Delivering on the Promise
Social Performance Management at BlueOrchard
BlueOrchard’s 2011-2012 Social Performance Objectives
Social Performance Milestones 2007-2011 SPIRIT What it is
SPIRIT Results so far
SPIRIT Results per Region and SPIRIT Dimension SPIRIT Results per Legal Status Key Social Performance Indicators Collected through SPIRIT A Quantitative Analysis of the Social vs. Financial Trade off Question
The Andhra Pradesh Microfinance Crisis and its Broader Implications
Peru Poster Child of Microfinance?
Interview with Peruvian Regulator
Transparency of Pricing in Microfinance
Transparency in Microfinance: Interview with an Activist
Pilar Ramirez: The Power of Conviction
Interview with Isabelle Barrès, Director, the Smart Campaign
Social Performance Updates and News
BlueOrchard’s Microfinance Investments Vehicles
Delivering on the Promise
It has been 10 years since BlueOrchard pioneered the concept of investing private capital in microfinance. Our initiative was met with both enthusiasm and disbelief. Today, with over USD 1 billion disbursed in more than 250 microfinance institutions and over 700,0001 direct micro entrepreneurs financed, BlueOrchard has proven its thesis: Commercial capital can be utilized profitably to expand the reach of microfinance.
In search of evidence of impact Yet it is the development impact of microfinance that has come under scrutiny recently: Does microcredit contribute to poverty alleviation? The microfinance industry needs more rigorous evidence of its claimed development impact. While we remain convinced that this assumption holds, we are working harder to respond to the call for stronger evidence of impact. This report illustrates how seriously we take our role as a responsible investor. In the following pages you will find social performance data collected by BlueOrchard analysts from over 75 Microfinance Institutions (MFIs), interviews with microfinance experts on such critical themes as transparency of pricing and client protection, and contributions from BlueOrchard staff on controversial topics. We also include a summary of the first econometric analysis conducted by BlueOrchard based on data collected through our social performance scorecard. This is a preliminary analysis and we recognize that it faces technical challenges, due to small sample size, MFI selection bias, diversity of contextual factors etc. Nevertheless, we choose to share our findings with stakeholders as a contribution to the industry’s search for empirical data on social performance. The growth of the microfinance industry has made it essential to focus on investing responsibly. Let me reiterate our commitment to responsible microfinance and summarize the main axes of our social performance efforts:
Improving social data collection and monitoring efforts ✓ In 2009 we developed a social
performance scorecard that allows us to assess the social performance of an MFI. In 2011, this proprietary tool was revamped and named SPIRIT (Social Performance Impact & Reporting Intelligence Tool). ✓ We are strengthening our Management Information System to more adequately capture and track social indicators. ✓ We have extended the length of our due diligence visits to learn more about MFIs’ social performance and verify self-reported social data. ✓ We conducted two internal staff workshops on social performance and incorporated valuable feedback from investment analysts into SPIRIT 3.0. ✓ We extended our regional presence which now includes offices in Bishkek (Kyrgyzstan), Lima (Peru), Phnom Penh (Cambodia) and Bogota (Colombia) thus improving our capacity to monitor MFIs and serve them better.
Actively participating in industry initiatives ✓ We have publicly endorsed industry initiatives such
as the Principles for Responsible Investment (PRI), the Smart Campaign (Client Protection Principles), the Principles for Investors in Inclusive Finance (PIIF), MFTransparency and are actively advocating the adoption of these best practices at MFI level. ✓ We are members of the steering committee of The Rating Initiative and participated in the pilot testing of a new rating tool, the Responsible Financial Rating tool.
1. This number does not include the many microentreprenuers who have benefited from financing over these years, but do not currently have a microfinance loan outstanding.
“Morinkhor” maker in Oulan-Bator, Mongolia
✓ BlueOrchard is participating in CGAP and Accion’s
State of the Practice Analysis of Client Protection Principles (CPP). We have contributed data to this research project that examines the state of implementation of CPPs at the Microfinance Investment Vehicles (MIVs) and MFI level. ✓ We actively participate in the Social Performance Task Force an industry-wide initiative that brings together more than 1,000 stakeholders across the sector. In this framework we have convened several investor discussions on over indebtedness. ✓ BlueOrchard’s Cambodia team has been actively monitoring the progress of Cambodia’s first Credit Bureau, and has coordinated communication between international MIVs and the Cambodian stakeholders. ✓ We have developed local currency funding facilities to meet the needs of MFIs that remain undercapitalized. In addition, we are also developing new products that better tailor the needs of earlier stage MFIs in challenging markets.
Illustration: Andrés de Schrevel
✓ While securing access to finance for low income
populations is critical, the underprivileged also lack access to education, to healthcare, to livelihoods, to housing and other services meeting their basic needs. To respond to this reality, in 2007 we founded Bamboo Finance (www.bamboofinance.com), an impact investing company that invests in solutions for low income populations. I wish you a good reading of this, our third, Social Performance Report and invite you to share your views with us, critiques, ideas and suggestions for improvement at email@example.com Best regards,
Jean Philippe de Schrevel Group CEO, BlueOrchard
Social Performance Management at BlueOrchard Ximena Escobar de Nogales, Head of Social Performance Management We believe that microfinance contributes significantly to creating a fairer, more inclusive financial system globally and provides much-needed services to millions that would otherwise be denied of basic financial services. We are also convinced that some conditions, policies and best practices increase an MFI’s 2 probability to generate social value and contribute to poverty alleviation, empowerment and sustainable development. Social Performance Management is about defining proclient policies and practices, putting them in place, verifying their implementation, monitoring results, and adopting corrective measures where necessary. There is an increasing consensus among microfinance practitioners on what constitutes development-enabling policies both at the MIV and at the MFI level:
Social performance management at the MIV level Set strict social criteria for investment (together with investors), incorporate them into the investment process (in the due diligence phase, at credit and investment committees, in loan agreements, in reporting requirements etc..), define red flags and address social performance concerns, monitor regularly, define corrective measures, and report regularly to investors and to general public (on both good and bad news).
Social performance management at the MFI level Establish pro-client policies. This means: define measurable social objectives to be reached over specified timeframes; conduct an adequate assessment of the client’s capacity to pay; offer adequate and relevant products and services that fit the clients’ cash flows and needs; give sufficient attention to the clients vulnerability (illiteracy for example); develop policies (staff incentives for instance) that contribute to reaching the MFI’s social objectives; ensure ethical staff behavior and sanction any abuse, etc.
Good social practices are good business practices Note that the social policies mentioned above also make good business sense. Keeping a focus on your ultimate client is a must, in microfinance as in any other business. Over indebting a client is socially wrong. It is also wrong from a business perspective.
Common and differentiated responsibilities Microfinance is a multi-tier business. Investors put money in funds. These are managed by investment managers like BlueOrchard who invest in MFIs, who then lend money to microentrepreneurs. All stakeholders in the value chain share the responsibility for the end result. Yet at each stage of the value change this responsibility is distinct. The investor, the investment manager and the MFI have a shared but differentiated responsibility. The MIV’s main role is to help build an industry responsibly, channeling money from capital markets to underserved MFIs. This involves a double responsibility on the one hand a fiduciary duty towards the investors and on the other hand an obligation towards the investees to negotiate and respect fair terms of financing. Consequently, our main yardstick is increase in outreach while adequately screening MFIs along our social and financial criteria. MFIs, in turn have the responsibility to conduct adequate analysis of the client’s capacity to pay and provide services that meet the needs of their clients.
Social Performance is not Social Impact These two concepts are not interchangeable. Social performance will examine how the loan was given to the client (How is the client treated? What is the interest rate? Are the conditions clearly spelled out in the loan agreement? Are they read out to the client, if necessary?
2. The term MFI is used loosely to refer to any provider of microcredit and includes Microfinance Institutions, banks providing microcredit, Non-Bank Financial Institutions and NGOs offering microcredit.
Does the client have the capacity to pay back the loan? Does the loan schedule fit the client’s cash flow? Does staff behave ethically?). Social Impact on the other hand asks: What changes in the client’s life can be attributed to the loan? This question looks for change at two levels: 1. The micro entrepreneur’s business; and 2. Her personal well-being and that of her3 family. At the business level it looks for change in sales, revenues, assets etc. At the individual’s level it examines changes in family well-being such as better nutrition, greater access to education and health services, house improvements, and women’s empowerment. The challenges of adequately measuring impact are numerous4. First is the challenge of attribution. It is difficult to isolate the intervention (giving a loan) from other possible effects such as government policies to promote education, health, other revenue sources, external shocks. That is, there is no way of knowing with full assurance what would have happened without the intervention. Impact studies that use experimental methods, such as randomized controlled trials (RCT, considered the golden standard of impact studies) solve this challenge by using a control group that does not receive the “treatment”. This allows one to capture evidence of causality on the lives of clients who received the loan. A second challenge is the fungibility of money. It is difficult to verify the exact use that was made of a given loan; the money may have been used for a different purpose than that for which it was originally borrowed. In addition, there is a lack of good quality
data. Few MFIs collect social data and integrate it regularly in their data systems. Loan officers often request socio-economic and business information on the client and her business, but it is not always systematically tracked. A recent study from The MIX with over 405 reporting MFIs, showed that 84% of MFIs define poverty reduction as their social goal. Yet only 10% can provide information on clients’ progress out of poverty5. Social performance data can be used to inform impact evaluations and to understand how process factors, such as staff training, staff incentives or disbursement mechanisms, influence outcomes.
