A few weeks ago, 70 financial inclusion leaders from around the globe made their way to Harvard Business School’s freshly blooming campus for the ninth annual HBS-Accion Program on Strategic Leadership in Inclusive Finance. This year’s class was a diverse group of financial service providers, investors, regulators, policymakers, risk managers, and technology innovators, bringing their vast experience from 35 countries. The program content mirrored the industry’s transition from a microfinance focus toward a broader financial inclusion and impact investing scope. Renowned professors Michael Chu and V. Kasturi Rangan, both senior affiliates of Harvard’s Social Enterprise Initiative, led the six-day course.

The week began with vigor, with the group engaged in a lively discussion on the case of Grupo Elektra, a Mexican retail and finance corporation that began offering financial services after first creating a consumer retail network. The case sparked a lively debate about whether social intention is necessary for social impact. Elektra has brought financial services to millions of Mexicans, but has never identified its purpose as social. Can it receive recognition as a social venture? The question of whether social and financial returns work together or whether they are at odds reappeared throughout the week. It was an undeniably controversial but important concept, and increasingly so as it’s nearly impossible to talk about poverty alleviation these days without impact investing coming into the conversation. One day of the course was focused on the role of impact investors and their investee companies, both within the financial sector and beyond.

As an observer of the course this year, I had the opportunity to see firsthand what hot-button issues prompted the most debate and disagreement. It is truly incredible how rich the quality of discussion is when you bring leaders from 35 different cultures together.

After the program, Eduardo Suescun from Finamerica in Colombia expressed my sentiment exactly, saying, “The program changes the way you think….it makes you think outside the building… It opens up your mind of how you see and prepare for the future.”

A collaborative industry-wide program such as this, built on case discussions gives us time to build and reflect on our work amidst a community of practitioners who make us question our beliefs and view challenges in a different light.

I’m looking forward to seeing what the HBS-Accion Program brings next year, but for now I’m excited to hear how participants changed as a result of this year’s course. After all, that is the purpose of a program like this, right? We actively learn, digest, and hopefully we’ve been inspired enough to apply what we learned when we return to the field.

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Four Challenges for Impact Investing

Your Neighborhood Bank, Walmart?

Dispatch from Harvard Business School — Relating Social and Financial Value

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?

It’s great to find this blog there, in the company of CGAP’s Microfinance Blog, Nicholas Kristof‘s New York Times columns, Grameen Foundation’s Creating a World Without Poverty blog, and the Wall Street Journal‘s India Real Time blog.

Check out the rest of their top 10 list by clicking here, and it’s worth glancing over the entire Opportunity Blog.  Recent posts have cast an eye on Tanzania, expanding client access through technology and innovative products, and Opportunity’s Banking on Africa Campaign.

Image credit: C. Thure

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13 Key Institutions in Microfinance Industry Sign Open Letter Supporting Muhammad Yunus

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As investors increasingly seek out social impact investing opportunities, microfinance continues to present an attractive opportunity for achieving double bottom line goals.

However, some countries are way ahead of the pack in terms of their social impact investing efforts. Investing in microfinance has gained particular traction in certain European countries, specifically the Netherlands and Switzerland, while investors in the US and UK have been less responsive to microfinance investment opportunities.

One example of social investing in microfinance coming out of the Netherlands is the Dutch Triodos Bank, which as of December 2009 had 236 million euros under management in its four microfinance funds.

This summer, the Center for Financial Inclusion is teaming up with a group of virtual Credit Suisse volunteers to find out why countries such as the Netherlands and Switzerland are so far ahead.  Our team of volunteers will be researching how differences in the legal and tax frameworks of these four countries have led to different outcomes in terms of social investing.

The project is one of the first initiatives within the recently launched Virtual Volunteering Program for Microfinance. Through the program, volunteers from Credit Suisse will collaborate with the Center on a variety of projects within the field of microfinance.

Results and key findings from the cross country comparison will be presented at the Council of Microfinance Equity Funds (CMEF) meeting in Costa Rica on October 13-14.

