highly professional, practical-minded individuals what the sector needs to be truly effective?

Most agree that the private sector mindset has yielded some benefits to the industry. Ronald Abraham, who has spent his career in the non-profit world (with an educationfocused NGO called Pratham), and in which capacity has interacted with many such individuals, believes the greatest advantage they bring is well-developed professional skills. He says, “It’s very evident that these people are already good with communication and project management, which are very useful to an organization like Pratham. Many also have advanced computer skills and can make very good spreadsheets, often better than the ones we can make.” These skills are especially helpful now, when many social sector organizations are attracting equity infusions, and require human resources to translate, analyze and effectively deploy these funds. Benefits notwithstanding, we should not ignore the heavy costs the industry is paying for hiring these professionals. Some, who are admittedly squeamish about spending time in the field with sub-par accommodation, may be of limited use in the long term. Others, who enter the field knowing that they are unwilling to bear the financial opportunity cost beyond a limited time period, may leave the organization with an intellectual debt. Still others may enter organizations where a private sector approach simply does not match a traditional grassroots mindset. These are very real costs for any organization, and should be closely examined before hiring such resources. The Way Forward Every industry thrives when fresh blood, oxygen, and perspectives are circulated. The same holds true for the social sector. Creating a space for former corporate professionals to contribute to the social sector can yield tremendous benefits for everyone if the recipient organization can funnel the talent appropriately. It is imperative for social sector organizations to create useful projects for this talent pool, prior to hiring them. The onus is on the organization to fully understand the individual’s strengths and limitations, create opportunities to maximize his/her time, and build seamless methods of passing institution-

al knowledge. Employers should also ensure that the individual stays with the organization long enough to significantly contribute.

“Creating a space for former corporate professionals to contribute to the social sector can yield tremendous benefits for everyone if the recipient organization can funnel the talent appropriately.” Most importantly, employers should understand the impact this career shift can have on the individuals, and nurture it appropriately. Ashish Singh, who left a core banking job at ICICI Bank to design a microfinance business with Fullerton India, believes his very definition of success changed when he met microfinance customers across India. He says, “In my early career, ‘success’ meant to be outstanding at your individual career. If you’re being felicitated and getting accolades, that means you’re successful. Now, I also look at the visible change I can create in people’s lives.” For Ashish, this paradigm shift occurred when he began working in the social sector. As the lines between the private and social sectors blur, it is up to organizations to channel best practices from both sides. If used appropriately, each sector can learn from the other, and can, hopefully, positively impact social issues as well as employees. n Sarika Bansal is currently working on new initiatives with Fullerton India Credit Company, and is specifically helping to design an urban microfinance business. Prior to that, she worked in management consulting with McKinsey and Company. She enjoys both writing and reading about social issues in her spare time. She can be reached at bansal@post.harvard.edu

The author would like to acknowledge the following individuals, whose candid insights made this article possible: Ronald Abraham of Pratham, Gaurav Gupta of The Climate Project India, Srikrishna KR of Ujjivan Microfinance, Jack McCambridge of SKS Microfinance, Sarayu Natarajan of Unitus Equity Fund, Ankur Puri of the Public Health Foundation of India, Monika Shah of Acumen Fund, and Ashish Singh of Fullerton India Credit Company.

1. For the purposes of this article, the term “social sector” will be used to refer to non-profit organizations, funding agencies, microfinance institutions, social ventures and social investor organizations.

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may/june 2009

microfinance insights

students

Credit for Credits: Student Groups Get Involved in Microfinance The students of Gumball Capital work towards moving people out of poverty, one at a time -- just like gumballs in a gumball machine.

ach year Gumball Capital organizes its own Challenge, encouraging teams to create value by running a business for one week, with just US$27 and 27 gumballs ($27 because that was the amount of the first loan given by Muhammad Yunus, and 27 gumballs because the organization believes that just as the exit of a single gumball moves the other gumballs closer to the exit, each person lifted out of poverty moves the others closer to that goal). At the end of each Challenge, the participants donate their revenue to entrepreneurs in the developing world through online lending portal Kiva, and more recently through China-based portal Wokai. Gumball Capital is just one of the many student-run organizations across the world that focuses on engaging with microfinance – whether by raising funding for entrepreneurs, providing consultancy services as part of their summer jobs, or simply building awareness about the sector. The social impact of microfinance is a strong draw for students and young professionals like Shen, and his colleague Bilal Mahmood, who joined the team shortly after the Entrepreneurship Week Challenge. At a time when being an investment banker on Wall Street is a less attractive career option, microfinance continues to draw talent. According to Avni Shah, Director of the Student Microfinance Development Initiative (SMDI) at the London School of Economics, students are drawn to microfinance because of its “innovative approach to poverty.” While the long-term goal of the SMDI is to set up a microfinance fund, currently the group is focused on doing innovative research related to microfinance and continues to

microfinance insights

The 2007 Stanford Entrepreneurship Week Challenge challenged participating teams to create value out of nothing more than office-stationary, and Post-It notes. Jason Shen was part of a team that won the “Most Value Created” award by raising awareness about microfinance on campus, and getting students to pledge donations to entrepreneurs in the developing world on Post-Its. The team raised a total of US$3000 in just under a week, and soon the idea for Gumball Capital was born. lend through Kiva. Utilizing online lending portals like Kiva and Wokai to motivate students is becoming more common among student groups. Paul Welvang, former president of the Microfinance Alliance at the University of Minnesota’s Carlson Business School says, “Students are busy, and it’s often difficult to build momentum. Kiva makes it easy to start a group, and to create partnerships.” Kiva has capitalized on this trend, setting up Campus Kiva, an international network of university chapters. Campus Kiva allows student groups to start University-specific communities on the portal, as well as helping student leaders set up operations. Campus Kiva helped Gumball Capital publicize their work, and get other university groups to set up parallel challenges. Kiva and Wokai apart, students groups are also getting their hands dirty, working in the field. As a newly-founded society, SMDI’s work in the sector includes partnering with Mimo Finance in the northern Indian state of Uttarakhand, where students engage in field work. The students at the Microfinance Alliance in Minnesota are currently working towards establishing a US$2500 fund by the end of 2009. The purpose of the fund is to provide low-cost financing options to immigrant families in the twin cities of St. Paul and Minneapolis. Getting your hands dirty can go a long way in building careers in microfinance. Mary Jo Kochendorfer, started the Microfinance Alliance in late 2006, while studying at the University of Minnesota. Driven by her desire to “do something in business that meant something,” she started tapping into the interest of people in her locality, and gradually grew the

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Alliance. Speaking about the challenges of starting a student group, Kochendorfer admits that it can be difficult starting up, particularly to build connections and help students gain experience – to get institutions to recognize that there exists a ready pool of talent for them to use. The experience of setting up a microfinance student group went a long way in building her own knowledge. Today she works with the Social Performance Management Center at the Grameen Foundation. Other challenges include longevity. The challenge for Gumball Capital, says Mahmood is in “the choice between keeping Gumball small and limiting the impact, or making the effort to turn it into a full time endeavor.” While they may be at the tipping point, Gumball already has a succession plan in place and is looking to hire full-time staff very soon. Kochendorfer offers more practical advice. She says “It helps to be tied with professors, since they have the ability to sustain relations with an organization year on year.” She advises, “Talk to people, and build connections. If you have a core group of students that are dedicated, talk to institutions and let them know you have a skill-set.” Given the growing number of microfinance-related courses being offered at universities today, it appears to be getting easier for student groups to build inroads into the microfinance community. Gumball Capital has recently started an off-shoot, Gumball University – an online portal for social entrepreneurship and microfinance. Although not accredited, the course is a sign of the growing ‘credit for credits’ phenomenon. n - Ranjit Koshi, Associate at Intellecap.

results

Elusive Impact or Concrete Change: How Social Performance Assessment is Helping to Change the Face of Reporting in Microfinance

When chasing multiple bottom line returns in microfinance, attaining concrete evidence on social impact can often be cost prohibitive and time-consuming, not to mention difficult to segregate causality. Yet achieving more concrete evidence of MFI social performance is not as elusive as it once seemed. The evolution and importance of social performance management and measurement—for donors, investors and MFIs alike—indicates the growing consensus around treating social performance as a process rather than a static outcome. Micol Guarneri, the Director of the Social Rating Department at MicroFinanza Rating, discusses how social rating, complementary to the traditional financial performance assessment, is emerging as a tool through which an MFI’s social returns may be monitored and even benchmarked against best practice and industry standards.

