Social Performance Management: CSR of Microfinance OR more than that?

Social performance management has been in existance for quite some time now. However, it is assuming new significance in recent times due to the negativity caused by the recent cases of suicides and harassment; as also by the increasing consciousness amongst investors to measure the social impact generated. Add to this, the increasing competition in a maturing industry. In such conditions, an MFI’s best bet is to retain its old clients while attracting new clients. This is possible by being responsive to the customers’ needs and requirements. At the same time, looking after the staff is of prime importance in order to achieve the social objectives of the institution.

In steps the concept of Social Performance Management (SPM) which is about making an organisation’s social mission a reality. Many times, focus on social performance is seen as being lenient on the aspects of financial sustainability and vice versa. However, that’s a fallacy. On the contrary, strong financial performance will enable an MFI to pursue its social objectives in an effective and efficient way. And the strong emphasis on social objectives will help in providing better, client-focused services and improve organisational culture. This in turn will lead to increased client satisfaction and retention; and reduced staff attrition rate.

SPM is beneficial to all stakeholders:

- Clients:
SPM involves taking into consideration the clients’ requirements and thereby innovating, developing and monitoring products & services and delivery systems which are more appropriate to the target customers’ needs and conditions. Better products and services would result in satisfied clients leading to customer loyalty and increased outreach.

- Employees:
Employees form a vital part of the entire process of microfinance. SPM focuses on human resource management including incentive plans, welfare actitivities, skill development, retention plan which would help in developing a motivated field force and reducing the high attrition rate prevalent in the microfinance industry.

- Investors:
In the absence of widely accepted social performance measures, donors and socially responsible investors typically base funding decisions on financial performance alone. Managing social performance allows MFIs to demonstrate their competitive blended returns, thereby providing a simple and cost-effective tool to assess social results of the MFI leading to an improved position in a competitive funding market.
Organisation:

• SPM system will aid in balancing financial and social objectives to make better business decisions based on a more thor¬ough understanding of the trade-offs each involves.
• SPM will aid in improving higher customer satisfaction and in developing demand driven products and services which would make the institution more attractive thereby leading to program growth and better financial performance.
• SPM is necessary to ensure that MFI doesn’t experience mission drift and remains true to its goals and objectives.
• With so much negativity surrounding the field of microfinance, many players are turning to ways through which the good work carried out by them is highlighted. The effective implementation of SPM system will not only fufill double bottom line of the organisation but will also enhance the reputation and brand image of the company while avoiding the negative impact on operations (reputational risk).

Thus, active monitoring and assessment of the SPM system will help an MFI to maximise both social and financial performance.

SRI inflows and the Micro finance sector - a positive development

Socially Responsible Investments are those investments that consider both the financial returns from an investment and the potential social, environmental and ethical consequences these investments might have. Broadly socially responsible investment can involve either (1) screening of the investment such that its social/ environmental impacts can be deemed “responsible” as per international standards (2) shareholder advocacy for social or environmental causes or (3) investment in communities that bring about growth in those communities. While today a majority of SRI’s are in the form  of assets held in socially screened investment funds or managed accounts ; internationally , community investments; particularly into microfinance; are enjoying strong growth rates, with such investments coming not merely from  foundations and NGOs as it used to be previously but also from individual investors and, increasingly, professional institutional investors. The importance of this trend lies in the fact that world over with greater volume of investor money flowing into what were once the territory of NGO’s and charities rapid transformations are happening in microfinance sectors forcing them to become more leaner, efficient,  transparent and by becoming more responsible, profitable

Microfinance is based on the recognition that the working poor can act in an entrepreneurial manner and are, in principle, creditworthy. In this respect it poses an attractive opportunity for investors who are pulled towards it primarily by the fact that investing in microfinance allows investors to adopt a social investment strategy geared toward poverty alleviation and social development while at the same time offering an attractive risk-return profile that is marked by largely stable financial returns, low credit default rates and low correlation to the general domestic economy. This is actively aided by fact that in many countries Microfinance institutions are themselves exploring new opportunities to obtain funding and in the process making themselves attractive to investors through means like securitizing their loan portfolios and in some cases by even going public. Critics are of the opinion that such transformations will only erode the microfinance sector and force it to become more profit centric in the process forcing it to move away from the people who constitute its customer base today. Is this true?

The answer is that it is a false argument and the advantages of the transformation process have been manifold. Firstly, it is an acknowledged fact that the microfinance sector in many countries has reached a point where the subsidized loans they are dependent on for funding is no longer sufficient to cover a large many of their funding needs. By securitizing their loans and inviting market investments into their portfolios the MFI’s are not only broadening their funding structure but also are mobilizing additional monetary resources to facilitate in the expansion of their lending activities. Secondly, external funding from investors has in most cases eliminated the disincentive that had slowly crept in to MFI operations in many countries. This disincentive wrought by subsidized money; had been forcing MFI’s to curtail many of their lending activities to meet non core requirements.

The transformation wrought by investment inflows into the MFI sector has not only forced the MFI’s to become more transparent; by virtue of the fact that investors constantly want to know where their investments are going; it has also forced them to significantly reduce the degree of bureaucratic red tape that had come to characterize their functioning; simply because investors prefer their money be spent on lending and portfolio expansion rather than on administrative expenses. Alongside the transformation has also forced the MFI’s to become more efficient and profitable in their operation; which in most cases has implied becoming leaner, more efficient  operations as they are now accountable to investors whose money is being lent.