BlueOrchard’s 2011-2012 Social Performance Objectives6 1. To expand our outreach and serve more microentrepreneurs sustainably, promoting extensive7 (vs intensive) growth whenever possible. 2. To innovate and develop products and services that are ever more appropriate for the clients. 3. To support our client MFIs in their efforts to improve their social performance and impact and to share experiences and best practices from MFIs. 4. To continue to actively participate in industry wide initiatives that contribute to more responsible microfinance including research projects on client protection, over indebtedness, etc. 5. To expand our data base input and reporting to integrate social performance indicators more fully in our investment process.
3. The feminine pronoun refers to both male and female clients in recognition that the majority of microfinance clients are women. 4. Duvendack M, Palmer Jones R, Coepstake JG, Hooper L, Loke Y, Rao N (August 2011) What is the evidence of the impact of microfinance on the well-being of poor people? London: EPPI Centre, Social Science Research Unit, Institute of Education, University of London ISBN: 978-1-907345-19-7 5. Micol Pistelli (2011) Does Social Performance Data Support the Industry’s Social Mission Claims? 6. Aligned to Hashemi, S. 2007. “Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions.” Focus Note 41. Washington, D.C. CGAP. 7. Adrian Gonzalez, the MIX (2011), extensive growth refers to growth in underserved and new markets and client segments.
2009 • BlueOrchard joins Social Performance Task Force
• DMCF obtains the LuxFLAG label
• Joins the Steering Committee of The Rating Initiative
• Endorses the Principles for Responsible Investment • Joins Eurosif • Signs the Client Protection Principles
Social Performance Milestones 2007-2011 8
• Receives FT Sustainable Banking Award 2008
XacBank: A Longstanding Partnership
XacBank started operations in 1998 as a project under the UN Development Programme “Microstart”. In 2001 it became a bank. Since that time, XacBank has continued to provide accessible and transparent banking services to marginalized citizens in remote rural areas, including nomadic herders. As of July 2011, it had 78,997 active borrowers and 213,370 active savers and the average loan balance per borrower was of USD 4,042. Around 45% of its borrowers are women and nearly 40% live in rural areas. More than one in five of its clients started
• Develops and starts implementing a social performance scorecard
• Produces BlueNews Special Edition-Social Performance • Featured in global initiatives (MIX SP blog, CGAP investor toolkit, IQPC conference and European Microfinance Week)
out below the poverty line. XacBank has maintained business relations with BlueOrchard Finance since 2002 and has received eleven loans, totalling USD 17 million, one of which was made in Mongolian Tugrik. Currently (as of September 2011) two loans are outstanding: USD 5 million with the Dexia Micro-Credit Fund and another USD 5 million equivalent in MNT with BOLD 2007.The BlueOrchard Private Equity fund has invested USD14,551,888 in XacBank and exited an investment in ECM.
• Obtains M-CRIL rating for DMCF • Staff receive social performance training by Microfinanza Rating training
• Endorses the Principles for Investors in Inclusive Finance
• Endorses MF Transparency
• Receives CGAP ESG transparency certificate • Produces BlueNews Special Edition on Over indebtedness
• Produces 2nd Social Performance Report
• BlueOrchard is selected Global Top 50 Impact Investment Manager
SPIRIT What it is
Our main tool to assess the social performance of an MFI is SPIRIT a proprietary social scorecard (Social Performance, Impact Reporting & Intelligence Tool) that measures an MFIs social performance along 5 dimensions, as indicated in the table below. A first version of our scorecard was launched in 2009 with inputs from external rating agencies like Moody’s, M-CRIL and Microfinanza Ratings. The current version (SPIRIT 3.0) of the tool incorporates feedback from management and investment analysts that have used the tool in the pilot phase and a calibration of weightings to better reflect the social performance of an MFI. Version 3.0 is also more closely aligned to industry initia-
tives such as the SPTF (universal standards) and the new version of the MIX social indicators. SPIRIT is fully integrated in BlueOrchard’s due diligence process and is applied in annual visits to microfinance institutions. The data collected through the scorecard gives insight into the non-financial performance of the organization. The MFI’s social performance score is part of the credit committee document and is discussed in investment/ credit committees and influences the final decisionmaking processes of BlueOrchard´s investment and credit decisions.
SPIRIT v 3.0
Issues Examined (not exhaustive)
Intent & Outreach
• • •
• • •
MFI´s financial and non-financial product offer MFI´s target market MFI´s social objectives and its commitment towards their achievement Outreach indicators MFIs Poverty focus Alignment of staff incentives with social objectives
Number of Questions
Endorsement and practice of client protection principles including: – Over indebtedness – Collection practices – Transparency – Responsible pricing – Complaints mechanism – Protection of client data – Client retention
Number of staff and gender representation Remuneration ratio (CEO to loan officer) • Compensation • Training • Career progression
Exclusion list Internal environmental policy • Board composition and adequacy of representation regarding social goals • Documentation of board decisions
Corporate Social Responsibility & Governance
Measurement of Social Performance & Impact
Impact indicators (data is requested on number of enterprises financed by the MFI and jobs created) • MFIs Social Performance reporting
SPIRIT Results so far
At the end of August 2011, SPIRIT8 had been applied to 75 MFIs. This is roughly 50% of BlueOrchard’s outstanding portfolio. All tables below refer to this sample.
MFIs by Region
MFIs by Legal Structure
n South America n Russia, Central Asia and Caucasus n Central America and the Caribbean n Africa n East Asia and the Pacific n Eastern Europe n South Asia n MENA
n Non-Banking Financial Institution (NBFI) 54%
n NGO 22% n Bank 20% n Other 4% 8) Most assessments were conducted using version 2.0 of SPIRIT.
SPIRIT Results per Region and SPIRIT Dimension Different institutions prioritize different dimensions of social performance depending on their objectives and context. The low marks on Measurement of Social Performance and Social Impact reflect the fact that few MFIs are tracking their progress against their social objectives (clients progress out of poverty for example). This is a quite generalized situation in the microfinance sector, though it is changing with the increased industry-wide initiatives to encourage more attention on social performance assessment and impact studies.
n Intent & Outreach n Client Protection n Human Resources n CSR & Governance n Measurement of SP & Impact 100
Central America & Caribbean
East Asia & Pacific
Russia, Central Asia & Caucasus
SPIRIT Results per Legal Status Commercial banks score well on product diversity and social responsability to clients and employees but have a lower score in targeting the poor (Intent & Outreach) than NGOs.
Intent & Outreach 100 80 60 40 Client Protection
Measurement of SP & Impact
n Non-Banking Financial Institution (NBFI)
Human CSR & Governance
n NGO n Bank n Cooperative
Key Social Performance Indicators Collected through SPIRIT Most SPIRIT assessments were conducted by investment managers on site at MFI offices and in many cases documentation was provided.
96% of MFIs have fair and uncoercive collection policies.
92% of MFI Boards adequately reflect the
organization’s social objectives and social mission.
82% of MFIs implement a rigorous system to
determine a client’s level of indebtedness.
78% of Loan officers take detailed information
on the client’s ability to pay and include it in the MFI’s database.
82% of MFIs strive to promote diversity among loan officers and hire staff that reflects the clients served.
80% of MFIs have a written, formal social
responsibility policy or code of conduct.
79% of MFIs have an exclusion list on lending. 72% of MFIs have endorsed the Smart Campaign’s Client Protection Principles
57% of MFIs reported to the MIX social indicators.
A Quantitative Analysis of the Social vs. Financial Trade off Question 9 Antoine Bovon, Economics Student and BlueOrchard Intern and Ximena Escobar de Nogales, Head of Social Performance Management With the data collected through SPIRIT, we conducted some basic econometric analysis to explore the relationship between financial and social performance. Is there a correlation between the two and if so, what are the trade-offs and synergies? This appears to be a simple question, yet to date few studies have been conducted 9.