ver the past few years, a variety of microfinance stakeholders have been working together through platforms such as the Social Performance Taskforce and the ImpAct Consortium to promote the development of social performance management (SPM) within the industry. Intended as the capacity of an institution to translate its social mission into practice and achieve its social goals, SPM could be likened to the Corporate Social Responsibility (CSR) of microfinance. In reality, however, SPM and assessment in microfinance is intended as a more proactive concept (i.e. “do good” rather than simply “do not harm”). In contrast to mainstream CSR which is often relegated to a single department, SPM in microfinance entails an intentional management and strategy to ensure that all operational aspects of the institution—from HR and internal control to IT and product design—are in line with the institution’s social mission and strategized in tandem with the financial performance management and results. SPM in Response to Stakeholder Demand For years, social impact and performance in the microfinance industry have often been considered a given. Due to its concentration of clients in informal economies and the developing world, coupled with a strong focus on women, the assumption was that by definition, microfinance was “social.” Some highly criticized recent experiences, together with the increasing amount of public and private resources invested in the sector, however, have put pressure on industry actors to better understand the social aspects of microfinance. For investors, this trend has meant that it is www.microfinanceinsights.com

no longer sufficient to choose the term “social investor” or make placements in microfinance to prove that one is a true socially responsible investor. Increasingly, investors and microfinance investment vehicles (MIVs) must also provide evidence of social returns aligned with the social mission of the respective financier. In this context, social investors have become the key drivers (alongside donors) in the effective dissemination and mainstreaming of social performance indicators and reporting in the sector, demanding concrete evidence of the once-assumed automatic social returns. Social vs. Financial During Economic Turmoil The debate over social vs. financial returns has taken on increased expediency given the ongoing global financial crisis. As bourses worldwide have seen stocks fall and investors seek to regain liquidity positions, some predict that socially responsible investment (SRI) will benefit with an upswing.1 Recent developments in peer to peer microfinance lending may help confirm such a trend. In late 2008, Kiva announced that despite the economic downturn, the company had experienced a 92% net increase of users alongside a record loan volume in October (US$3.6m).2 More recently, Microplace. com,the peer to peer lending site which offers a financial return,launched its first investment opportunity to offer a 6% annual return.3 Despite the apparent rising interest in social investment following the crisis, some still fear that an increased focus on social performance necessarily constitutes a sacrifice or decline in financial returns. Yet such blatant causality is not confirmed by recent experience. Indeed, an emergent body of evidence suggests

that a much more nuanced approach to the discussion is required. According to recent studies on the relation between social and financial performance, the promotion of social performance factors (e.g. adequate service delivery, promoting client trust, etc.) can result in synergies which positively impact an institution’s financial performance.4 The Imp-Act Consortium case studies also offer anecdotal evidence of a South African MFI which offers dual poverty-focused and nontargeted programs, where the higher client retention and lower portfolio at risk (implying better financial results) is experienced among the clients of the poverty-focused program.5

Main contents of the client survey as carried out in the Comprehensive Social Ratings Household members/activities (occupation, age, education) Kind of enterprises financed with micro-credit Income/consumption analysis and/or PPI Assets property and living condition Access to financial service (financial exclusion) Access to basic services Awareness (cost and conditions of products)

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Client satisfaction

microfinance insights

results tion available at the institutional level, and in particular, through the management information system (MIS). The comprehensive social rating, on the other hand, complements and augments the data available at the MFI level with direct client level information gathered through a survey and focus groups with clients.

A large number of MFIs are now following the path to social performance management. Credit: Adsel Wood

Social Rating a Tool to Assess Performance The growing demand for concrete evidence of MFI social performance, coupled with the increased interest in microfinance as a socially responsible investment option, illustrate the gap in current mainstream reporting requirements for many MFIs. Until recently, the industry push to achieve financial sustainability meant that social impact or performance, while not forgotten, was sometimes left by the wayside. As the demand for proof of social performance has been on the rise, so has the development of the necessary tools for assessing an MFI’s social performance alongside the traditional financial indicators . Among the tools developed to date is the social performance rating, intended as an independent and external assessment of an MFI’s social performance. In contrast to a traditional impact evaluation,6 which focuses on the end result, the assessment of social performance considers a broader context whereby the entire process through which impact is created is examined. The social rating thus entails an in-depth analysis of the individual MFI’s declared mission, objectives, outreach and service quality as well as the effectiveness of its systems and processes to manage and monitor its own social performance.

Social rating plays an increasingly important role, considering the often limited transparency of self evaluations undertaken by MFIs (e.g. lack of standardized social reporting formats, poor diffusion of best practices, etc.). Similar to the key role of microfinance ratings over the past decade in increasing transparency of financial reporting, the social rating functions as an external and thus a more credible evaluation of an MFI’s social performance. Moreover, through the growing number of social ratings being undertaken across all regions, the microfinance rating industry is helping to promote agreed-upon standards, improved transparency in social reporting while concurrently working towards a consensus on definitions, indicators, etc. To date, two specific social rating products have been designed by the microfinance rating industry to address investor/donor/MFI demands for assessing social performance: the standard and the comprehensive social rating. The standard social rating examines informa-

Towards Social Performance Benchmarks Rather than accept an MFI’s social performance as an automatic outcome of the services, it is increasingly evident that social investors, donors and other stakeholders require that MFIs provide more concrete evidence of social performance and outcomes. Social rating, as mentioned earlier, is one way in which MFIs are now working to provide evidence of such returns. Numerous other tools are also being developed to assist MFIs to integrate SPM into operations and then to assess their social performance along the various stages of development. Exciting headway is also being made in the standardization of social performance reporting/benchmarking across the sector. Just last quarter, the Microfinance Information Exchange (MIX) released a set of social indicators, which it plans to add to the MIX this fall. The centralized consolidation of standardized social indicators will thus allow for the benchmarking of MFIs with regard to social as well as financial returns. Moreover, investors are also developing internal systems for evaluating and monitoring an MFI’s social performance. Taken together, these efforts to promote social performance assessment and commonly accepted social indicators not only increase transparency across the sector, but also establish concrete methods for determining an MFI’s achievement of multiple bottom line returns. n

Micol Guarneri is the Director of the Social Rating Department at MicroFinanza Rating and an active member of the Social Performance Task Force. Ingrid Stokstad is a Financial Analyst based in Nairobi. MicroFinanza Rating has helped pioneer the development of social rating services and counts on the most extensive experience in providing such services to date (31 social ratings across all continents). To learn more, please visit www.microfinanzarating.com

1. See “Socially Responsible Investing is a strategic priority for Crédit Agricole Asset Management Group.” The Financial online. March, 2009. 2. “Lending Through Kiva.org Repaid at 98 Percent; Despite Economic Downturn, Kiva Lenders Continue to Invest for Social Return.” Press release from Kiva. November 11, 2008. http://www.kiva.org/about/release_20081111 3. “MicroPlace Announces First Microfinance Investment Offering 6% Return for Everyday Investors.” CRS Wire, April 6, 2009. See “SPI and Financial Performance Brief No.7: Studies of links between social (SPI) and financial performance (Mix) for 42 Latin American MFIs.” CERISE, 2008. 4. Knotts, Katherine. “We just cant’ afford to be social…” DevFinance list serve discussion. March 17, 2009. 5. Traditional evaluations, such as impact studies, also are unfeasible for the majority of MFIs given their costly and timely nature and the difficulty of isolating causation in the context of MFI operations.

microfinance insights

may/june 2009

results

Back to Basics:

Getting on Track after Mission Drift Negroes Women for Tomorrow Foundation (NWTF) is a non-profit Filipino NGO which was founded in 1984 at the height of the Philippine economic crisis. Since its inception, NWTF has been working with the poorest as a target client. In this article, NWTF shares their long experience of social performance management and how it helped the organization get back on track after realizing that they had shifted from their targeted client base.