Image credit: Tango Desktop Project

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Mobilizing Microfinance Advocates from New York to Zurich, Pune to Singapore

Making History: Investors in Microfinance Agree on Principles of Conduct

A Difficult Balancing Act

What is responsible financial performance?  In other words,  “How much private gain is appropriate for organizations serving the poor?” The Social Performance Task Force (SPTF), meeting this week in Den Bosch, the Netherlands, is putting this controversial question on the microfinance industry’s agenda – opening a debate that is sure to be both complex and emotionally-laden.

As an opening salvo, the Task Force is proposing that standards addressing the following questions become part of the Social Performance “Universal Principles”:

• What are acceptable levels of profit?
• How can we tell if organizations are charging clients for their own lack of efficiency?
• What levels of executive compensation are fair?
• Are there norms regarding use of profits?
• When is growth irresponsibly high?

Yesterday I listened to a session in which these issues were discussed.  Adrian Gonzalez of the Microfinance Information Exchange (MIX), who has been combing the MIX data, warned that it is impractical to create standards in these areas. Many variables that are institution- and context-specific must be taken into account in making a judgment – size of loans, age of institution, population density in area served, product mix (especially non-financial services), local labor market conditions, local infrastructure conditions, et cetera, et cetera. He argued that the only valid standards would have to be peer group specific, and that fair peer groups would have to be very narrowly defined – leading to a plethora of peer groups.

Chuck Waterfield of Microfinance Transparency also noted that the diversity in the industry needed to be taken into account, but he was more ready to move toward a fixed standard.  “There’s a limit on how much profit we make off the poor and still call ourselves social microfinance,” he said.

Others pointed out that establishing fixed standards may invite caps – it’s a short step from standards to caps.  One person noted that fixed standards don’t work because organizations can easily adjust their balance sheets to show higher or lower returns.

A number of others, especially investors, argued for transparency rather than fixed standards. Transparency would allow participants in the microfinance industry to make their own judgments about acceptable levels of profit. One investor I spoke with noted that his organization had turned down a number of potential investments that were considered to have excessive profits.

Finally, a number of speakers argued that the focus on financial outcomes was a diversion from the main focus for social performance, which should be on client well-being.

No one at the SPTF meeting made the private commercial argument that superior returns attract competitors and are justified as the fastest way to build an industry that serves more currently excluded people.

The SPTF will continue working on the responsible financial performance question during the coming year. Buckle your seat belts. It’s going to be a bumpy ride.

Image credit: Takk

Have you read?

Is Microfinance Ready for Social Performance Certification?
Social Performance Agendas Gain Ground
Metrics That Matter

This week, we’re excited to highlight the housing-microfinance link, Islamic microfinance, and a debate that’s been brewing since the era of Monica Lewinsky.

• Philanthropy News Digest announces that Habitat for Humanity International, Habitat for Humanity India, and the ASK Group are launching a five-year initiative to provide microloans to thousands of low-income households in India.
• CGAP’s Microfinance blog continues coverage of its Islamic Microfinance Challenge by profiling Tanzania eco-Volunteerism’s honey project, which provides a microfinance model for rural Tanzanian communities that also complies with Islamic guidelines for business and finance.
• More than 2.5 billion people — half the world’s adult population— don’t have access to a bank account, and the Financial Access Initiative blog explores the research done in order to best help the “poorest of the poor.”
• The longest-running microfinance debate lives on, as reported by the Innovations for Poverty Action blog, in the form of a paper released by Mark Pitt as a further response to the Morduch vs. Pitt & Khandker debate dating back to 1998. Be sure to take a look at David Roodman’s parry as well, over at his Open Book blog.
• Alex Counts, president and CEO of Grameen Foundation, also shares his insights on the Roodman/Morduch vs. Pitt/Khandker debate at Grameen’s blog.

How much of the US federal budget do you think goes to foreign aid, including microfinance and microenterprise? If you think around 25 percent, you wouldn’t be alone — that’s the median estimate from the most recent poll. The poll also asked how much Americans thought would be “appropriate” to spend on foreign aid; the median response was 10 percent. But how much do we actually spend? Just 1 percent. This is consistent with numerous polls over the years. Americans grossly overestimate what we spend overseas on development and diplomacy.