Methodology Our social performance scorecard provided us with data on five distinct dimensions and indicators of social performance (SP): • Intent and Outreach (IO) • Client Protection (CP) • Human Resources (HR) • Corporate Social Responsibility and Governance (CSR) • Measurement of Impact (Meas) Financial performance (FP) was split into three dimensions and we selected a total of five indicators: • Productivity: The loan officer productivity measured by the number of active borrowers per loan officer (BorLo); • Portfolio quality: Represented by the MFI’s Write-Off Ratio (WOR) and its Portfolio at Risk over 30 days (PAR30) which is all the loans overdue by 30 days or more ; • Efficiency: Assessed by the Operating Expense Ratio (OER), a common indicator within the industry, and • Return on Assets (ROA), that measures how well an MFI uses its total assets to generate returns. Our sample was very diverse in factors such as size, age, legal status of MFIs and geographic location. This diversity affects both social and financial performance. This prevented us from running simple correlations. It was necessary to control those differences in order to observe the effect of each independent variable on the dependent (ceteris paribus effect). We therefore built two types of econometric models so as to run regressions using the ordinary least squares (OLS).
We thus used five control variables that hold their effect on the dependent variable: • Years of operation of the institution • Type of institution (NGO, Bank or NBFI) • Average loan size (AVL) • GNI per capita (GNICAP) • Number of active borrowers (nborrow). In the first model, we ran regressions of SP indicators (k=1,…,5). On each of the FP indicators (j=1,…,5). 5
FP j=0 +
k × SP + 6 × nborrow+ 7 × k
GNICAP+ 8 × age+ 9AVL + 1× Bank+ 2 × NGO + u In the second model, we ran regressions of FP indicators (j=1,…,5) on each of the SP indicators (k=1,…,5). 5
j × FPj+ 6 × nborrow+ 7 × j=1
GNICAP+ 8 × age+ 9AVL + 1× Bank+ 2 × NGO + u
Caveat Now, some very important facts must be highlighted in order to avoid misinterpretation of this research and its results. First, there is a selection bias as all MFIs are BlueOrchard clients. We therefore should note that this non-random sample may very well be unrepresentative of the microfinance industry. In addition to this, the small sample size (64 observations) prevents us from generalizing our findings to the whole BlueOrchard portfolio. Moreover, lack of statistical significance may arise for relationships where this significance was expected. Eventually, the simplicity of the models used may be problematic and pushes us to be very cautious when interpreting our findings. Thus, we will not try to seek for causality and will be satisfied with partial correlation between the independent and dependent variables (i.e. we do not know which one induces the other).
9. We would like to thank Adrián Gonzalez (the MIX) and Florent Bédécarrats (Cerise) for their valuable comments and guidance. Mistakes, of course, are only the authors’ responsibility. 10. Adrián Gonzalez, MIX Research, (2010) New Research Results on Trade-offs and Synergies between Social and Financial Performance and David Dewez and Sandra Neisa MFI’s Social Performance Mapping and the Relationship Between Financial and Social Performance. 11. Definitions of financial indicators come from “Microfinance Consensus Guidelines”, CGAP/The World Bank Group, September 2003, Washington DC USA
Having said this, some interesting findings came up, which we wish to share:
1. Financial Performance on Log of Intent and Outreach When looking at the relationship between financial indicators and the score obtained for intent and outreach, an expected trade-off with the OER is statistically significant (0.05). This result is consistent with the assumption that targeting the very poor, in rural area, increases operating costs. • The productivity of loan officers is positively correlated with the score obtained for intent and outreach (significant at 0.01 level). This synergy is contrary to the common belief that the productivity should be higher in urban areas. The explanation for this result may find its root in different lending methodologies (group in rural areas vs. individual in urban areas). •
2. Financial Performance on Log of Human Resources The regressions of financial performance on the log of Human Resource provided us with more statistically significant results. We also found differences between the types of institutions12. • The marginal changes for ROA tend to be stronger for Banks than for the other types of institutions. That means that ROA for Banks grows faster than for others. There are no significant differences between NBFI and NGO. • There seem to be no differences between types of MFIs with regard to the portfolio quality (PAR30). That probably results from the selection bias; the portfolio quality of an MFI is an important factor in selecting MFIs as clients. • Yet, we wanted to know if our model would be better if we removed all the variables interacting with legal status of MFIs (i.e. testing for joint significance). We found that they are jointly significant (0.05) which means that different types of institutions do not have the same regression function.
Now, holding the effects of the types of institution fixed, two synergies came up: Higher productivity is associated with a better score for Human Resources (significant at 0.1); higher Return on Asset (significant at 0.05) is also positively correlated with Human Resources.
3. Financial Performance on Measurement of Impact Two synergies were found in this regression: MFIs with good score for Measurement of impact tend to have a portfolio with lower financial risk, PAR30, (significant at 0.05) and a better productivity (significant at 0.01).
4. Financial Performance on log of Corporate Social Responsibility and Governance Corporate social responsibility and governance is correlated with the portfolio quality. A better score in this dimension is associated with a lower write-off ratio (significant at 0.1).
Next Steps There are many technical challenges to conducting an analysis of the relationship between financial and social performance. This exercise should be repeated with more observations, better data quality (SPIRIT 3.0) and refined models and/or using more advanced econometric methods. We will continue improving SPIRIT, our social performance scorecard, and its implementation across our clients. We will also continue seeking advise and insights from others stakeholders who are advancing the field of social performance assessment (in particular the Social Performance Task Force). We believe that more research is necessary in order to confirm that better social performance leads to higher Social Impact and to better understand the linkages between social and financial performance.
12. In order to allow for marginal differences between types of MFIs, we had to modify the model slightly logHR=0+1×PAR30+2×ROA+3×logBorLo+6×nborrow+7×GNICAP+1×Bank×ROA+2×NGO×ROA+3×Bank×PAR30+4×NGO×PAR30+u
The Andhra Pradesh Microfinance Crisis and its Broader Implications Julie Cheng, Director, BlueOrchard Finance Cambodia and Sarah Djari, Senior Investment Manager Asia, BlueOrchard Investments The Cause of the Crisis and technology to increase product range its Immediate After-Effects while containing costs, banking The current crisis in the Indian microfinance sector was precipitated by real and/or perceived overindebtedness (the lack of a credit bureau does not allow for reliable data on this topic) and allegations of coercive lending practices on the part of MFIs that led to unexpected and intense local government interference. In October 2010, the Andhra Pradesh (AP) Government passed an Ordinance that dramatically altered regulations on how MFIs could conduct their business and prohibited many practices that were integral parts of their business model. These changes effectively halted repayments by clients within AP which in turn led to no new loan disbursements in the state and a rapidly deteriorating situation in AP which caused banks to stop lending en masse to the sector. A general liquidity crisis in microfinance in India ensued in which MFIs were at risk of defaulting on their loans and MFI profitability deteriorated while customers were not getting access to new credit.