WTF and its founding directors have shown a firm commitment to social responsibility and social performance management from the beginning. As early as three years after its inception, clients’ progress was tracked by a basic means test. Later, more client-responsive product development tools such as the SEEP/ AIMS tools were introduced. As the organization matures, we realized that if NWTF is to keep its pursuit of the vision and mission rolling with the same fervor, all members of the organization must espouse this conviction and commitment to social responsibilities. This is how the social performance management committee was formed with a view to diffuse the concept throughout the organization. By involving representatives from all departments and stakeholders, everyone’s voice is heard and concerns at all levels are addressed. Since then, the SPM committee has become a forum for strategic decision making. The practical value of having such an assemblage came to the fore when the apparent mission drift was identified. The lenient client selection process caused mainly by the large-scale, rapid expansion program that NWTF embarked on in 2000 was thought to have provoked the trend. The mission-drift was confirmed in 2006 when the pilot test of the Grameen Foundation’s Progress Out of Poverty Index (PPI) revealed that at entry, 40% of NWTF’s clients fell in the non-poor category, against our pledge to reach out to the poorest. In response to this dilemma, the management initiated a back to basics strategy which attempted to keep our client target-

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By keeping track of social impact, MFIs can remain anchored, avoiding mission drift. Credit: Eoin Gardiner

ing focused on the poorest tier, and social and financial performance balanced. Under this scheme, NWTF now diligently targets only very poor clients with the objective of lifting at least half of this population from poverty within five years. Discussions during the SPM committee meetings for the past several years have resulted in the organization’s heightened awareness that all organizational systems and policies must be aligned with its social objectives, and that monitoring checks should be incorporated into operational procedures.

“NWTF now diligently targets only very poor clients with the objective of lifting at least half of this population from poverty within five years.” A set of client information gathered by NWTF’s Management Information System (MIS) and the research department through PPI provided reliable data on our clients’ economic standing. Today NWTF applies it to every client at entry and updates it every loan cycle so that we can keep track of their progress and poverty level. As of now, although NWTF has not developed a formal policy on social responsibility, key organizational policies and procedures have been reviewed and revised in order to align them with SPM objectives such as client protection, community development and environmental conservation. For example, the HR policy now clearly states expected behavior and responsibilities in relation to interactions

with clients. Moreover, as a precaution against overindebtedness, loan officers are mandated to conduct a cash flow analysis for loans exceeding US$200 to ensure the client’s credit absorption capacity. Furthermore, the internal audit procedures to monitor the adherence to these standards of conduct have been put in place. To conclude, years of experience have taught us that four key elements are crucial for the successful implementation of SPM. First, it is important for SPM to be part of organizational culture. Management’s commitment to its social mission must be effectively communicated to all levels of the institution. Second, the coherence of organizational mission and actual operational performance should be monitored regularly to avoid mission drift. Third, MFIs should have a clear understanding on how they use the data generated through SPM, otherwise it could be overwhelming and end up being misused. Finally, all members of the organization must be aware of the paradigm-shift within the organization, that is to say, to be away from a purely micro-financial mindset, to include social scopes in their daily operations and to have an attitude to look for synergies rather than just tradeoffs. n

The author, Dr. Cecilia del Castillo, is the founder and president of NWTF, a pioneering MFI in the Philippines. She is also President and CEO of the Dungganon Bank Inc. (DBI), a microfinance thrift bank in the Visayas region in the Philippines. She can be reached at cdelcastillo@nwtf.ph

may/june 2009

microfinance insights

gender

The Women’s Empowerment Myth

Access to credit does not necessarily equate to empowerment, although the two are often confused. Photo Credit: Joe Silver.

omen form a large percentage of microfinance clients worldwide, especially in South Asia and Sub-Saharan Africa. While microfinance has long been lauded as a tool for women’s empowerment, the correlation between access to microcredit and women’s empowerment has been widely questioned by feminists since the late ‘90’s. Linda Mayoux (1999) identified three paradigms on microfinance and women’s empowerment: • Financial Sustainability Paradigm (FSP): The focus is on the cost-effective functioning of the credit operation in order to ensure financial sustainability, which in turn serves as an engine to enable greater outreach to the financially excluded and the poor. Women are targeted because of their high repayment rate. • Poverty Alleviation Paradigm (PAP): Microfinance is seen as a sustainable strategy for poverty alleviation because of its outreach to the poor and the financially excluded. Women are targeted because they are believed to be responsible for the well-being of households. Further, an increase in women’s income has been shown to bring the maximum improvement in household well-being. • Feminist Empowerment Paradigm (FEP): Microfinance is a finance-centered strategy that has the potential to achieve improved livelihoods and empowerment of women. The focus is on gender equality and human rights. The first two approaches use women as an instrument, either for achieving

microfinance insights

Women are an important client base for many MFIs worldwide. Their diligent repayment and contribution to the well-being of households are a well known fact. Women’s empowerment is often assumed to occur as a natural result of improved access to credit. Radhika Desai, a former chairperson of the gender sub-committee at the CGAP Social Performance Taskforce, disagrees. Elaborating on the complex and context-specific nature of women’s empowerment, she makes a strong case for MFIs, especially those that are spearheading Social Performance Management programs, to place the utmost priority on gender mainstreaming.

financial sustainability or for poverty alleviation. It is only in the third paradigm that there is an explicit underpinning of gender in its targeting of women and aiming at bringing about “change in lives of women” per se. While it is plausible that women’s wellbeing, understood as an improvement in resources, may be achieved without changes in gender relations through microfinance interventions, it cannot be genuinely termed “women’s empowerment.” Empowerment, by its very definition, implies an increase in the ability to exercise power. Moreover, as the lives of women and men are embedded in a matrix of unequal gender relations, a decrease in this gender inequality is necessary for an outcome of “empowerment” for women. In other words, changes such as increased income, skills and self-confidence, may be better understood as enablers that promote women’s empowerment.

“Empowerment by its very definition implies an increase in her ability to exercise power.” Access to Credit is not Empowerment A brief review of past impact studies presents the complex reality of women’s empowerment. The general consensus, drawn from the studies, is that microfinance leaves positive effects on access to resources and general well-being of women, but partial or limited impact when it comes to empowerment. There are

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some negative impacts such as increased work burden or greater pressure to save and repay. This is a serious issue especially when women have little or no control over the loans they have taken. Control over loans is often used as an indicator of empowerment and many researchers, Goez and Sen Gupta for instance, found that a large proportion of women borrowers simply handed over the loan amounts to their husbands. Interestingly, according to Rehman, women clients, despite having limited control over use of the loans, continue to be better off in terms of nutrition levels, and spending on medical care and their own consumer goods, than those who have not borrowed at all. In contrast, Govind, cited in Goez and Sen Gupta, identified a number of positive changes among members of an SHG named ‘Sagams of Chenchu women’ in Andhra Pradesh. Participation in a new livelihood initiative called Non-timber Forest Produce (NTFP) gave the women the ability to manage household income better: they restricted the amount that was handed over to men for their alcohol consumption. Thus, they spent more on household consumption, children’s education, and their own consumption. And importantly, she observed a reduction in domestic violence. Similarly, Swain Ranjula Bali’s study on SHG women and microcredit across five states in India noted that some members had experienced better access to resources, improved

gender mobility, freer and more active participation in public spaces such as politics, and increased self-esteem and confidence. These studies concluded that SHG membership can truly enhance their access to credit, reducing their dependence on local money lenders and bringing about many benefits to women. The above mentioned studies, however, also stated that these changes are currently limited to relatively few members, and many of them are only felt partially. For example, although women are more articulate, they are not yet able to influence decision making in key areas of family planning such as children’s marriages or buying and selling of assets. Kelkar paid attention to the social mobilization strategy, which underlies the SHG methodology, and attributed the sense of strength the women experienced to it. She concluded that the enhancement of agency is not an individual matter, and we cannot expect a single woman in isolation to have the same degree of strength. Microfinance is a very minimalist approach and does not confront the fundamental cause of the distorted power balance. Thus, it would not have a lasting impact on the empowerment of women. Women’s empowerment requires more structural changes that entail an alteration of existing norms and culture, in other words, a gender system in which the power relationship of women and men is defined. In fact, SHG programs, where a majority of the members are linked to other institutions that provide more holistic support in training and awareness-raising, create a more enabling environment and will eventually show more continuing impact. Women’s empowerment as an integrated part of microfinance goals Qualitative approaches developed in order to measure the process and degree of women’s empowerment have been criticized for not being standardized. But the contextual, relational and multidimensional nature of women’s

empowerment is extremely difficult to quantify and report in a standardized format. Thus, there exists a general scenario in which, despite avowed commitment to women’s empowerment, little progress has been made in its assessment. The development of Social Performance Standards Report by MIX in consultation with the Social Performance Task Force members is a recent case in point. A perusal of the Social Performance Indicators included in the format shows that there has been an effort to include gender in the social indicators in the context of the MFI. Each of the sections on intent, governance, strategies and systems, training of staff on Social Performance, staff performance appraisal and incentives, and social responsibility to staff has at least one gender-sensitive indicator. Nevertheless, the attention to gender in the section on “Achievement of Social Goals” has left much to be desired. The only gender-sensitive indicator included is school attendance of clients’ daughters and sons. An indicator on women’s empowerment and one seeking sex-disaggregated data in the sub-section of outputs and employment are simply absent.

