Ethical finance
Due diligence: social investors want impact...and quantifiable returns
Social returns in microfinance management and investment
Authors:
J. Chen; N. Biggar
Publisher:
[publisher information not available], 2008
As more investors enter into the microfinance market, it is increasingly clear that they are not binary - either purely social or purely commercial. Most investors fit into a spectrum where the role of social performance along this continuum differs substantially.
Some pioneering investors are beginning to recognise that the industry’s assertions of poverty alleviation must be matched by verifiable data and actions.
The indicators that social investors use to determine if they are achieving their desired social impact and whether a microfinance institution (MFI) is poverty focused, are the following:
- poverty focus impact using metrics such as, location & country, urban vs. rural, percentage of female clients, collateral requirement, and initial average loan size/GNP per capita
- client satisfaction impact (meeting needs of poor) using client retention rate as a measurement
- female empowerment impact using percentage of female clients as a measure
Experience, however, has shown that these measures are poor predictors of microfinance client poverty levels and thus are of limited use to social investors. MFIs in some countries are not automatically reaching the poor, but serve clients that are well above the poverty line. Social investors have to be worried to whom investment reaches, and whether the beneficiaries move out of poverty, and after how many loan cycles.
In order to quantify social impact, investors seek relevant MFI client information, and MFIs need simple-to-collect, observable client information. Social performance assessment tools focus on the measurement of client-level results in addition to processes. The Progress out of Poverty Index (PPI) answers questions pertaining to poverty levels and assesses whether clients are moving out of poverty over time.
For social investors, social performance management (SPM) needs to be integrated into all aspects of the investment process, from the investment selection criteria and through diligence process to the portfolio management and investor reporting.
If better client-level data that is, better understanding of an MFI’s clients and their needs contributes to stronger financial performance, then even commercially-oriented investors will desire a better understanding of an organisation’s social performance.