Yet the House of Representatives continues to attack the foreign aid budget in an attempt to cut the national deficit. Michael Gerson — Washington Post columnist and former policy advisor to President George W. Bush — called the attacks on the international affairs budgets “both irrelevant and destructive.” It’s irrelevant because cutting funding from less than 1 percent of the budget is not going to make a dent in our national deficit. Instead, the attempt creates a distraction from the real, difficult decisions that have to be made.”

These cuts would be destructive because the programs are saving lives and building stable countries.

It’s rare that one agency will call for increased funding for another, but that’s exactly what Defense Secretary Robert Gates has repeatedly done. “Development is a lot cheaper than sending soldiers,” he said to the US Global Leadership Council. “Having invested an enormous amount of money, we are now arguing about a tiny amount of money to build the peace.” In a letter to the Senate, Gates explained why we should invest in development even where there isn’t conflict: “In other parts of the world, the work performed by diplomatic and development professionals helps build the foundation for more stable, democratic and prosperous societies. These are places where the potential for conflict can be minimized, if not completely avoided, by State and USAID programs – thereby lowering the likely need for deployment of US military assets.” Some Members of Congress also remind their colleagues why cuts to foreign aid are penny wise and pound foolish. Sen. Lindsey Graham (R-SC) recently said, “Stay ahead of them (Al Qaeda and other terrorists), not with 100,000 troops all the time, but by partnering with people who will live in peace with us. The worst nightmare for Al Qaeda is to come into a community that feels supported and has hope.”

Nevertheless, the threat of draconian cuts to foreign assistance looms. The United States is now operating under a continuing resolution that funds the government through April 8. There are no cuts to foreign aid — yet. It’s very likely that we will see attempts to slash foreign aid during the next round of negotiations to finalize the FY 2011 budget. Simultaneously, Congress is also starting to negotiate the FY 2012 budget, where we can probably expect more attempts to cut foreign aid.

Cuts to the foreign aid budget in FY 2011 and FY 2012 may very well include cuts to microfinance and microenterprise funding. In his FY 2012 budget request to Congress, the president requested $155.5 million for microenterprise.  Both the Obama and Bush administrations typically request substantially less for microenterprise than Congress appropriates. The final FY 2010 budget included $265 million. Although Congress has protected microfinance and microenterprise in the past, this year members will face extraordinary pressures to cut every program. Yet the program enjoys bipartisan support, so with continued efforts, funding may still be protected.

To learn more about the budget process and to stay updated on what steps you can take to ensure effective foreign aid programs, including microfinance and microenterprise programs, please click here.

Image credit: Simon A. Eugster

This week our blog-hopping takes us from the water pump to the cell phone, as well as points in-between.

• Mary Ellen Iskenderian, president and CEO of Women’s World Banking, guest posts at the Harvard Business Review blog to point out the many circumstances in which women are not only microfinance clients, but also microfinance leaders.
• The UN’s World Water Day was last week, and Chelsea Dubois of the (oft-microfinance-oriented) Innovations for Poverty Action blog took the opportunity to show us a striking photo (and the story behind it) that shows us the dire need for clean water in areas such as rural Ghana. (And in connection with MF and H2O, don’t forget Matt Damon.)
• Via the Financial Access Initiative blog, Jonathan Morduch provides his take on whether microfinance truly alleviates poverty, and shares research that could help shed some light on the subject.
• Over at The Inclusive Economy, Carol Wayman offers angles on why an estimated 70 million Americans are financially excluded from access to mainstream credit.
• Finally, at CGAP’s Technology blog, Mark Pickens maps out a new aspect of mobile money: the mHealth universe, which specializes in mobile phone-based solutions to healthcare access challenges in developing countries.

Frontline staff, like these field officers in Varanasi, India, need support and guidance to make microfinance effective and meaningful to their clients.

Sitting at his desk in a small office in the far northeast of India, Anil describes why he does what he does: “When I see a client who started with two pigs and now has 50, I know I’m helping to make a difference in her life.” As a regional manager at a small microfinance institution (MFI) working in rural villages, he leads a team of five branch managers and 30 field officers.