“The distinctiveness and centrality of women’s empowerment within the goals of microfinance needs to be accepted by the sector as a whole.” The absence of indicators on women’s empowerment as opposed to a separate section on poverty assessment cannot be attributed to merely the difficulties in measuring empowerment, It, more importantly and depressingly, reflects the ambiguity towards the goal of women’s empowerment in the microfinance sector.

The distinctiveness and centrality of the dimension of women’s empowerment within the goals of microfinance such as financial inclusion, poverty alleviation, livelihood promotion, etc. need to be accepted by the sector as a whole. This entails a shift among mainstream microfinance institutions and programs from mere claims of achievement of “women’s empowerment” in their social missions to the actual implementation of gender mainstreaming policies, strategies, systems, methods and programs in an institution-specific and context-sensitive manner. MFIs should also introduce the monitoring of internal processes, outcomes and impact among their client households. Women’s empowerment is achievable through microfinance only when: • Methodologies of sustainable group formation based on social mobilization are adopted, • Women are provided capacity-building inputs not only for enhancing individual resources/capabilities, but also for developing critical awareness of their life situation and human rights, • Men are incentivized, encouraged or mobilized to support a change in gender relations. Last but not least, the microfinance sector and especially those MFIs that are spearheading the SPM program should take the lead and give the utmost priority to delineating the centrality of “women’s empowerment” in the Social Performance agenda and the achievement of social impact. If they fail in this, Social Performance Management and Social Impact will be added to the scores of initiatives that have sacrificed “women’s empowerment” in favor of other mission(s), burying the hopes of millions of poor women for a better life with dignity and human rights. n

Dr. Radhika Desai is a sociologist specialized in social movements, livelihoods, gender and caste system. She was a member of the CGAP Social Performance Task Force in 2007 and 2008, and served as a chairperson of the Gender Subcommittee. You can reach the author at atish_para@ yahoo.com.

References: Gupta, Sen., and Anne Marie, Goetz. “Who takes the credit? Gender, Power and Control over Loan Use in Loan Programs in Rural Bangladesh”, World Development 24. No.1, 1996 Govind, Kelkar. “Community Learning and Strategic change: identifying Lessons for Effective Rural Development in Asia.” Working Draft. IMI Workshop, IFAD Rome, November 2005. Mayoux, Linda. “Women’s empowerment Through Sustainable Microfinance: Rethinking Best Practice Gender and microfinance,” 2005 website: www.genfinance.net Bali, Swain. “Microfinance and Women’s Empowerment: Evidence from Self Help group bank Linkage programme in India.”, ART NO: SIDA30632en: Division for Market Development. 2006

microfinance insights

may/june 2009

resources

Recommended Readings New Guidelines to Help Investors Measure Success of Microfinance Institutions Robert Kropp, February 2009 This news article highlights the guidelines developed by Grameen Foundation, along with Oikocredit, to enable investors to secure greater transparency in the double bottom line of their investments and to help MFIs measure their social performance. The checklist developed alongside these guidelines allows institutional investors to evaluate how effective MFIs are in alleviating poverty; it especially looks at the time period it requires for people to come out of poverty. These guidelines will give individual investors a clear picture of which investments support the poor and the poorest populations and how categorizations of “poor,” “very poor,” and “extremely poor” are arrived at, and if these definitions are based on national or international standards of poverty. The author adds that investors need to be better equipped to measure the social impact of the MFIs they support, and using this checklist, they can ensure their investments are reaching the right people and achieving the desired results. Performance and Governance in Microfinance Institutions Roy Mersland and R. Oystein Strom, December 2008 The paper examines the relationship between the governance structure and performance of microfinance institutions. To measure financial performance, the study looks at return on assets (ROA)1 and portfolio yield of MFIs. Outreach is measured by the MFI’s average outstanding loan and the number of credit clients served. The study rests on two hypotheses: that ownership type (Non Profit Organizations or Share Holder Firms) does not influence financial performance and outreach of MFIs, and that increased competition will increase outreach and efficiency levels (achieving the same results as internal governance) and lower ROA. The results of the study indicate that ownership type of MFIs is not the prime determinant for financial performance. It also reveals that MFIs that focus on group lending as opposed to individual lending reach poorer fractions of the population and have greater outreach, and MFIs concentrating more on individual loans than group loans fare better financially. Return to Capital in Microenterprises: Evidence from a Field Experiment Suresh de Mel, David McKenzie, Christopher Woodruff, November 2008 This paper, published in the Quarterly Journal of Economics (Vol.123, Issue 4, November 2008), takes a closer look at how microloans affect the businesses of women entrepreneurs, and why capital infusion may benefit male-run businesses more than femalerun businesses. Based on experiments carried out in Sri Lanka, the study established that MFIs are increasingly courting the wrong kind of clients -- not the poorest of the poor or those with good business acumen, but rather those that have some physical collateral. The experiment showed that after receiving large cash or equipment infusions, women’s businesses did not on an average become more profitable, while men’s businesses did enjoy a profit boost of 60 percent. The paper also discusses why capital infusion rarely helps female-run businesses, as opposed to those run by men.

The answer has nothing to do with sex differences, but rather the types of businesses run. Social Performance of Rural Microfinance Institutions: Theory and Empirical Measurement Florence Marie Milan and Manfred Zeller, October 2008 The paper views social inclusion as a phenomenon preceding and following financial inclusion in the microfinance sector. While the original intent of microfinance was to provide financial services to the poorest sections of the society, with time the financial performance became a key issue due to external evaluation by donors. Now, again there is a growing interest in developing a set of indicators to measure the social performance of an MFI along with its financial efficiency. The authors argue that social performance measurement will encourage MFIs to achieve their social mission, and allow them to demonstrate their performance, transparency and credibility to investors. The paper elaborates on the use of Principal Component Analysis (PCA) in assessing social performance using the example of Angkor Mikroheranhvatho Kampuchea (AMK) in Cambodia. It also suggests that quantitative indicators like PCA help overcome the problems encountered in benchmarking social performance indicators by giving weight to various parameters (such as food security, ability to save, land owning, etc.). The Role of Investors in Promoting Social Performance in Microfinance C. Lapenu et al., Social Performance Working Group, 2008 This publication is a compilation of 11 resources on the role of investors in encouraging MFIs to measure the social impact of their services. The report discusses a workshop on microfinance investment vehicles (MIVs) and investors held in Switzerland; a report by the social investors subcommittee of the Social Performance Task Force; case studies on social performance management in Alterfin, Belgium and Oikocredit, Netherlands; environmental and social risk management approach as practiced by the Netherlands Development Finance Company (FMO); and social performance monitoring in the European Fund for Southeast Europe. The report begins by developing an understanding of “social performance management,” and proceeds to explain the importance of reporting and documenting the results of the social performance analysis. It also presents step-by-step guidelines for MFIs to conduct social performance measurement including foreseeable challenges at the implementation stage. Putting the ‘Social’ into Performance Management: A Practice-based Guide for Microfinance A. Campion et al, 2008 This guide introduces the basics of social performance management and its components, drawing on the experience of a wide range of industry stakeholders, including MFIs, donors, investors, networks and support organizations. The guide is intended to help MFIs committed to achieving both social and financial inclusion through their work. It elaborates on the three components of SPM: setting clear social objectives and creating a deliberate strategy to achieve them; monitoring and assessing progress towards achieving social objectives; and using social performance information to improve overall organizational performance.

