> Posted by Beth Rhyne

The microfinance community pursues a double bottom line: both social and financial. Originally, the social bottom line dominated, while the financial bottom line was seen as a means (not an end) of achieving social ends, particularly through scale and permanence. But as microfinance became more commercial, financial returns began to hog the attention. Not only are financial returns a great motivator, they are much more easily communicated, monitored and understood than social returns.

To correct this imbalance and put the social bottom line in its proper place, over 900 microfinance professionals joined the Social Performance Task Force (SPTF), a sector-wide group that has met for several years to develop social performance measurement, management and reporting. The enthusiasm of microfinance practitioners for the SPTF shows how serious the field is about the social bottom line.  But although the SPTF has made very important strides, it has not yet cracked the nut.

What is the social bottom line?

The SPFT defines social performance as “the effective translation of an institution’s mission into practice in line with accepted social values.” This definition has two distinct parts – “mission translation into practice” and “accepted social values”.  

Let’s set aside the accepted social values part of social performance for now.  Accepted social values is another name for good corporate citizenship: applying client protection principles, being a good employer, supporting the local community, being environmentally responsible, and so on. These are values we expect any company to fulfill, especially when working with a low income, vulnerable population. But, with the possible exception of client protection, these elements are not unique to microfinance and cannot tell us much about whether a microfinance organization is fulfilling its specific mission.

The other part of the definition does address mission – specifically, translation of mission into practice.  But microfinance institutions set their own missions. Each expresses its own aims in its own way.  The variety of missions makes it difficult (actually, impossible) to identify a bottom line indicator with which all organizations can measure their missions.

The SPTF and others working on social performance have addressed, but not solved, that problem by stepping back from direct indicators of mission fulfillment to process indicators that show an institution’s seriousness of purpose.  An example is the question: “Does the board regularly examine the organization’s social performance?” The SPTF and others have successfully encouraged MFIs and their supporters to ask this question, which is good. But internal process questions like that one speak to social performance management more than measurement.

I believe it is important to continue efforts to directly measure mission fulfillment. Even though microfinance institution missions vary, the variety of missions is limited, and that fact creates the possibility for some common and cross-cutting approaches to measurement.  Mission statements cluster around a few aims like improving client quality of life or businesses, serving previously excluded clients, or creating jobs. This variety can be boiled down to just three questions: 1) Who are your clients? 2) Do you provide quality services? 3) How do your services affect your clients (and those around them)? The first two of these questions are answerable, and although the third is very hard to answer, much can be gained through a focus on the first two. The social performance measurement approach I am proposing here would focus mainly on improving the quality, comparability and frequency of data reporting on who clients are and dimensions of service quality, although it would not ignore the third, client outcome question.

Measurement challenges

The question of who is being reached can be answered fairly reliably with data collection methods and tools such as the Progress out of Poverty Index (PPI). This index, developed by Grameen Foundation, offers a set of tested, country-specific proxy indicators of poverty that are easily applied through surveys or as part of client intake, making it relatively straightforward for organizations to get a grip on the levels of poverty of their clients.

The second question can be answered through indicators that address elements of service quality such as pricing, waiting time or convenience, and through client surveys and focus groups that reveal what clients think about the services they receive and whether they respond to clients’ needs. There are many practical and methodological issues around each of these first two questions, but they are, generally, solvable.

When it comes to the third question – client outcomes – the water gets deep fast. Impact evaluations that demonstrate change in a way that allows causal attribution are fraught with methodological pitfalls.  The advocates of randomized control trials have de-legitimized other forms of information gathering. Changes in client status can be measured through tools such as the PPI, but such tools cannot attribute observed changes to microfinance services used.

The important point here is that while the third and most important question is very hard to answer and generally requires expensive, expert research, that is not a reason to throw over the whole social performance measurement effort.  Much can be learned through careful data collection on who clients are, deep qualitative research, and monitoring what happens to clients over time. When more controlled research results are available, that is even better.

Incentivizing transparent social performance reporting

Because of the variation of missions, satisfactory social performance reporting needs flexibility on which indicators to measure. Because of the complexity of data gathering, it also needs to cope with variation in the quality of data. Data collected by loan officers is often less reliable than data collected by independent survey researchers, but the latter is expensive to obtain, and even commissioning such research requires a certain amount of expertise.

The approach I favor is to encourage MFIs to provide detailed social performance reports, analogous to annual financial reports, that address to the best of their ability the three questions (who their clients are, the quality of their services and what happens to clients who use the services). The reports would contain information on such indicators as numbers of clients, percentage of women, rural vs. urban, business sector, poverty levels, business growth, client satisfaction, client retention, and product usage. Each report would include different indicators, because beyond some basic commonalities, organizations would focus on their own missions. This approach would encourage organizations to state their claims for mission fulfillment as best they can.

The next part of the proposal is to set up mechanisms for evaluating whether the claims are credible and backed by sound data collection methods. Most annual reports feature a front section with beautiful photographs, stories, graphs and explanations, followed by a section displaying financial statements complete with detailed notes explaining where the numbers came from. Auditors and other outsiders pore over these notes to see whether financial performance is accurately represented.

A transparent social performance report would have a glossy front section that tells the story, while the back end would give qualifying details about where the data came from and exactly what was being measured. With truth in social performance reporting, MFIs would have to provide detailed information on data sources and collection methods. The SPTF could encourage scrutiny of those annexes to ensure that the claims made in the glossy portion of the report are valid. I can imagine a star system rating quality of data such as now available for financial data on the Microfinance Information Exchange. The SPTF could also devote attention to standardization of definitions of common indicators to promote comparability across organizations. A similar approach is already present in the recently introduced PPI certification process.

For example, if an organization claims that 78 percent of its clients are poor, the back side of the report would explain which poverty line is being used and how the poverty data was gathered. A third party would check on the validity of the definitions and methods used. A report that did not provide such detail (or which used questionable collection methods) would be deemed lacking in credibility.

By encouraging organizations to tell their own stories in a data-rich way, such an approach would also allow readers to consider the question: Is this MFI’s social mission compelling? Competition among organizations to produce convincing social performance reports could do more to spark competition in the production of social returns. It would, in short, encourage MFIs to achieve mission-related results.

Have you read?

Is Client Retention Always a Good Thing?

How Much Profit is ‘Responsible’?

Is Microfinance Ready for Social Performance Certification?