The Implications in India As a result, the microfinance model and its social impact are now being questioned in India and globally. Despite the significant dislocation caused by the current crisis, however, we feel that there is also an opportunity to generate important positive outcomes: • The draft of a national microfinance bill was made public in July 2011. This bill, in conjunction with guidelines from the Malegam Committee of the Reserve Bank of India, is expected to: – clarify the definition of what is microfinance – explore ways to prevent exploitation of the poor by ensuring transparency in pricing, client protection and corporate governance – reposition microfinance as part of the broader financial inclusion agenda and maintain it as a “priority sector” – protect the sector from local political interference as microfinance will be explicitly governed by the national bill and regulated by the central bank • There is also a renewed focus on the creation of supportive infrastructure to the sector, including a credit bureau to control overindebtedness,
correspondent models to allow access to savings for customers Even if some negative aspects are unlikely to change: – Stringent external commercial borrowing regulations and the prohibition on MFIs to mobilize savings mean that the dependency of the sector on commercial external funding will continue. – Some services currently delivered to low income groups might fall out of the official definition of microfinance – Hasty short-term recommendations may reduce the attractiveness of the sector in the near term for equity investors and debt funders
The Implications Globally – what can be learned from the AP Crisis? We believe that the crisis in India has raised issues for stakeholders and observers that are relevant not only in India but worldwide. • Political risk cannot be underestimated. By all accounts, the issuance of the AP ordinance was largely, politically motivated as local and state politicians might have been inclined to use the massive outreach of the MFIs for their own political benefit. The reason that the ordinance and subsequent crisis arose in Andhra Pradesh is because the AP Government runs its own self-help programs which proved to be poor competitors to MFIs in terms of outreach, profitability, portfolio quality, quality of service etc. By some accounts, many informal money lenders are also politically backed and were losing business to the prospering and growing MFIs. There was therefore enough political and financial capital at stake for politicians with vested interests to unilaterally change the rules of the game and the very environment within which MFIs operate. How can
MFIs and investors mitigate political risk in the future? • The importance of public opinion and the media cannot be underestimated. The articles on the AP incident that appeared in the local press in India as well as internationally in reputable journals were often misleading if not inaccurate. The articles were overwhelmingly critical, citing the profits made by the SKS IPO and including anecdotes evidencing the negative consequences of microfinance such as apparent MFI-linked suicides, overindebtedness and coercive collection practices. There were scant articles supporting microfinance practices in India or calling for balanced reporting. The tide of opinion seems to have shifted against microfinance. Investors have become scared of the credit risk and the reputational risk of lending in India. What can MFIs and investors do to respond better to criticisms and ensure fair, balanced reporting? • MFIs can make “too much money”: Closely related to the unfavorable articles in the press and the political activity was the idea that the MFIs in AP were making too much money. It has been standard practice in the past several years for MFIs in India to convert from non-profit NGOs or Trusts into for-profit NBFCs. The profitability of MFIs did not come under scrutiny in India until the SKS IPO, when press articles revealed and questioned the amounts that allegedly ‘unethical’ shareholders and managers made in some MFIs. When is a CEO’s salary or an MFI’s ROE too high? There is no specific number or threshold, but given the poverty levels of the clientele of microfinance
organizations, there are certainly levels which make the profitability of MFIs ethically unseemly. • MFIs can lend too much. MFIs in India and elsewhere have typically shown high double-digit growth over the past decade or so. Until October 2010, an Indian MFI growing at less than 50% per annum would be called into question. Growth was good. It implied more outreach and services to clients who needed financial services. In reality, however, MFIs may have simply been lending more money to the same borrowers and not necessarily expanding growth to reach the unserved – this is especially the case in regions where the MFIs’ successful expansion has led to more saturated markets. As the industry has developed, the decision to grow to meet unmet client demand may have become less important than the pressure from other sources: shareholders seeking higher returns, the egos of MFI management, lenders looking to allocate liquidity, etc. What can funders, investors and MFIs themselves do to ensure that growth is healthy and appropriate to the requirements of the MFIs’ end-clients? • Cost-benefit of microfinance: The AP crisis put a spotlight on some of the negative aspects of the industry including aggressive practices of some MFIs and the risks and consequences of client overindebtedness. Together with a growing body of studies seeking to measure the effects of microfinance, these incidents have called into question the very nature and benefits of microfinance. Which clients can benefit from microfinance and under which circumstances? Can the microfinance model be improved to better serve its customers? As a lender to and investor in Indian MFIs, BlueOrchard is in close contact with many participants in the microfinance market in the country, including many MFIs, regulators, other lenders and investors, banks, raters and commentators. It is clear that much damage has been caused to the sector by the crisis, and it will take time to recover from these significant setbacks and get back on track to providing much needed financial services to millions of India’s poor. It is essential, however, that all participants take away important lessons from the crisis and we will also play our part to ensure that solution between all stakeholders will lead to the sustainability of the sector, as well as a commitment to strong, responsible lending practices that protect the interests of the clients of MFIs.
Asmitha customers in Andhra Pradesh, India
Peru: Poster Child of Microfinance? Alfredo Ebentreich Aguilar, Investment Analyst, BlueOrchard Finance Peru
The Economist Intelligence Unit was commissioned in 2007 to provide an assessment of the microfinance environment. Initially focusing only in Latin America, the analysis was broadened in 2009 to have worldwide coverage. In the 2010 issue of the Microfinance Microscope, 54 countries were ranked on their microfinance development using three categories: regulatory framework, investment climate and institutional development. The top ranking was assigned to Peru with an overall ranking of 74.3. In the individual categories, Peru wasÂ 4th highest in regulatory framework, 5th highest by investment climate and 1st in institutional development13 (tied with Bolivia and Ecuador). The prominent position of Peru reflects a microfinance market where some of the largest microfinance players have been operating for almost 30 years, and have become key actors in financial intermediation. Key to this development was the establishment in the mid-1990s
of an enabling regulatory scheme, which regulated both operations and institutional forms, creating specialized types of financial institutions to allow the formalization of microcredit operators. Institutional development, seen in the wide range of services available and high competition, is a result of the success over the last few decades of both downscaling and upscaling microfinance operations: Many large banks in the country have acquired or created their own microfinance units, while at the same time smaller, specialized MFIs have transformed into full-fledged banks.
13. For more details on the Microfinance Microscope, please visit the following website: http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=35379430
Interview with Peruvian Regulator Narda Sotomayor, Head of the microfinance analysis department, Superintendence of Banking, Insurance and Private Pension Funds of Peru In order to explore several important issues of microfinance in Peru, we interviewed Ms. Narda Sotomayor, Head of the microfinance analysis department at the Superintendence of Banking, Insurance and Private Pension
Q: What is the role of the regulator in deepening financial access in Peru? A: The SBS has a â€œfour pillarsâ€? strategy to address factors affecting financial inclusion. The first pillar consists of providing a regulatory and supervisory framework conducive to the improvement of the access and use of financial services, without endangering the soundness of the financial system. This includes the regulation and supervision of microcredit operations, as opposed to just microfinance institutions, as most financial institutions in Peru offer microcredit products. Microcredit was defined as a separate type of credit, easing the screening process and facilitating risk evaluations of microloan portfolios. We also addressed micro savings by
reviewing our requirements for anti-money laundering and combating the financing of terrorism regulation, assuming a proportional risk approach. The use of retail agents (banking correspondent) by financial institutions was allowed to improve the access and efficiency in the provision of financial services. These low cost channels have had tremendous success in Peru, as there are currently more than 9,500 banking correspondents, almost three times the number of branches of the financial system. Another scheme for the delivery of financial services is mobile banking, and there is a proposed law waiting for approval of the Congress to regulate electronic money. We are confident this could also have a large impact in financial inclusion, as cell phone penetration in Peru is more than 95%, and in rural areas, as everywhere else, this penetration is much larger than that of the financial services. The second pillar of our work toward the deepening of financial inclusion is consumer protection. Here the SBS focuses on preventing and minimizing the incidence of infractions against consumers and ensuring that financial institutions have a system in place to attend to consumersâ€™ complaints. The emphasis of the regulation is on transparency: The SBS has the responsibility to review the contracts in order to be sure there are no hidden costs or rights that might affect clients. (Note: The SBS issued a specific regulation on overindebtedness plus other norms on consumer protection). We understand client protection is a responsibility that goes up to the board of each financial intermediary. The third pillar is transparency. The objective of this pillar is to have the population well-informed about the services and products offered by the financial, insurance and pension funds systems. The last pillar financial literacy, aims to build and strengthen capabilities of the population to understand the benefits of the financial services and products available in the market. Different actions to improve financial literacy have been taken such as training courses for high school teachers and the addition of a course on financial literacy on the national secondary school curriculum.
Q: What is your perception on the risk of overÂ indebtedness in the microfinance market? Are there any guidelines that microfinance institutions should adopt in mature markets like Peru? A: We do not feel there is already overindebtedness, as the statistics we manage indicate market growth has been accompanied by an increased access to financial services and new clients. However, in order to reduce this risk, we have introduced a regulation (Resolution Nr. 69412008) to induce financial institutions to take into account overindebtedness risk in the credit analysis of the retail portfolios (consumer, microcredit and mortgage loans). It is important to incentivize the use of best practices in the process of credit granting and take preventive measures in the expansive cycle anticipating portfolio deterioration in a contractive cycle. Q: In your opinion, what are the risks that are faced by a microfinance market like Peru? Do you think Peru will be prepared to face a crisis in the sector? Could a crisis like that in India occur in Peru? A: Peru has a very dynamic microfinance market, and we expect this to continue. We also expect further consolidation through mergers or acquisitions, like the ones that have occurred in the last few years. Mergers could consolidate medium size MFIs, and turn them into large ones to compete head-tohead with the largest MFIs. A third set of microfinance institutions would find that in order to compete they will need to go deeper in the market, either incorporating riskier clients or targeting lower-segment clients. A situation like that currently in India is very unlikely to happen inÂ Peru, as it reflects a different political structure where state regulations coexist with national regulators. In Peru there is no such thing.
Transparency of Pricing in Microfinance Maxime Bouan, Associate Analyst, Bernhard Eikenberg, Director, Latin America (Colombia), and Anne Lucie Lafourcade, Investment Analyst, BlueOrchard Finance
An often heard criticism of microfinance is that prices are too high. Explaining microfinance pricing generally involves justifying that it costs more to make 10,000 small loans of $100 each than to make one $1 million dollar loan, so the prices on smaller loans need to be higher. In addition, however, long-standing pricing practices, together with the lack of financial sophistication of microfinance clients has often led to a range of confusing pricing techniques and charges that make it difficult to determine the real price for a loan. As such, non-transparent pricing in the microfinance sector has brought about controversies, media accusations of irresponsible pricing and poor understanding by clients, providers and investors on the true rates that are charged. Examples of non-transparent pricing can be found across the globe: For simplicity’s sake, or because “this is the way things have always been done,” interest rates are often charged on a flat basis rather than on the declining balance method; improper disclosure of all commissions make it difficult for the borrower to choose the better offer; unremunerated, compulsory savings, used at many MFIs to build up collateral on otherwise uncollateralized loans, represent a high additional cost by forcing the client to essentially pay for borrowing capital he or she already owns.