1. ROA is an indicator of how profitable a company is relative to its total assets. It is calculated by dividing a company’s annual earnings by its total assets, and is displayed as a percentage.

microfinance insights

may/june 2009

resources

Mark your Calendar May NEW YORK, USA

The Global Microfinance Investment Congress 2009* 19th May – 20th May, 2009 In an era of increased economic uncertainty, microfinance remains a powerful and growing sector. But as the market matures, it raises new questions about future investment strategies and sources of finance. This event will bring together key players from the investment and banking community with microfinance networks and funds. Sessions will include the current financial crisis and microfinance, models and processes for investing in microfinance, and regional case studies. Sponsor: American Conference Institute and PlaNet Finance Website: http://www.microfinancecongress.com

BELGRADE, Serbia

12th MFC Conference of Microfinance Institutions - Global Crisis: Threat or Opportunity for Microfinance? 25th - 27th May, 2009 The current global economic crisis is severely affecting low-income households, in the Central, Eastern Europe and NIS region. This event hopes to improve understanding of both current economic developments and the impact on society, as well as the condition of financial institutions that serve the poor. Also on discussion will be client protection issues and strategies and measures for dealing with the challenges. Sponsor: Microfinance Center for CEE Website: www.mfc.org.pl/conference2009

MUNICH, Germany

Off-Grid Power Conference – Focus 2009: Micro-Finance* 28th May, 2009 This annual international conference will focus on power supply in developing countries and will bring together private companies, international organizations with a development and infrastructure focus, NGOs and entrepreneurs, focused on rural electrification. The focus this year will also be on MFIs operating in the renewable energy space, and on exploring synergies between the industry and off-grid power supply Sponsor: PSE AG Website: http://www.off-grid-conference.org/cms/front_content. php

June CARTEGENA, Colombia

Latin America and Caribbean Regional Microcredit Summit * 8th – 9th June, 2009 The Summit will be the 13th gathering in a series of global and regional summits organized by the Microcredit Summit Campaign. The 2009 Summit will focus on assessing progress and discussing obstacles towards achieving Microcredit Summit’s goals for 2015, particularly in the region. It will bring together over 1000 professionals from across 40 countries. Sessions will be held

simultaneously in English and Spanish Sponsor: Banca de las Oportunidas Website: http://regionalmicrocreditsummit2009.org/

SAN FRANCISCO, USA

Innovation and Microfinance* 15th – 17th June, 2009 This IQPC and Silicon Valley Microfinance Network event is designed to leverage the unique attributes of Silicon Valley and the San Francisco Bay Area. The conference will focus on new innovations in microfinance, and will cover vital, forward-thinking topics such as strategies for microfinance in a credit market, government involvement in microfinance, technological inventions, social networking insights and investor insights. Sponsor: IQPC and Silicon Valley Microfinance Network Website: http://www.iqpc.com/ShowEvent.aspx?id=17882

BARCELONA, Spain

GSMA Mobile Money Summit 22nd – 25th June, 2009 The Mobile Money Summit 2009 is designed for senior executive of financial services institutions, mobile operators, development organizations, technology vendors, and policy makers. The Summit will highlight key markets, showcase new solutions, and share successes and learnings from practitioners across the globe. Sponsor: GSMA Website: http://www.mobileworldcongress.com/

July LONDON, UK

Investments in Microfinance: Surviving the Liquidity Crisis & Ensuring Sustainable Growth 7th - 9th July, 2009 This event will bring together key industry experts to discuss the future of investments in microfinance. Discussions will focus around how MFIs and MIVs can utilize sophisticated treasury and also asset liability management techniques to offset financial risks. Participants will also discuss sources of finance that are still available to the industry as well as exploring factors that drive continued interest in microfinance investments from institutional investors. Sponsor: Hanson Wade Website: http://www.hansonwade/events/investments-in-microfinance/index.shtml

WASHINGTON, USA

Microfinance: The Investment Opportunity* 13th – 14th July, 2009 The fourth in the series of conferences, this particular event will focus on investment opportunities in microfinance for pensions, endowments, foundations and social investors. For discussion are a range of topics including the role of intermediaries in a microfinance deal, and valuations in the current economic crisis. Sponsor: Financial Research Associates, LLC Website: http://www.frallc.com/

*Indicates a Microfinance Insights recommended event. If you are interested in securing discounts to attend our recommended events, please contact Ranjit@mfinsights. com. Terms and Conditions Apply.

www.microfinanceinsights.com

may/june 2009

microfinance insights

trends

Microfinance Market Indicators Statistics and numbers related to global poverty, and the microfinance rating industry, selected and compiled by the Microfinance Insights editorial team. Global Poverty Map – an Illustration of Global Poverty from Multiple Perspectives Change in Global Poverty Levels1

Human Development Index 1990

Human Development Index 2008

High Human Development Med Human Development Low Human Development Not Ranked

Regional Snapshot of Gender Inequality2

Slight Decline of the Population Undernourished 2 40

EAP

LAC

MENA

SSA

Literacy Rate, Female (% aged over 15)

54%

86%

88%

73%

55%

Literacy Rate, Male (% aged over 15)

72%

91%

90%

85%

69%

Estimated Earned Income, Female (PPP US$)

2,069

6,091

5,189

3,934

1,764

Estimated Earned Income, Male (PPP US$)

5,004

12,309

10,323

14,287

3,738

35 % of total population

30 25 15

19 16 16

% of absolute poor families reached

18 14 13 12 10

EAP LAC MENA ECA

Regional Breakdown of Microfinance Outreach3 90 80 70 60 50 40 30 20 10 0

SSA

1990

2004

SA: South Asia EAP: East Asia & Pacific ECA: Eastern Europe &Central Asia

SA and EAP SSA and MENA LAC ECA

LAC: Latin America & Caribbean MENA: Middle East & North Africa SSA: Sub- Saharan Africa

Facts and Numbers2 • SA and SSA show significantly low GDP per capita: US$3,893 and US$3,099 respectively • SA spends 2% of GDP on Health, making it the lowest globally. However, the public expenditure on education is 12% of GDP, while other regions spend about 5% on average. • Gender Empowerment Measure index is lowest in MENA region, scoring 0.34 in average

2002 2003 2004 2005 2006 2007 2008

MFI Double Bottom Line4 Financial Self-Sufficiency

125

Cost per Loan Africa Asia ECA LAC MENA

120 115 110 105 100

2004 • Cost per loan is one indi-

150

2005

cator used to determine an MFI’s operational efficiency 2006 • While MFIs save by building their credit portfolio rather than client base, cost per loan rises

100

0 2004

200

95 90

250

US$

% of financial self sufficiency

130

2005

microfinance insights

2006 l

may/june 2009

Africa

Asia

ECA

LAC

MENA

trends Microfinance Rating Market Microfinance rating has become a fast growing market. In 2007, demand grew by 19%.

Growth of Rating Market5 600

Number of Ratings by Regions5 • The number of ratings conducted is proven to correlate with market maturity

Social Ratings 250

500

Credit Ratings

400

Microfinance Ratings

200

300

150

200

100

LAC ASIA SSA ECA MENA

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Market Drivers5 International Investments into Microfinance

MFI investments have grown steadily. They increased from US$1.5bn in 2004 to US$4.2bn in 2006. They showed a 35% increase in 2007, reaching US$5.7bn. As private investors become active in the sector, the number of MFIs that use mainstream credit ratings rather than an MFI rating has increased.

Regulations

Mandatory ratings account for a very small portion of the rating market (less than 15% in 2007). LAC and ASIA are the only regions where ratings are mandated in some countries. It certainly contributed to the market growth and maturity in the LAC region at the initial stage, however, voluntary rating outnumbers mandatory ratings greatly today.

Cost Comparison of the Major Impact Assessment Tools6 Progress out of Poverty Index, Grameen Foundation

CERISE

Global Reporting Initiative (GRI)

SEEP/AIMS Impact Assessment

Cost

Low

Low (Depending on the degree of participation.)

Low to moderate

Relatively high (US$20,000 +)

Time

About 3-5 minutes to complete the questionnaire per client.

The questionnaire can be completed in less than half a day. Depending on the degree of stakeholder involvement, the reflection process can take longer.