Anil joined his MFI to help address the poverty he saw in his own community and because he needed a steady job. He stays because he sees the impact his work is having — and because he still needs a steady job. There are limited employment opportunities in his area and many young people are unemployed. His story is a typical one. He’s not out to make a fortune; he just wants to provide a comfortable life for his family and give the people he serves a chance at a better future.

The Indian microfinance sector is facing an unprecedented crisis and the reasons are many and complex.  Politicians, regulators, academics, and the visionary founders and leaders of the sector will continue to debate what went wrong and the best way to fix things. Meanwhile, people like Anil will still be in the field, working hard to help their poor clients escape the bounds of poverty.

One of the things Anil does especially well is translating the mission and vision of his organization for his team in the field. Beyond ensuring that growth and collection targets are met, he wants each one of them to develop the capability and confidence to use their strengths to advance the MFI’s social mission and sustainability objectives. But he’s got a lot on his plate, and thinking about how to support his team sometimes comes at the end of a long 14-hour day. Imagine how much more effectively he could support the professional development of his team members if he had easy-to-use, relevant tools to help him.

Grameen Foundation and Grameen Foundation India (GFI), with the support of funders who understand and value the contributions of people like Anil, are determined to help the sector regain its footing and reclaim its mission. Our perspective is simple — the people really making microfinance happen are those in the field, and they need support and guidance to work to the best of their abilities.

We recently announced our plans to work with socially-motivated MFIs who understand that a well-trained, committed staff is the key to strengthening their ability to serve the poor with appropriate financial and other services.   Starting with a review of their current human capital management practices, we will work together to identify and implement the changes that are needed to better support their social and financial objectives.  We will also develop and pilot a comprehensive leadership development program designed to address the current and future challenges mid-level field managers such as Anil face every day. Underscoring our commitment to the Indian microfinance sector, we will hire a program manager to be based at GFI’s office in Gurgaon to oversee our human capital management work in India.

Many of the changes won’t be difficult or expensive to implement. But, they will require the commitment and support of the senior leaders at each organization. They must take the lead in championing and communicating the organization’s mission, values, and strategic objectives, and must hold everyone accountable for supporting them. The great leaders in Indian microfinance are right now out in the field, listening to and talking with all stakeholders, especially their employees. They are getting a deeper understanding of the realities on the ground and making sure that everyone understands what their organization stands for and its commitment to meeting the needs of both clients and employees.

This is a critical juncture for India’s microfinance sector — and a “teachable moment” for the global microfinance community. We hope this renewed focus on these vital “people practices” will help move the Indian microfinance sector forward so that Anil and the thousands like him can continue to make a difference.

Peg Ross is director of Grameen Foundation’s Human Capital Center, helping anti-poverty focused financial institutions across the globe strengthen their people practices to achieve more sustainable growth and reach greater numbers of the world’s poorest people.

Alex Counts, president and CEO of Grameen Foundation, speaks with community members in Banda Aceh, Indonesia.

Why do so many capable people put their lives into building the microfinance industry? What do they hope to accomplish? What motivates them? Why do they think microfinance is a solution? Are they pleased with the results?

The Center for Financial Inclusion is interviewing founders, pioneers, and entrepreneurs in order to answer these questions and capture the scale and impact of microfinance in today’s world.

During 2011, we’ll bring you a score of such ‘Microfinance Matters’  interviews from leaders around the globe. These authentic voices will speak about what is most meaningful to them in their work.

Today, we talk with a leader in the international dissemination of the Grameen model…

Alex Counts

Reaching Out to the Poorest

In the spring of 1987, Alex Counts, a student at Cornell University, wrote to Muhammad Yunus, founder of Grameen Bank, and expressed his interest in working with one of the world’s first microfinance institutions.

“God bless him, he wrote me back,” says Counts. That was the beginning of a career in microfinance that led Counts and other friends of Grameen Bank to the 1997 founding of Grameen Foundation, an independent organization that collaborates with microfinance organizations around the world to deepen services provided to the poorest and more remote communities…

To read more of the interview with Alex Counts, click here.