Microfinance institutions that do not use the transparent methods of interest calculation such as the US-used Annual Percentage Rate (APR) or the EU-used Effective Interest Rate (EIR) contribute to bad practices in the sector, spurred by the idea that end clients are unable to understand these internationally recognized benchmarks. But these institutions with non-transparent pricing have a clear competitive advantage over those adopting best practices: Flat interest rates appear to be much lower than declining interest rates and hidden commissions are disclosed late in the process, once the client has already made his decision to borrow from the MFI. The prospect of unfair competition explains why many MFIs are reluctant to change their practices, and underscores the importance of implementing transparency on a market-wide basis. As borrowers become more educated on the true cost of their loans, MFIs that are not transparent in their pricing run the risk of creating distrust with their endborrower and see client turn-over rise as borrowers discover the effective price of the loan. The microfinance sector has made tremendous strides to tackle non-transparent pricing. The more mature markets tend towards transparency as clients become more financially literate and regulators issue more stringent regulations on price disclosures. We find examples of such practices in Mexico, where regulated MFIs are required to disclose the APR, or in Morocco, where compulsory savings are prohibited. On the other hand, interest rate caps set by regulators to protect consumers against high pricing actually fail to provide adequate consumer protection against abusive lending, since MFIs may get around caps by increasing commissions, external fees, and compulsory savings to artificially decrease official nominal rates. Important industry initiatives include MFTransparency Illustration: Daniel Gónima
and the Smart Campaign, which hail Transparency and Responsible Pricing as two Client Protection Principles. The focus is on the transparency and adequate disclosure of rates, fees and conditions and also on the responsible pricing set in a way that is both affordable to clients and sustainable for financial institutions. By endorsing the Client Protection Principles, and MFTransparency, BlueOrchard continuously pledges to encourage increased pricing transparency. A first step was to include this factor in our social performance internal rating tool (SPIRIT), such that MFIs who fully disclose pricing to their clients earn higher scores. Furthermore, BlueOrchard Investments uses its position on MFI boards to push for transparency, while BlueOrchard Finance takes
price transparency into account in its analysis and investment process. Recent developments in the microfinance market have shown the increasing need for transparency from all stakeholders: practitioners and investors. Transparency regarding mission, values and processes is most important to increase visibility on how MFIs reach their social objectives. Pricing transparency is indispensable to improve MFI performance, attract capital and most importantly, protect the client and allow them to choose the best services for their needs.
Transparency in Microfinance: Interview with an Activist Chuck Waterfield, CEO MFTransparency Q: Why is the calculation of compounded interest rates relevant when microfinance clients tend to care more about the nominal amount of weekly payments and often tenors are significantly shorter than a year? A: This is a great question. Few are comfortable with what seem like abstract financial percentages, and many of us gravitate to the tempting idea of simply answering the common question: “How much do I have to pay back per week, and in total?” That seems so much simpler and clearer, and it seems like it would be the “price”. However, Truth-inLending legislation around the world always requires that the true price be stated in the form of a percentage. Why is that? There are two problems with payment figures. First, the weekly payment and the total amount paid can be manipulated to make a loan look cheaper than it is. We have examples of that on our MFTransparency website. Second, the weekly and total payments cannot be used to compare two different loan products, whereas the effective
interest rate can. The effective interest rate is not really an abstract financial concept. It is, in reality, the “price to rent one unit of currency for one year”. A client isn’t really “purchasing a loan”. She is “renting money”, and she is renting a variable amount of money for a variable length of time. The financial institution charges her a “total cost”, but that isn’t a good measure of the rental price. The effective interest rate compares that total cost she pays to the amount of money she is renting in order to convert it into a unit rental price. That’s why it works, and that’s why truth-in-lending legislation always requires effective percentages. Imagine renting an office, and the different prices you’re considering are for different sized offices for different lengths of time. How do you compare the prices? You convert the figures to “price per square meter per year”. Then you can compare the options. That’s what an effective interest rate does, but for loans. You also ask if the prices should be annualized. That is a standard convention in Truth-in-Lending, so that different figures can be compared more readily. Just like office rental prices, you need to know “is that per month or per year”? Annualization works well with conventional loans because loan terms are generally longer and
because interest rates are lower. That isn’t generally true in microfinance, and we at MFTransparency do believe that monthly effective interest rates can be used effectively for very short-term micro-loans. Clients often think of informal credit prices in monthly terms. Converting those monthly nominal prices to true monthly equivalents can be more readily absorbed by clients. The new regulation just passed in the Philippines allows the option of prices being communicated as monthly figures for short-term loans, and that is a good example of how we can develop pricing transparency that works in a way that consumers can understand. Q: How do you convince/incentivize an MFI to start publishing effective rates when it puts them at a disadvantage vs. its competitors? A: The current prices in microfinance are so opaque that in most of the 28 countries where MFTransparency is collecting data, the MFIs don’t even know if their prices are higher or lower than the competition. There is no known market price, and they set their prices mostly by a combination of guesswork and the need to cover internal costs. Publishing transparent prices resolves that, and the most interested parties when we first post the prices are the MFIs themselves. As a result of the pricing uncertainty, there is always a sense of nervousness when we first start. So why does any MFI voluntarily submit prices? The first MFIs to send their data are those that find our pricing initiative to be fully in line with their core values. They believe in transparency, they have signed on to the various codes of ethics, and they recognize that our country-level transparent pricing initiative provides the safe environment where they can practice transparent pricing. Then comes the next group of MFIs, something of the “fence-sitters”. These are the MFIs who are waiting to see if there will be enough broad-based participation for the transparency initiative to work. They see the leaders participate, and then, by the time the next group participates, we generally hit at least 80% participation rates in every country where we work. A small number of MFIs do continue to decline participating, despite the majority doing so. Why those MFIs choose not to participate is then something they need to explain to all other stakeholders.
Q: How often does MFT plan on updating the data, since some markets see frequent pricing changes? A: We communicate to all participants that they can, and should, update their price information any time they make changes to their pricing. In fact, when the prices are published, we often see some MFIs adjusting their prices once they see where their prices sit, relative to the market. We also have set up systems whereby we will ask each MFI to state, on a quarterly basis, that their prices have not changed if they have not updated their data. And once a year, we collect completely new pricing data and calculate the prices all over again. As a result, we are building a system that gives reasonably current price information, and not just “what did prices used to be last year in country x?” Q: Which regions are most inclined to have non-transparent pricing and where do we have to be specifically careful in assessing responsible pricing? A: We aren’t finding any strong regional patterns to transparent pricing. MFTransparency calculates a “Transparency Index” for all products we monitor, whereby we compare the nominal interest rate quoted to the client to the APR that we calculate on the full price of the loan. Full transparency results in a Transparency Index of 100. Even within a single country, we find MFIs that communicate nearly the full price (an index of 95 or 100) and others with an index of only 25 or 30. We do find some countries where the Transparency Index is rather high, or rather low, and those tend to be due to the degree of pricing legislation in place in that country. For example, in countries that have banned the use of “flat interest” calculations, we find much higher Transparency Indices. We also find, within countries, that the smaller loans have less transparency, and that is because of the price curve. By necessity, MFIs need to charge significantly higher prices on the very smallest loans. Rather than communicate that substantially higher price, there is a tendency to hide those higher prices. For more information on MFTransparency www.mftransparency.org
Pilar Ramirez: the Power of Conviction Banco Fie Founder interviewed by Ximena Escobar de Nogales, La Paz, Bolivia, May 2011.