Ongoing process. If fully adopted, equivalent in time and resources to other operational departments.

Each survey takes 45-90 minutes per client. The study requires a relatively large member of samples (100-400). Study preparation and analysis take about 2 weeks.

• Basic interview skills • Basic data management skills

• Advanced facilitation skills to conduct the questionnaire and following discussion • Good commitment and participation from various stake holders

• Moderate to advanced assessment and analytical skills • Advanced and strong management skills to adopt and integrate GRI into daily operation

• Advanced research design skills • Advanced interview and assessment skills • Advanced knowledge in statistics and data analysis

• Basic database system (Excel etc.) or MIS

• Access to basic financial and operational data

• Database software to manage social accounts

• Statistical analysis software (SPSS, Stata, etc.)

Skills

Infrastructure

Sources 1. Adapted from Human Development Map, UNDP, http://hdr.undp.org/external/flash/hdi_map/ 2. Adapted from Human Development Report (2008), UNDP. 3. Adapted from Sam Daley-Harris, “The state of microcredit summit campaign report,” 2001 to 2009. 4. Adapted from the Micro Banking Bulletin, Issue no. 16, Spring 2008. 5. Adapted from KPMG Luxembourg and ADA asbl. , “The Microfinance Rating Outook Report 2008”, 2008. 6. Adapted from The SEEP Network Social Performance Working Group, “Social Performance Map,” April 2008.

www.microfinanceinsights.com

may/june 2009

microfinance insights

survey

Microfinance and Social Impact Is microfinance really making a difference? After over three decades in existence, the microfinance industry has started to seriously evaluate its effectiveness in poverty alleviation. Today, social impact measurement is widely debated in the sector. This issue of Microfinance Insights explored MFIs’ and investors’ perspectives, attitudes and practices on social impact. The results reveal a firm social commitment from both MFIs and investors. However, impact measurement seems to impose cost and time constraints to both parties. Furthermore, an immature measurement framework is a major issue yet to be overcome. We bring you some of the highlights of the survey on these pages. The complete Microfinance and Social Impact Survey Report will be available to subscribers.

Survey Sample Overview 127 Total Respondents: 74 Microfinance Institutions, 53 Microfinance Investors

Microfinance Institution Profiles

Investors’ Profiles Types of Fund Offered

16%

11%

Bank

9.4%

Loans and Debt Securities

67.9%

Bank

13.2%

Equity Investments

50.9%

Donor Facility

20.8%

Grants

34.0%

Private Investor

39.6%

Guarantees

26.4%

Other

35.8%

Technical Assistance

43.4%

Other

9.4%

Cooperative/Credit Union NBFC

23% 47%

NGO-MFI

Types of Instruments

Apex Institution

Other

• 30% of investors invest only in established MFIs • 53% of investors invest in both start-up and established institutions

MFI Perspective on Social Impact and Impact Measurement Should MFIs Aim for Wider Social Development Beyond Financial Inclusion?

Social Objectives Poverty Alleviation

83%

Women’s Empowerment

78%

Better Employment and Work Conditions

50%

Health

44%

Education

41%

Housing

22%

Water and Sanitation

21%

Conflict Resolution

85% Yes...because: • Poverty is a multidimensional problem • There is no harm for MFIs in doing so • People need capacity development to effectively utilize funds provided by MFIs • Client development and growth is critical for an MFI’s sustainability • MFIs have already established their presence and outreach to the poor • It could develop a new revenue model

Additional Products Datapoint: 79% of MFIs offer products/services that are consciously targeting social impact beyond financial inclusion

Women’s Empowerment Empowerment Women's

83%

CommunityDevelopment Development Community

63%

InclusionInclusion of Minorities, or Poorest of Minorities, or Poorest Population Population Better Employment Opportunities Better Employment Opportunities and Labor andConditions Labor Conditions

60%

15% No … because: • MFIs specialize in financial services and do not have the competency to work on other social issues • It may adversely affect an organization’s growth rate • MFIs can work with NGOs to provide other services. NGOs can utilize the infrastructure and outreach base built by MFIs

53%

Children's Children’sEducation Education

47% %

20%

40%

60%

80%

100%

Why aren’t MFIs aiming for wider social impact? • 15% of MFIs say they are NOT capable of making a social impact beyond financial inclusion • A lack of expertise and appropriate human resources are prime concerns in introducing additional products • 16% of MFIs feels that offering additional services may cause mission drift

microfinance insights

may/june 2009

survey Data Tracked by MIS Client/Household Income

62%

Client Asset Holding

To keep track of clients’ changes: • The majority of respondents (74%) rely on informal discussions and feedback • 55% utilize Impact Studies • Only 27% use measurement tools • MIS is not popularly used to track social indicators • Among MFIs in operation over 5 years, 61% have conducted an impact study at least once

50%

Client's Education/Literacy Level

46%

Drop Outs

45%

Exit Monitoring

40%

Client's Housing Conditions

36%

Client's Nutrition/Health Level

12%

None of the Above

10% %

20%

40%

60%

80%

100%

Changes Made After Impact Study Datapoint: 88% of MFIs have utilized data generated from a survey

Concerns MFIs have about Impact Studies

Introduce New Products/Services

1. Too early for Impact Studies Young MFIs (Less than 1 year and 1 to 5 years)

Change Loan Design

2. Cost and Time

68%

Change Operational Policies

3. A system or reporting format which provides proxy information is already in place

64%

Additional Training on Customer…

64%

Change in Business Strategy

1. Cost and Time MFIs with in operation for more than 5 years

74%

60%

MIS

2. A Lack of Expertise

55%

Other

3. Existing tools are not easy to use or not relevant

5% %

20%

40%

60%

80%

100%

Investors’ Perspectives on Social Impact and Impact Measurement Motives for MFI Investment

Investee’s Social Performance Measurement Datapoint: 76% of investors monitor MFI investees’ social performance

Datapoint: Only one third of microfinance investors are motivated by good financial return

Poverty Alleviation

62%

Financial Inclusion

59%

Wider Social Development

20%

40%

60%

80%

Importance of Social Return in Investment Decision Making Private Equity Fund

Donors

Social Return = Financial Return

47%

17%

Social Return > Financial Return

29%

83%

Social Return < Financial Return

24%

none

www.microfinanceinsights.com

70% 24% 22%

Other

17% %

Make Visits to MFI

Existing Metrics

32%

Portfolio Diversification/ Risk Mitigation Strategy

70%

MFI's Rating by a Rating Agency

53%

Good Financial Return

Internal Indicators

100%

8% %

20%

40%

60%

80%

Facts • 79% of investors have social criteria for investee evaluation • 63% of investors said that an immature measurement framework is a major issue for impact assessment, followed by 60% who cited cost and time considerations • 61% of investors said MFIs should aim for achieving social impact beyond financial inclusion • “Lack of competency” and “increasing risk by deviating from main activity” are common opinions expressed by investors that feel MFIs should concentrate on financial inclusion

may/june 2009

microfinance insights

100%

books

Nurturing the Knowledge Tree:

Making Private Schools Work for the Poor Microfinance Insights featured Professor James Tooley’s views on private schools for the poor in the Microfinance Plus issue in Jan/Feb 2009. Tooley’s new book “The Beautiful Tree” challenges the popular doctrine that private schools are for the upper and middle class, and that poor people can only afford public education. It is a thought provoking account of one man’s consistent belief in the idea that the poor are very capable of making their own choices. The very existence of hundreds of small schools in some of the poorest countries around the world, started by self motivated individuals, is every bit of proof skeptics need to rethink their stance. Every chapter leaves the reader with new ideas. It is a book that can change our perception of the poor and what they are capable of doing. “Read the development literature, hear the speeches of our politicians, listen to our pop stars and actors, and above all the poor come across as helpless. Helplessly, patiently, they must wait until governments and international agencies acting on their behalf provide them with a decent education.” James Tooley, author of “The Beautiful Tree,” and President of the Education Fund at Orient Global, grew up adhering to this school of thought. Later, as part of a World Bank assignment to study private schools in 12 developing countries, his belief system began to change as he saw some of the world’s poorest people educating themselves. This book offers a terrific journey through communities across the globe who are not only capable of educating themselves, they are doing it already. Tooley seems to be driven by the idea of discovering the way poor people live their lives. He does his research firsthand, crossing overflowing sewers, encountering children squatting on the streets, passing through odorous fish markets. He sums it up, “To find private schools, you really must get your boots dirty, not everyone is ready to do that.” The book debunks several myths about education in developing countries. Tooley believed that such schools existed in other developing countries. His idea, however, was challenged time and again by “development experts,” who argued that their existence was a “logical impossibility.” He experienced his first set back from the World Bank staff, immediately after his “discovery” of private schools in Hyderabad, India. Despite acknowledging the presence of private schools for the poor, Bank experts called this phenomenon a rare sighting. The situation was no different in Nigeria, where Dennis Okora, the retired chief

