MICROFINANCE MATTERS - Measuring Social Performance

An odd development has occurred in the world of microfinance. People who maintain that microfinance empowers poor people and raises their standards of living are being asked to prove it. Organizations that are spending taxpayer's money in the name of poverty alleviation are being summoned to back their claims. While outrageous to those minimalists who feel that providing quality financial services to people not on the basis of their income status but on the content on their character is good enough, the fact is that MFIs have long argued that interventions are empowering women, lifting households out of poverty, and so on. From a donor and investor perspective, requests for verification were long overdue. The focus on financial performance is now complemented by calls for information on social performance, the so-called "double bottom line". Donors are now encouraged to consider the extent to which organizations they fund "can identify and achieve (their) social mission".[1] Yet, while this push for transparency, accountability and, dare we say, intellectually probity, is laudable at first sight, it also raises a number of concerns. Could the minimalists have a point?

The Challenges of Measuring Social Performance

What's in a Definition?
In theory, few among us would deny the value of collecting as much information as possible regarding the extent to which an institution achieves its social mission. Yet, as always, the devil is in the details. To understand the many challenges of measuring social performance, it is important first to clarify what we are talking about. The words "social performance" mean different things to different people. For some, achieving a social mission is synonymous with impact assessment. An institution that claims that it is helping the poorest of the poor increase their standards of living, for example, will have to show a) that its clients are the poorest of the poor, and b) that access to its products has resulted in positive changes in their lives. For others, the links between access to financial services and poverty alleviation will be implied, intuitive and or contingent upon other variables over which a financial institution will have no control. At best, the institution can measure the poverty level of its clients to ensure that its stated target group (if indeed, it has one) is really the focus of its operations and focus on providing services based on certain principles which it seeks to uphold. The impact on clients' lives can then only be hoped for, or desired, but with the understanding that isolating such impact from the many external elements that affect a person's life is too costly, and too complex to measure.

Confusing Client Responsiveness and Impact
Since few of us really understand what "identifying and achieving one's social mission" really means in practical and measuring terms, the current buzz over social performance often confuses the two distinctly different notions of client responsiveness and social impact. During a recent workshop on social impact organized by the Collectif Francais des acteurs de la Microfinance in Paris on June 21, Renyaldo Marconi of Finrural eloquently and usefully reminded the audience of the need to separate the two.[2] Understanding who the clients are, what their needs are and whether the institution's culture, processes and products are aligned with the interests of the clients is indeed essential. It is called being client responsive and those institutions that do not attempt to know their clients do so at their own financial peril. This is, however, very different from measuring whether the institution is achieving its social mission of empowerment, or increased standards of living.

How Should Social Performance Data Be Used?

The difficulties in determining client status and evaluating impact have been well documented. Yet, even if the methodological and financial constraints to measuring social performance (however it is defined) were removed, we must think seriously about what we do with the information being sought. There should be greater clarity than what is currently available (even within donor agencies) as to how we would use social performance data before we ask financial institutions to report on it.

The Donor Perspective - Social Performance as Reporting Requirement
To understand this "professional imperative" from a donor perspective as well as the difference between a client focus and a measurement of social performance, let us consider the following set of questions: What if, in the case of an institution that claims as its mission to "give people the tools they need to work their way out of poverty", we were to find out its client needs were not being met? Should the programme be terminated? Should donors withdraw? Should investors stay away? I argue that in this case, the answer is much more straightforward. In a context of limited donor knowledge about microfinance, it is very difficult to establish causal links when it comes to poverty alleviation - and this is really the question we should focus on.

The eleventh principle from the Consultative Group to Assist the Poor's (CGAP) 'Pink Book', "Donor Guidelines on Good Practice in Microfinance", states that "Microfinance works best when it measures-and discloses-its performance…MFIs need to produce accurate and comparable reporting on financial performance (e.g., loan repayment and cost recovery) as well as social performance (e.g., number and poverty level of clients being served)." Yet, without a clear definition of what social performance means, are we paving the way for a new wave of donor abuse? The example of "number and poverty level of clients" does not require an impact measurement (marginal increase or decrease in standards of living solely attributable to access to financial services) but determining the poverty levels of its clients constitutes nonetheless a heavy burden for any financial intermediary.

Larger dangers loom when and if donors define social performance more broadly and require financial institutions that offer financial services "to empower people" to actually measure such empowerment. Evidently, poverty levels and impact are important information to have, yet to include them as donor best practices in a world of bad practicing donors can have adverse consequences; and since the Guidelines do not define what social performance means, un-educated donors may interpret it as a green light to impose unrealistic expectations and reporting requirements on financial institutions.