Sitting in her office in La Paz, accompanied by her dog Nube (cloud in Spanish), Pilar lets her mind wander back to the early years of the creation of FIE, the NGO she co-founded in 1985 to offer microcredit to poor women in Bolivia. “I was graduating from high school when the revolutionary hero Che Guevara was killed in Bolivia. He had represented hope for a generation of discontented young people like me. We were disgusted with the ubiquitous inequality, discrimination, racism, poverty and machismo.” Pilar says it was the example of her aunt, an engaged social worker, and her mother who worked all her life (Pilar’s father died when she was born) that taught her early on a clear lesson: women’s emancipation results from economic independence. But Pilar first went to study Psychology in the United States. The US was then experiencing the protests against the Vietnam War and the women’s liberation movement was riding the waves of success. Pilar returned to La Paz where p olitical migrants were arriving from Argentina, Chile – every corner of South America. Pilar joined the MIR (Movimiento Izquierda Revolucionaria). She worked with a cooperative of gold miners in Tipuani, Bolivia and was surprised to learn that the miners did not know if they were making a profit and were not aware of their operating costs or the price of gold in the market. “I soon realized you don’t eliminate poverty with psychoanalysis.” Wanting to strengthen her business skills, she applied for and obtained a fellowship to attend Harvard’s Kennedy School of Government. Already married and with two small children, she moved again to Boston and signed up for all the economics courses she could. It was there that she read about the Grameen Bank and the Self Employed Women Association (SEWA). “I realized that was exactly what I wanted to do: return to Bolivia and start lending money to poor women.” She talked 4 women friends into joining her in this adventure (Maria Victoria Rojas, Maria Eugenia Butron, Pilar Velazco and
Gelda Salinas). They knocked on doors and were so stubborn they are still reminded of their determination. They started off with some European donations and their own savings. But they soon ran out of money. When they had run out of funds from friends and family, the Inter American Development Bank gave them a soft loan of USD 500’000 with which they got off the ground.
A woman of strong opinions “I never liked the idea of group lending. A Bank doesn’t ask a businessman applying for a loan to go and find four other businessmen like him to form a solidarity group first. The poor have sufficient limitations, we need not add more. Group lending infantilizes the poor. You perpetuate poverty when you infantilize the poor.” All five founders agreed on this, and decided they would go for individual lending. But this was not the currency of the time: ACCION was beginning to launch its lending activities in Bolivia (through Prodem) in group lending. “Ours was an ideological project. It had two axes: gender equality and economic independence of women. We were moved by a genuine solidarity with the majority of this country, the millions of vulnerable, weak, discriminated people.” But a major economic crisis hit Bolivia just when they got started. The IMF structural programs closed state-owned mines and industries sent thousands of men and women to the street. Pilar and her partners decided to serve the thousands of men and women who were rushing to create an immense informal sector: “We were often ridiculed; they want to create a little bank for the poor, skeptics would say.” The NGO evolved and made its first major transformation to a private financial fund, FIE FFP, in 1998, incorporated as a limited liability company. The transformation process took 6 years. “We wanted to safeguard our social mission through the change.” External investors joined the NGO as shareholders of the new FFP. The first were the Swiss Agency for Development and Cooperation and Bolivian investors. New capitalizations followed and the NGO was diluted with every round of capitalization.
In 2008 the NGO founded CONFIE Holding and through this entity, maintains 50.33% ownership over what is now Banco FIE (the transformation to a Bank took place in 2010). Pilar today chairs CONFIE Holding that, aside from Banco FIE, has two other direct investments in microfinance (in Peru and Argentina). “It took me a while to understand the concept of a holding company; I founded an NGO and never ever thought I would be sitting at the head of a holding. Critical to me is to secure outreach and maintain our mission. If the holding is the best way to do this, so be it.”
We were often ridiculed; “they want to create a little bank for the poor”, skeptics would say.
Banco Fie was recognized on the occasion of BlueOrchard’s 10th anniversary for its long standing commitment to social performance. In September 2011, Banco Fie has been recognized by the Inter American Development Bank with the Microfinance Excellence award. Florist in Cali, Colombia
Ky Thoy, artisan, Siem Reap province, Cambodia Ky Thoy is 37 years old and lives with her 13-year-son studying at grade 5, together with her mother in a small wooden house in the rural village in Siem Reap province. Her husband left her apparently to marry a new wife. Her only source of income since her husband’s departure is rice farming, cheal making (a kind of traditional basket), chicken raising and mats and baskets weaving. Ky Thoy’s household income and assets have since increased significantly, thanks to her access to VisionFund’s small loans over the past two years. Her first loan was in early 2009, when she borrowed US$100 from VisionFund to buy 2 piglets for livestock farming purpose and raw materials to weave baskets. In 2010, she used her second loan of US$100 for a similar purpose. Her daily income has now increased from US$0.5 before the loan to US$5, which enables her to get better food and some pocket money for her schooling son. She now owns a paddy field of 1 hectare (previously only 0.5 hectare). “In 2011, I plan to borrow US$250 to build new wooden house and buy zinc panels for the roof”. Her current source of income will be sufficient for repayment, she revealed. With more loans from VisionFund, she will also start a grocery business, buying cheal from other villagers to sell for profits. Thanks to VisionFund she could improve her living and she hopes her son will be able to complete tertiary education and get a job.
Interview with Isabelle Barrès, Director, the Smart Campaign The “Smart Campaign” is a global effort, guided by the experience and expertise of microfinance leaders from around the world who are committed to strengthening their businesses and supporting their clients. Endorsing the Smart Campaign means signing on to the Client Protection Principles, compiled by CGAP in 2009. Recently, the Client Protection Principles were expanded, and we took the opportunity to interview Isabelle Barres, Director of the Smart Campaign, to find out more. Q: What is new in the Smart Campaign’s revised Client Protection Principles (CPP)? A: We have expanded the principles beyond their initial focus on credit in order to take into account the full range of financial services, including services such as credit life insurance and savings. We have also added a principle of nondiscrimination, and have separated two principles that should have always been separate: Transparency and Responsible pricing. An additional category is Appropriate product design and delivery: by this we mean that providers should develop products tailored to the needs of low income clients and deliver them in a way that does not cause clients harm. Q: How do you define responsible prices? A: A responsible price allows an MFI to be sustainable and a client to move forward. When examining an MFI’s pricing we check if prices are not subsidized, are market oriented and competitive within the country context. The Social Performance Task Force (SPTF) is conducting more work on the notion of responsible pricing. Our Client Protection Principles’ self-assessment questionnaire (an online tool to help MFIs define where they stand from a client protection practices), includes indicators for responsible pricing. The indicators seek to identify if an MFI is charging high prices and why. There may be an explanation to high prices; it may be because it is attending a rural market with high operating costs, for example. This is why comparison
and benchmarks should be drawn with peers. We examine ratios such as operating expense ratios of peers. Q: Tell us about the Smart Campaign’s certification of client protection practices? We are working on a certification process of CPP validation. We are seeking harmonized data on client protection practices. The certification will not deliver scores but will indicate if the MFI meets the minimum standards for client protection or not. Investors such as BlueOrchard have social performance scorecards, but a third party certification stamp will provide assurance that the same criteria have been used across all MFIs. We will be pilot testing the certification program starting September 2011 and hope to launch the CPP certification in 2012. There will soon be a public consultation on the certification process, including minimum indicators. Q: There are many social performance initiatives competing, is there not a need for consolidation? A: There is more and more harmonization among industry initiatives and social performance tools. The Smart Campaign, the Universal Standards (promoted by the SPTF), the Rating Initiative’s Responsible Financial Rating, the MIX Social Standards are all coordinating efforts. Depending on the scope and use of models to assess an MFI, we may see some initiatives merging with others.
BlueOrchard endorsed the Smart Campaign and is actively promoting client protection principles among MFIs as well as incorporating them into our own procedures.
Principles (CPPs), a research project that seeks to examine the state of implementation of CPPs at MIV and MFI level. Findings, which will be shared publicly in September, are expected to feed policy recommendations.
State of the Practice analysis of Client Protection Principles BlueOrchard is participating in the Smart Campaignâ€™s State of the Practice analysis of Client Protection
Revised Client Protection Principles Appropriate product design and delivery Providers will take adequate care to design products and delivery channels in such a way that they do not cause clients harm. Products and delivery channels will be designed with client characteristics taken into account.
Responsible pricing Pricing, terms and conditions will be set in a way that is affordable to clients while allowing for financial institutions to be sustainable. Providers will strive to provide positive real returns on deposits.
Prevention of overindebtedness Providers will take adequate care in all phases of their credit process to determine that clients have the capacity to repay without becoming over-indebted. In addition, providers will implement and monitor internal systems that support prevention of overindebtedness and will foster efforts to improve market level credit risk management (such as credit information sharing).
Fair and respectful treatment of clients Financial service providers and their agents will treat their clients fairly and respectfully. They will not discriminate. Providers will ensure adequate safeguards to detect and correct corruption as well as aggressive or abusive treatment by their staff and agents, particularly during the loan sales and debt collection processes.
Transparency Providers will communicate clear, sufficient and timely information in a manner and language clients can understand so that clients can make informed decisions. The need for transparent information on pricing, terms and conditions of products is highlighted.