microfinance insights

inspector of schools, completely denied the existence of such schools. Nevertheless, Tooley found 26 registered private schools in Makoko Slum of Nigeria, and realized that many more existed around the world, but remained unregistered. Tooley also observed that these schools are sound business models and not merely products of charity. The extent to which business drives an “edupreneur,” however, varies. In Makoko, Nigeria, he found that Bawo Sabo Elieu Ayeseminkan, the proprietor of Ken Ade Private School admitted 25 students for free, justifying, “If a child is orphaned, what can I do? I can’t send her away.” Xing Ming Xin, the proprietor of Xu Wan Jia Private Primary School was motivated to start a school in Gansu, China because the nearest public school was an hour away on foot and the route became inaccessible during the rainy season. He and his wife also ensured that all the 86 students in the school got food and drinks, something not provided in public schools. The book also compares these schools for

“Read the development literature, hear the speeches of our politicians, listen to our pop stars and actors, and above all the poor come across as helpless.” the poor with public schools. In India, for example, the public schools were also found to be significantly inferior (in education and attendance levels) and unnecessarily overstaffed. In Hyderabad, he observed 37 teachers for 36 students. Parents in Makoko added, “We pass the public schools many days and see the children outside all the time, doing nothing. But in private schools, we see them everyday working hard.” In Kenya, most parents would

may/june 2009

send their children, especially girls, to nearby private schools because public schools were farther away and they feared abductors. Tooley also makes an interesting observation, reflecting on C.K. Prahalad’s revelation in the famous “Fortune at the Bottom of the Pyramid” that, in fact, the “poor are very brand-conscious.” Tooley observed, after a study of 24,000 students in India, Nigeria, Ghana and China, that the poor people are aware of the choices they make, and they have their own ways of evaluating different schooling options (for example, by visiting the school unannounced) for their children. “The Beautiful Tree” is a practical, yet, emotional account of Tooley’s journey into the slums of some of the world’s poorest countries. Tooley is persistent and assertive, yet never rude to any of his critics. He provides a light, humorous touch to the book set in the midst of intense debate. The book is not only meant for development practitioners or policy makers; it is suitable for everyone who wants to know anything about education in developing countries. It also provides some food for thought on how to ensure that these schools are acknowledged in the mainstream, and are nurtured, instead of weeded out. n -By Vibha Mehta, Associate at Intellecap

Ordering Information The Beautiful Tree By: James Tooley Published by: Cato Institute, April 2009 ISBN No: 978933995922 Price: US$19.95

books

Using Entrepreneurship to Bring About Social Change Book Excerpt: Stay Hungry Stay Foolish

Rashesh Shah did it. Sanjeev Bikhchandani did it. Shantanu Prakash did it.

As children, we all aspire to do something different: become a pilot, a dancer, a painter. And then we grow up, and our responses become more conditioned to what is expected of us. Some, however, do not forget their goals, and nothing, not even the highest paying, most comfortable corporate jobs can shake that belief. It is not the lure of making it big or the fancy of being labeled an “outlier,” it is a belief in their objective and a fire to make it happen. Rashmi Bansal, a graduate of Indian Institute of Management in Ahmedabad (IIM-A)—India’s Harvard—and the author of Stay Hungry Stay Foolish, captures this self-motivating spirit of 25 IIM-A students who decided to take up off-the-beaten-path careers. The short stories are divided into three sections: believers (entrepreneurship was their chosen path), opportunists, and people with alternative vision (those that use entrepreneurship to create social impact). This excerpt reveals the journey of one such man with an alternative vision, Venkat Krishnan, the founder of GiveIndia, who very early in his life, was exposed to clear class discrimination and decided to do something about it. 'Stay Hungry, Stay Foolish' is the story of 25 such IIM Ahmedabad graduates who chose the rough road of entrepreneurship. They are diverse in age, in outlook and the industries they made a mark in. But they have one thing in common: they believed in the power of their dreams. This book seeks to inspire young Bschool graduates to look beyond placements and salaries. To believe in their dreams.

The Centre for Innovation, Incubation and Entrepreneurship (CIIE) at IIM Ahmedabad aims at fostering innovation-driven entrepreneurship through incubation, research and dissemination of knowledge.

Rs.125/-

is first IP (Independent Project) was on the feasibility of private enterprise in education, especially vocational education. By this time he was quite confident about wanting to become an entrepreneur, at some stage in life. But it was also clear that even if he became an entrepreneur, it would not be something like IT, but about “making a difference.” “I remember my first reflective note for the LEM class1 – I see myself as an instrument or tool that is available to the society. And my choices should be guided by maximizing the returns that I will give to the society. So I will not do something just because I like it, but because that is the best use of my time for the society’s benefit.” Come placement and you know Venkat is not going to go for the usual companies. Actually, he almost joined an aatawallah2 near Vapi who had participated in placement that year. He was offering a fancy salary, but the chap said that the job is to help the atta chakki3 and help him to save income tax. That put Venkat off completely. “I would have joined him, if he had been an honest guy. Because he was asking you to run the business as a CEO,” says Venkat wistfully. And that’s something that makes a lot of sense for any MBA with ambitions of becoming an entrepreneur. Joining a company which may not be the biggest or most glamorous name in the business, but a place where you get a hands-on and get a 360 degree experience of actually running a business...

“We need the best minds in the country to think, ‘What is the human ideal that we aspire towards?’ Rather than what is the next 30 crore flat that I can buy for myself, or whatever else that I can do for myself.” He hastens to add, “Please have a 30 crore flat, but don’t be blind to the world outside your window.” The time was ripe. A growing number of Indians were beginning to do well for themselves. They were going to have everything that they could possibly want very early in life. Could we not then start building a culture that helps give back? And thus was born “GiveIndia,” an organization dedicated to promoting and enabling a culture of “giving.” When Venkat left Eklavya4, a couple of things fell in place. He had just bought a home PC and was fascinated by the power of the internet. The net was also a useful source of information. Venkat found out that in the US “giving” – in all forms – formed 1.8% of GDP or US$180bn in ‘99-00. The corresponding number in India was less than 0.1% or 0.2%. And here’s a startling fact – the poorest people give the most, as a percentage of income. This is true not only in the US, but all over the world. Venkat realized that on the one hand there were organizations and people who are passionate about and doing amazing work which nobody has heard of. On the other hand, there is an opportunity to pay back.

1. Laboratory in Entrepreneurial Motivation, a course offered to IIM-A students 2. An owner/worker at the flour mill 3. Flour mill 4. A day school for the poor started by a few IIM-A graduates under the guidance of Professor Sunil Handa

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- Rashmi Bansal

ISBN 978-81-904530-1-1

“I used to write to batchmates, friends, people I know who are doing well asking them, ‘Why don’t you give more?’ The first question was, ‘Who can I give to? I don’t know if my money will be used properly.’ That typical cynicism that we have in our system is perhaps justified.” So the idea was born that one can create an organization that showcases NGOs doing good work and enable those who wish to “give” a platform to connect with them. And thus, help create a culture of giving back... “I think the next generation has a much greater orientation of giving. We have all seen difficult times in childhood. So there is this fear that something could happen, there could be a recession, etc. But the youngsters today are so confident, so secure. They feel confident that we will be able to take care of ourselves, so let’s share a bit.” Venkat recalls GiveIndia’s first ever annual report, which contained a paragraph which he wished to see in the 2020 annual report. It’s a letter which read as follows: Dear Stakeholders, We are delighted to inform you GiveIndia has closed down. Donors are now active, they are finding NGOs, they are engaging with them, they are giving money directly and they don’t need GiveIndia. n Ordering Information Stay Hungry Stay Foolish By: Rashmi Bansal Published by: Centre for Innovation, Incubation and Entrepreneurship, February 2009 Pages: 325 ISBN: 9788190453011 Price: INR 125, US$ 2.5

may/june 2009

microfinance insights

last word

A Dose of Realism: Tempering Expectations Critics place the blame for slow or negative results in poverty alleviation squarely at the door of microfinance. The model, which is the most important tool to improve access to finance at reasonable costs for the poor, can at best provide a way out of poverty, but cannot guarantee success, says Vineet Rai.