An Unfair Standard
Some argue that financial institutions should be requested to demonstrate the validity of the claims upon which they base their requests for public funds. While this argument is theoretically sound, the reality is that such a request would set a challenging - and somewhat unfair - standards upon microfinance. First of all, donors seldom request institutions involved in education to show impact. In both cases, the focus is on providing access, based in the assumption that such access is a vital component to people's survival strategies and development goals. Second, mission statements are too broad and too generic, to a) be taken literally, b) be applied and proven scientifically. Mission statements in microfinance range from the highly succinct and explicit "provision of quality financial services to economically active poor" to the more ambitious "provides financial services to the world's poorest families so they can create their own jobs" to the much more ambitious " strengthen the economic foundations to build a country's democracy": how does one determine whether these missions are "identified" and "achieved". The role of donors in microfinance should be to correct market imperfections so that demand is met. Hence, when selecting and monitoring an MFI, this criterion should suffice: is a market imperfection being redressed? Whether the market imperfection applies to the bottom of the poverty scale, the middle, the fourth echelon, etc. is essential for the institution as it designs its services, but only interesting for the donor as it monitors its contribution to the industry's "goal of building inclusive financial sectors".

Sending the Wrong Signal to Investors?
Finally, are we ghettoizing microfinance by increasing the focus on social performance? How does this fit in with financial integration? Will it scare investors away? The Pink Book highlights the emerging though not universal consensus that if microfinance is to reach scale, it must become fully integrated into national and international financial sectors. This approach is translated in various methodologies at the retail level, which all share the recognition that the lines between microfinance and traditional financial sector actors and structures are quickly fading. Now how does the requirement to report on social performance fit into this evolution? Does microfinance "work best", e.g., will financial sectors become more inclusive when and because financial providers "produce accurate and comparable reporting on social performance"? Here again, the purpose is not to be callously dismissive of the concept, but to warn that we may be pulling the industry in different directions, sending mixed messages to a financial sector that we want to attract, to the detriment, in the end, of the very people we want to serve.

Abuse and Mission Drift

Finally, another way to explore the issue of social performance and assess its value is to explore the motivations behind the buzz. Where do these calls for reporting on social performance come from? Various hypotheses are possible, each with its own degree of cynicism. When and if they come from financial institutions, one could argue that they serve two, distinct purposes: for some institutions, it is a way to fight the - inevitable? - trend toward financial integration by tickling the donors pink and appealing to their heart in a way that more commercially oriented institutions won't or can't. In that case, the focus on social performance is a clever ploy to protect one's territory.

Moving into the realm of conspiracy theories (and up the ladder of cynicism), one can also wonder whether these calls for reporting on the double bottom line are not an ingenuous way for scores of consultants, research organizations to justify their existence and their funding requests through action plans that consist of sophisticated studies, which lead to the development of innovative measurement tools, which, in turn lead to the drafting of publications. Donors are often willing accomplices in the plethora of initiatives that emerge around the issue for they can also justify the significance of their work to their own constituents. Some will claim that this complicity stems from a genuine desire to gain a stronger understanding of how financial services affect poor people's lives.

The Wrong Priority

Even so, in a context of limited resources, to focus our attention and our money on measuring and reporting on the loosely defined concept of social performance is the wrong priority. Donors should support MFIs that are client responsive and committed to sustainability. By being client responsive, we know the institutions will meet real needs.

Financial institutions should indeed monitor the extent to which they are effectively fulfilling their mission. Donors, on the other hand, should be more cautious when beating the social performance drum to the MFI's overwhelmed ears. The current confusion over what it means, how and when it can be measured, who should measure it, and what to do with the results leaves ample room for waste, misinterpretation and additional donor failures. At this stage, focusing on social performance is the wrong priority, one that benefits the few to the detriment of the many. Should donors, indeed, spend time drafting and launching a "white list" of good students that have signed a commitment to "set clearly specified criteria on social performance for the organizations (they) support"?[3] Now, that sounds like mission drift.

(1) E.g., see www.Imp-Act.org

(2) This workshop was part of the World Bank/DFID/UNCDF conference "Financial Access for All: Better Measurement, Monitoring and Policy Action". For more information, please see "International Year of Microcredit Initiates Cooperation to Develop Core and Headline Indicators"

(3) See www.triasngo.org and the manifest on "promoting social performance in microfinance."