Privacy of client data The privacy of individual client data will be respected in accordance with the laws and regulations of individual jurisdictions. Such data will only be used for the purposes specified at the time the information is collected or as permitted by law, unless otherwise agreed with the client. Mechanisms for complaint resolution Providers will have in place timely and responsive mechanisms for complaints and problem resolution for their clients and will use these mechanisms both to resolve individual problems and to improve their products and services. For more information http://smartcampaign.org/
Social Performance Updates and News
Rating of MIVs BlueOrchard’s Dexia Micro-Credit Fund (DMCF), was among the first MIVs to be rated by a specialized microfinance rating agency. In 2010 M-CRIL presented the results BlueOrchard received recognition for increasing our efforts in the Social Performance area, and were awarded the mark of “recommended” for Social Performance. We were particularly recognized for:
• • •
Professional systems and culture; Some MFI reporting on selected social indicators; Responsibility assigned to develop Social Performance Management backed up by engagement across teams; In process of piloting monitoring of social performance and including in due diligence; Supporting global initiatives in social performance; Good relationships with investees.
The Principle Our Practice 1. Range of Services
2. Client Protection
3. Fair Treatment
4. Responsible Investment
• • • • • •
BlueOrchard Finance and BlueOrchard Investments manage separately three debt funds and one private equity fund dedicated to microfinance with investments in more than 50 countries across more than 150 MFIs. Each fund has its own risk profile and invests in MFIs at different levels of maturity. We encourage MFIs to develop innovative products tailored to the needs of low income clients and to expand to rural areas and more vulnerable populations. We encourage the development of savings, insurance and payment services. Focusing on the interests of the ultimate client is the only way to achieve long term sustainable financial returns. We have publicly endorsed the Client Protection Principles (CPPs) and incorporated them into investment policies, due diligence and monitoring processes and financing agreements. We build long term relationships with our clients based on transparency and fairness. Our loan and shareholder agreements are clear and transparent. We provide financing in local currency whenever possible so that hard currency risk is not passed on to the ultimate borrowers. BlueOrchard is currently lending in 20 currencies (in most cases, hedged back into the fund currency). We set exposure limits per client, country and currency. We endorsed the UN-PRI We adhered to CGAP MIV Disclosure Guidelines and report annually. We actively participate in the Social Performance Task Force and benefit from the standards and tools offered. We coordinate an investors’ work stream on over indebtedness at country level. We are active Board members on all our equity investments. We visit our MFI clients regularly (debt investments at least once a year, equity investments more than twice a year). Each fund (MIV) publishes at least quarterly investor reports containing financial and social performance data. We publish regular newsletters on critical topics (BlueNews) and an annual report and strive to keep our investors informed on upcoming trends and issues that may have an impact on our funds. We publish our progress report to the PRI. This 2011 Social Performance Report is our third consecutive annual report exclusively focusing on social performance. We promote transparent pricing and have endorsed MF Transparency.
6. Balanced Returns
We seek to obtain balanced long term social and financial returns that take into consideration the interests of the ultimate clients, the MFIs and our investors.
We actively participate in industry-wide initiatives to help develop standards and best practices. As an example, BlueOrchard is participating in CGAP and Accion’s State of the Practice analysis of Client Protection Principles.
Principles for Responsible Investment BlueOrchard is a member of UNPRI since 2008 and has submitted progress reports for three consecutive years (2009, 2010, 2011)14. Signatories can choose to publish their progress reports. BlueOrchard has volunteered to publish them online. Note that only 36% of investment managers disclosed progress reports in 201015.
BlueOrchard Endorses Principles For Investors In Inclusive Finance On January 2011 BlueOrchard and Bamboo Finance signed the Principles for Investors in Inclusive Finance (PIIF). We joined a group of 40 global investors at the Responsible Finance Forum to assert the goal to support and invest in responsible financial institutions that offer a wide range of quality services while embracing transparency and sustainability.
Social Performance Task Force annual meeting BlueOrchard participated for the third consecutive year in the annual Social Performance Framework gathered this year in Den Bosch in June 2011. On the first day, the Investor Group of the Social Performance Task Force and CGAP organized the Microfinance Social Investor Meeting where over 50 participants representing 34 investment organizations that are directly investing in MFIs, including Microfinance Investment Vehicles (MIVs) and Development Finance Institutions (DFIs), discussed their role in making microfinance more responsible. BlueOrchard coordinates an investor group on overindebtedness.
Creation of a Credit Bureau in Cambodia In May 2011, the National Bank of Cambodia approved new legislation (‘Prakas on the Process of Credit Reporting’) to create, regulate and supervise a credit bureau. As part of the bill, all banks and regulated MFIs will be obliged to provide positive and negative payment information to the bureau and will possibly be obliged to check a borrower’s credit history and current status before disbursing to a client. The launch of the credit bureau is scheduled for November this year.
bureau which has been incorporated as Credit Bureau of Cambodia (CBC). CBC is owned 49% by VEDA and 51% by Cambodian financial institutions including ABC, CMA, and other banks individually. MFIs will be trained on how to use and incorporate the Credit Bureau information into their credit decision making process. Some MFIs are working with the NBC, CBC and other industry stakeholders (ADB) to see what resources can be provided (funding, training) to address this issue.
The Rating Initiative´s Responsible Finance Rating Tool BlueOrchard is a founding member of the Rating Initiative. The Rating Initiative has been working on a Responsible Finance Rating (RFR). This rating product should over time replace the current financial rating, as the RFR sheds more light on an MFI’s operations, especially as these relate to reputational and operational risks.
BlueOrchard listed in Global Top 50 Impact Investment Managers BlueOrchard was selected as one of the top 50 private debt and equity impact investment fund managers. The list is compiled by the independent ImpactAssets50 research panel. The ImpactAssets 50 database is the first “open source,” publicly published list of private impact investment fund managers, providing investors and their financial advisors a gateway into the world of impact investing. Bamboo Finance, BlueOrchard’s sister company is also on this list.
Banco Fie to Launch Impact Study The Board of Directors of Banco Fie has approved the launch of an impact study to be conducted during the second semester of 2011. The study seeks to assess the impact of microcredit (loans up to USD 5,000) on the well-being of poor people who have been clients of Banco Fie for at least 3 years. The study examines four different sub-questions:
The credit bureau has been put together under the auspices of the IFC, NBC, ABC (Association of Banks in Cambodia) and the CMA (Cambodia Micro-finance Association). In July 2011, VEDA Advantage, a Singapore based company, was selected to manage the credit 14. See http://www.unpri.org/report11/index.php 15. Report on Progress 2010, PRI, page 3, An analysis of signatory progress and guidance on implementation
Jeepney driver in the city of Tungko, Bulacan province, Philippines
1. Impact on microenterprises: The metrics to be examined are microenterprise profits, revenues, assets, expenditures and job creation; 2. Impact at the Family level: This will look at human development indicators such as education, health and nutrition. 3. Women’s empowerment: What is the evidence of the impact of microfinance on women’s empowerment? 4. Client protection practices: Perception of overindebtedness, collection practices and transparency. BlueOrchard proposed the launch of this study and has been actively involved in the drafting of the questionnaire.
BlueOrchard´s Corporate Social Responsibility Engagements Initiatives in support of the victims of political turmoil in Kyrgyzstan Bai Tushum & Partners and Mol Bulak Finance together with the law firm Kalikova & Associates founded in July 2010 the non-profit MFI Revival Foundation for victims of the political events in the southern region of Kyrgyzstan during 2010. The two founding MFIs provide financial assistance in terms of micro credits with low interest rate (7%), interest free loans and grants. BlueOrchard offered financial support to this initiative. Also in Kyrgyzstan, a fund for Rebuilding Communities through Micro Enterprise initiated by Mercy Corps and implemented through FG Kompanion received funding from multiple international donors including USAID and BlueOrchard. The Fund targeted micro-entrepreneurs in Jalalabad and Osh Oblasts who lost their businesses, often their household’s primary source of income, due to the violent events in 2010. Beneficiaries received cash grants to rebuild their place of business, purchase equipment and tools, replace inventory and sometimes to assist in rebuilding their home. Center for Financial and Credit Counselling (CFKS) CFKS is a nonprofit organization offering debt mediation and financial education in Bosnia and Herzegovina (BH). CFKS seeks to empower citizens to manage their finances efficiently in order to achieve financial stability, avoid overindebtedness, protect their consumer rights and build assets. CKFS offers: A national credit information helpline; mediation services for overindebted clients with legal and repayment issues; a monthly mobile financial education program; one-onone financial and credit counseling on issues such as
budgeting and advice on how to take on debt; and materials about social services and consumer rights in local languages and with pictorials. Since March 2010 CFKS has offered over 50 financial literacy workshops attended by 650 persons and provided debt and credit advice to over almost 400 individuals with debt repayment difficulties. CFKS’ next steps are to make services available to citizens in Sarajevo and Banja Luka. In 2011 BlueOrchard is offering financial support to CFKS and endorses the Center’s efforts to implement debt advice and structured financial education services in Bosnia and Herzegovina. For more information on CFKS www. cfks.info Somalia staff donation action Exceptionally poor rainfall in the Horn of Africa, coupled with high staple food prices and regional conflict resulted in the worst food crisis of the 21st century and the driest period in 60 years, leading to crop failure, deaths of livestock and increasingly, the death of children. BlueOrchard staff mobilized funds in support of relief operations for the Horn of Africa. The funds raised by staff were matched 1 to 1 by BlueOrchard Investments. The donation was channeled through CARE International and the International Committee of the Red Cross.
