Social Performance: increasing accountability and transparency in microfinance Frances Sinha, EDA Rural Systems There has been tremendous progress in the microfinance industry over the past decade, especially in India, in working towards financial sustainability, reducing costs of delivery and attracting investment funds. This is an important measure of success – in terms of growth. The numbers are impressive, and reported against industry standards of profitability, efficiency, portfolio quality and capital adequacy. However, relatively transparent reporting on growth and financials has not been matched by clear reporting on effectiveness. The numbers tell us something about growth of outreach, including women and relatively small (‘micro’) loan sizes. But increasingly – and since 2006 when Mohd Yunus and the Grameen Bank received the Nobel Peace Prize in the name of poverty reduction – there have been questions around:
Who is microfinance serving (are clients poor? who is meant by ‘poor’? are target clients getting left out? Microfinance institutions – and programmes – may actually serve a range of market segments);
The utility of standard loan products (easy for the MFI to implement, but do they cater effectively to different market segments? Do they really serve the needs of poorer people? of women in particular?);
Exit – or dropout (how many clients drop out? Is this an indicator of dissatisfaction? Who are the clients that leave and why do they leave?); and
Client protection: what is a reasonable level of transaction costs for clients (given costs of funds, type of operations, small product size)? is there clear communication to clients on costs and procedures? what is the approach to default (‘zero tolerance of delinquency’ is no longer acceptable)? Are there mechanisms for client feedback or complaint – and their redressal? Are there safeguards against pushing clients into excessive debt, as competition between MFIs increases with overlapping operations?
These questions reflect a growing interest in ‘social performance’ and a concern to build standards in the industry
for addressing such issues as part of microfinance management, and reporting on them systematically.
Whatever the ‘mission’ or model of an MFI, there are certain common themes that are common across the sector. A number of initiatives globally – and in India - highlight the steps for enhancing accountability and transparency, including:
Have a balanced Board: make sure they are up to date on and committed to social performance as well as financial issues
Clarify and define intent more clearly – in terms of target outreach (including different types of area, and market segments), specific services and intended results
Track client profile on entry – in relation to intended outreach, and as a basis for product development, and tracking change over time (the Progress out of Poverty Index developed for India and other countries is a practical tool to benchmark poverty levels that can be integrated with membership or loan application details)
Adjust the MIS to track clients – not just loans – so as to integrate social profile/market data, and be able to track client retention and exit
Develop routine systems for market feedback (including client satisfaction, exit surveys) and apply results for product development and adaptation
Integrate social goals and values into HR systems (training, performance appraisal and incentives)
Have a clear policy on client protection which is reflected in operational guidelines and monitored as part of internal audit.
These are practical – and rigorous – steps. ‘Social’ – is not just soft and qualitative, or a sort of side project; nor need it be seen as just too complex. These are steps that mirror the process of financial management, and involve as systematic
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