t a talk I gave a few years ago at the Stanford School of Business, I told my audience, “Microfinance has a limited role in poverty alleviation.” It drew gasps of stunned disbelief from the students. For most, if not all of them, microfinance has been the last word on issues concerning poverty worldwide for the last decade. The reaction I received is similar to the wonder I felt as a child about visiting a bank. To me, it was a privilege, and I believed that those who were “banked” were bound to do well. My naiveté convinced me that they were guaranteed the path to prosperity. An interesting parallel exists between my perceptions about the banked as a child and the general perception about microfinance and its impact. When I first learned about microfinance, I was thrilled by its potential to change the world as the ultimate tool to remove poverty. As I began to understand the model of microfinance better, I became a realist and started accepting that while microfinance does make a difference by meeting the need of its target clientele to access capital at a reasonable price, it is not a path out of poverty. Microfinance today is breaking new ground on Wall Street as well as Dalal Street, eliciting interest for its ability to deploy finance with base of the pyramid markets to seek, and in some cases, find phenomenal scale, setting impeccable track records, and generating excellent return opportunities. Yet, the sector faces the snigger of the skeptic who believes that it is losing its focus on the poor, and is failing to deliver on the social mission it inherited. Critics raise questions about its ability to serve the poor and bring them out of poverty, and perhaps, rightly so. I have some views on the criticism leveled at microfinance as well as the questions critics raise. However, let me interject some disclaimers. I have never formed a self-help group, never been a loan officer, branch manager or founded a microfinance organization. My understanding of microfinance is limited

microfinance insights

to its emergence as a business that has the potential to change lives with an implicit social benefit linked to the scalability of the access to finance for the marginalized. So while we look at the impact of microfinance, it may be pertinent to ask what is it that microfinance as a business model stands for and what impact does it intend to make? The most obvious benefit appears to be creating access to money for those who either had very expensive access to money or had no access at all. An oft-cited benefit includes the empowerment of women, which seems to have been discovered along the way, driven largely by the group formation need of microfinance to create the social collateral. A closer look at the social mission of various microfinance institutions seems to suggest that they are dedicated to creating access to financial services for the poorest, with the intended outcome linked to the betterment of lives of the poor.

“Access to finance, however, is just one of the many input variables in poverty alleviation, and is in no way the sole factor to influence the outcome.” As organizations, the focus of microfinance institutions remains on what they believe are their controllable variables, namely, access to finance, focus on the poor, interest rates, group quality and managing the risks of the loans. Poverty alleviation remains a desired outcome for the microfinance business by the act of creating access to finance. Access to finance, however, is just one of the many input variables in poverty alleviation, and is in no way the sole factor to influence the outcome. Thus, microfinance may make marginal direct impact on the position of poor in the poverty hierarchy, but has a pre-eminent position in the cocktail that possibly may address the ills of poverty. Does this mean that the social impact of microfinance is questionable? The answer would depend on what you believe should be the outcome, and hence, would carry varia-

may/june 2009

tions in viewpoints. My answer is that microfinance has made a major contribution in terms of creating access to finance and reducing the cost of access to finance for marginalized communities and poor people. It has also reinforced the belief that it can continue to do so at a rapid pace. Its impact on the desired outcome of poverty alleviation, however, is questionable simply because we do not understand enough about the ingredients within the secret antidote to poverty except that microfinance is part of it. Further, all resources in microfinance businesses are dedicated to improving access and efficiency, and not really to building infrastructure that supports poverty alleviation. Hence, even in the long term, the success of microfinance should be measured by how quickly it scales up and how much lower the interest rates are rather then how many poor people it brought out of poverty. Social impact studies focused on microfinance must take into account this dichotomy of resource focus to the desired outcomes, and clearly explain how microfinance does not make an impact on poverty, but could only be a minor, albeit effective step toward poverty alleviation. It may be more pertinent to focus studies on direct variables in the microfinance business model like client access to finance, cost of access to finance or the breadth of financial services offered rather than the change of client position on the poverty pyramid. The refocus may also provide impetus to certain sector level reforms like client level data sharing and building a code of conduct on client poaching. In conclusion, I would like to remind everyone of my childhood notion about banking: having access to debt does not guarantee you the path to success, but it may be a necessary precondition for the poor to find an exit from marginalized survival. n Vineet Rai is the Co-Founder of Aavishkaar and Intellecap, the social investment advisory firm that publishes this magazine.

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Features Risk & Reward Exploring Risk in Microfinance

Moving Beyond Inclusion – Financing the Poor April 29th

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Critique Why Microfinance Needs Radical Change Politics Interference in Pakistan Commentary Dangers of Leverage

Global Crisis & Microﬁnance: Tough Times Ahead?

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This issue of Microfinance Insights looks at how the industry is coping with the greatest economic slump since the Great Depression. We probe the assetworthiness of the industry, the risk involved in investing in the sector, and how MFIs will weather the storm. Articles include an analysis by Yana Watson of Dalberg Global Development Advisors on the recession’s effects, a critique of the sector by Prof. Milford Bateman, a perpective on how Islamic Finance can weather the crisis by Zohaib Patel of Fajr Capital, and as always, diverse perspectives from borrowers, investors and MFIs.

Volume 10 - Connections & Partnerships From water to education, health care to clean energy, there are numerous products and services that MFIs can offer to the communities they work with. This issue takes a critical look at how these services stack up in the move towards greater financial inclusion. Includes an interview with Harish Hande, Founder, SELCO India; an article on how MFIs can utilize carbon credits from MicroEnergy Credits; a perspective from Green Microfinance, and more.

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Volume 11 - Microfinance and the Global Recession

Volume 9 - The African Landscape With over 300 million people in need of financial services, over 20 large MFIs, and a growing appetite for investment, there has never been a better time to take a closer look at microfinance in Africa. In this issue, read an overview of the African microfinance landscape from Women’s World Banking (WWB), a commentary from Wagane Diouf, Managing Director of Mecene Investments, interviews with James Mwangi, CEO of Equity Bank, and Ingrid Munro, Founder of Jamii Bora, and more!

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Volume 8 - Technology Solutions: Testing the Waters

Think mobile phones, think smart cards, think biometric devices, think microfinance. This issue delves into technology solutions for Microfinance. Technology will not only make the lives of people at the base of the pyramid simpler, it could also be the great socio-economic leveller. The first bimonthly issue includes an exclusive interview with Prof. C.K. Prahalad, author of Fortune at the Bottom of the Pyramid, highlights from our Technology Survey, and perspectives from Intel, IBM, Microsoft, and PlaNet Finance.

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Mitigating Risk Subprime Crisis and Microfinance

MAINSTREAMING Are We Ready for Takeoﬀ?

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Volume 7 - Mainstreaming: Are We Ready for Takeoff?

Survey Investment Perspectives from MFIs & Investors Commentary Commercialization of Microfinance: Barbarians at the Gate?

From planning dynamic roundtables and events to promoting your event through our networks, Microfinance Insights adds value to every partner we work with. Since the beginning of 2009, Microfinance Insights has participated in nine financial inclusion conferences and events around the world. If you are planning a financial inclusion, responsible finance, CSR, mobile money or microfinance event, training or workshop, partnering with Microfinance Insights gives you access to readers on 6 continents, our diverse database, and exposure through our website. To find out more about how you can partner with us, email team@mfinsights.com

There are numerous signs of the sector’s move into the mainstream: MFIs are shedding their NGO skins to become regulated entities; commercial banks are scaling down to reach a segment once thought “unbankable,” and mainstream investors are pushing money at the sector. All the while, traditionalists shout, “What about mission?” The July 2008 issue focuses on this move from niche to mainsteam.

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Investment Balancing Social and Financial Critique It’s No Magic Bullet Gender The Women’s Empowerment Myth

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