Key Partnerships BlueOrchard would like to recognize its key partners for helping us to further our social performance goals.
The Social Performance Task Force (SPTF) was created in 2005 as an initiative of CGAP (Consultative Group to Assist the Poor), Argidius Foundation and Ford Foundation to bring together leaders from various social performance initiatives in the microfinance industry to come to agreement on a common social performance framework and to develop an action plan to move social performance forward. As of July 2011, SPTF consists of over 1,000 members from all over the world and from every microfinance stakeholder group.
The United Nations Principles for Responsible Investment (UNPRI) initiative is a network of international investors created under the auspices of the United Nations (UN) in 2005 to promote the practice of responsible investing. UNPRI has put together six principles for responsible investment which focus on environment, social, and governance (ESG) principles; collaboration; and transparency. Its signatories include asset owners, investment managers and professional service partners who work in concert to promote UNPRI principles in practice. As of February 2011, UNPRI has 876 signatory investors. The Principles for Investors in Inclusive Finance (PIIF) initiative was created in 2011 as a separate work stream housed within UNPRI to serve as a framework for responsible investment focusing on providing access to finance to poor and vulnerable populations. The PIIF seek to raise awareness among investors and motivate them to integrate responsibility towards end-users of microfinance and other stakeholders in their decision-making and business models.
The Rating Initiative was launched by ADA in collaboration with the Government of Luxembourg, the Microfinance Initiative Liechtenstein, the Swiss Development Cooperation, Oxfam Novib, the Oesterreichische Entwicklungsbank (OeEB), ICCO, the Principality of Monaco and BlueOrchard. The Rating Initiative seeks to: Promote and contribute to the establishment of a financially viable, sustainable and healthy global microfinance rating market; Address in the long term the lack of available, transparent information on MFIs for investors, donors and other microfinance stakeholders, and; Ensure the availability of market information not just on MFIs but on the microfinance rating sector in general.
For the last 4 years, the Dexia Microcredit Fund has received the Luxflag label which alerts investors to vehicles that comply with minimum requirements including transparency and investor protection.
Since 2010, BlueOrchard is a member of the Sustainable Finance Geneva and since 2011 part of its Executive Committee. The mission of Sustainable Finance Geneva is to promote sustainability and responsibility within the Geneva financial community.
Eurosif aims at acting as the voice of the SRI community to the European legislative and decision making bodies such as the European Commission and European Parliament and fosters sustainable business and investment practices through the financial market.
The Smart Campaign is an â€œeffort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry.â€? As of February 2011, approximately 1,600 microfinance institutions, microfinance support organizations, investors, donors and individual industry professionals have endorsed the Smart Campaign.
Facts and Figures – BlueOrchard’s Microfinance Investment Vehicles
Debts Funds Dexia Micro-Credit Fund BlueOrchard’s flagship commercial investment fund, which provides debt financing to microfinance institutions (MFIs) serving micro-entrepreneurs in emerging markets. It represents 48% of the portfolio managed by BlueOrchard.
Figures in USD as of 30 June 2011 (audited fiscal year end) Net Asset Value USD
452.1 million 2.4 million
Average outstanding loan size to MFI USD
Portfolio maturity Number of loans outstanding
Number of MFIs with outstanding loans
Number of countries in which there are outstanding loans
Local currencies delivered in the fund:
including the Peruvian sol, Colombian peso, Indonesian rupiah, Armenian dram, Kazakh tenge, Azeri manat, West African CFA, Russian rouble, Philippine peso, and others. All local currency loans are hedged and investors do not take on foreign exchange risk Total number of microentrepreneurs in MFIs in the DMCF portfolio
Number of microentrepreneurs reached by funding provided by DMCF
Percentage of rural clients
Percentage of female clients
Percentage of individual lending
Percentage of group lending
Average loan outstanding for MFI
Average loan size per borrower
Regional Distribution in % of the NAV as of 30 June 2011
n Russia, Central Asia and Caucasus 23% n South America 21% n East Europe 13% n Liquidities and Other Assets 10% n East Asia and the Pacific 9% n Africa 8% n MFI Networks 7% n South Asia 5% n Central America and the Caribbean 3% n MENA 1%
Microfinance Enhancement Facility (MEF) The fund was established in 2009 in response to the global credit crisis to provide loans to well-established MFIs. MEF was founded by the International Finance Corporation and KfW. BlueOrchard Finance is one of the comanagers of the fund, together with Cyrano Management and responsAbility Social Investments. Figures in USD as of 30 June 2011 (unaudited, based on MEF BlueOrchard Pool) BlueOrchard NAV BlueOrchard MFI loan portfolio: Portfolio maturity
NA 55.0 million 19.04 months
Number of loans outstanding
Number of MFIs with outstanding loans
Number of countries in which there are outstanding loans
Total number of microentrepreneurs in MFIs in the MEF portfolio
Number of microentrepreneurs reached by funding provided by MEF
Percentage of rural clients
Percentage of female clients
Percentage of individual lending
Percentage of group lending
Average loan outstanding for MFI Average loan size per borrower
Microfinance Growth Fund (MiGroF) The Microfinance Growth Fund was established in 2010 to make debt investments in MFIs in Latin America and the Caribbean region to support the growth of microfinance and the provision of financial services to low-income populations with limited access to mainstream financial services. MiGroF is sponsored by the IDB/FOMIN, IIC and OPIC. Figures in USD as of 30 June 2011 (unaudited) BlueOrchard NAV
BlueOrchard MFI loan portfolio:
Number of loans outstanding
Number of MFIs with outstanding loans
Number of countries in which there are outstanding loans Total number of microentrepreneurs in MFIs in the MiGroF portfolio Number of microentrepreneurs reached by funding provided by MiGroF
7 2,051,704.00 49,005.15
Percentage of rural clients
Percentage of female clients
Percentage of individual lending
Percentage of group lending Average loan outstanding for MFI Average loan size per borrower
26% 2,368,626.17 3,119.10
BlueOrchard Private Equity Fund The BlueOrchard Private Equity Fund is a SICAV registered in Luxemburg in December 2007. The Fund seeks to forge long-term partnerships with microfinance organisations across the world. It acquires minority stakes in their capital while playing an active governance role by sharing international experience, information, networks, knowledge and taking active part at board level. It is committed to achieve strong tangible social returns along with market financial returns. Figures in USD as of 30 June 2011 (audited fiscal year end) Total assets (committed capital)
Total investment disbursed
Number of equity investments
Total number of microentrepreneurs in BOPEF MFIs
Percentage of rural clients
Percentage of female clients
Average loan size per borrower
Average loan size as % of GNI per capita
100% of the MFIs in the BOPE portfolio use declining balance interest rates • 85% explicitly pursue social goals • 73% offer insurances •
64% have endorsed the Client Protection Principles 56% have conducted third party social ratings • 45% are reporting to the MIX Market on social standards • •
Oasis Fund Furthering its mission to serve an increasing number of poor and excluded people in a sustainable manner, BlueOrchard has pushed the frontier of impact investing beyond microfinance and launched the Oasis Fund. The Oasis Fund is a Luxembourg SICAV-SIF launched in 2007 which is advised by Bamboo Finance (www.bamboofinance.com) . It invests in innovative, commercially viable enterprises which are designed to generate significant social impact and a solid financial return. The Oasis Fund invests in companies that directly benefit low income communities by providing access to affordable housing, healthcare, education, energy, livelihood opportunities, water, sanitation and the like. Oasis is global in its scope and uses both debt and equity instruments to support the growth of ventures in its diversified portfolio. To date, the Bamboo Finance team has already closed landmark transactions in the field of social entrepreneurship. These investments are not only expected to yield financial returns, but are also impacting the lives of thousands of low-income families in Pakistan, India, Vietnam, Laos, Kenya, Mozambique, Mexico and Central America.
Figures in USD as of 30 June 2011 (unaudited) Inception date
Assets under Management
Number of equity investments
Portfolio Exposure by Sector and USD Amount
n Agriculture 2% n Livelihood 2% n Housing 2% n Rural Dev. 5%
n Energy 9% n Education 11% n Financial inclusion 16% n Healthcare 55%