Assessing social performance cost-effectively

Many MFIs have an explicit social mission that goes beyond profitability such as reducing poverty and exclusion by providing good quality, reasonably priced and sustainable financial services to poor people who are normally excluded from regular banking systems. The link between microfinance services and poverty reduction, however, is far from simple. Positive impacts cannot be taken for granted.

Although MFIs have well-established procedures for assessing their profitability the challenge is to develop equally strong standards for measuring their outreach and impact (or social performance). Effective social performance assessment (SPA) must balance the need for methodological consistency (so as to enable learning across different MFIs) with the need to adapt to the vast diversity of MFI programmes and contexts.

SPA can be broken down into four levels:

• At the process level, it is important for the boards of MFIs to develop their own routine mechanisms for reviewing the quality of its SPA systems. External investors can help by ensuring that their own quality control activities reinforce the ability of an MFI to meet its mission goals and the needs of its clients.
• At the MFI outcome level, it is important for MFIs to be able to monitor who is taking up services, who is continuing to use them and who leaves. MFIs that routinely collect information based on carefully selected poverty indicators can respond quickly to changes. This can have commercial benefit too, in enabling MFIs to identify and consolidate their place in the market.
• At the level of individual client outcomes, the trend is away from large impact surveys, to more responsive and flexible methods for assessing benefit to clients based on focus group discussions, in-depth interviews with key informants, and reports arising from routine staff-client interactions.
• Wider social impact can be measured through periodic research. As mentioned above a growing number of MFIs are doing this collectively and sharing the results.

It is not enough to develop good SPA. Both MFIs and their donors also need to ensure that the immediate financial and time costs of SPA are more than justified by the benefits. It is therefore critical that SPA is integrated into regular decision-making processes. Effective SPA implies active social performance management. Some case studies illustrate the potential for SPA to be highly cost-effective.

Prizma in Bosnia-Herzgovina, and Small Enterprise Foundation in South Africa have already integrated both client monitoring and assessment into their routine operations. A critical indicator for both organisations is the number of clients leaving the programmes for negative reasons. Simple cost calculations suggest that reducing and holding down exit rates comfortably covers the costs of setting up and maintaining their SPA systems.

Covelo in Honduras and FINRURAL (La Asociación de Instituciones Financieras para el Desarrollo Rural) in Bolivia are both network organisations who took the initiative to coordinate SPA on behalf of their members. In the case of Covelo, involving senior management in the data collection ensured that necessary changes in both products (e.g. loan terms, collateral requirements) and operations were quickly implemented resulting in increased recruitment, savings in administration costs and reduced exit rates. FINRURAL took a similar approach, though using more orthodox impact survey methods and with the wider public as its principal audience. It also contracted out most of the work, rather than encouraging MFIs to do it for themselves.

As these examples show, it is difficult to generalise about what constitutes an appropriate investment in SPA for a 'typical' MFI, since there is no such thing. However, it is useful for MFIs to monitor and compare costs of SPA, both per client interviewed and relative to the total number of clients served. The studies mentioned here suggest that it should be possible even for MFIs with only 10000 clients to run a fully integrated system for no more than 2-3 US$dollars per client per year (including initial set-up costs).

Donors and governments have generally sought to satisfy their need to know about the effects that MFIs have through independent and often very costly impact assessment studies. These studies face many methodological and practical difficulties. Using internally managed systems that are already being developed by MFIs is a promising alternative, and donors can help by investing in such systems rather than develop other independent evaluation efforts. SPA through existing systems can be useful and cost-effective, rather than a costly indulgence. However, it will ultimately be senior management and owners of MFIs themselves who continue to invest in them because they find them sufficiently helpful to achieving their social mission.

James Copestake
Department of Economics and International Development
University of Bath
Bath BA2 7AY
UK
T +44 (0)1225 383859
F +44 (0)1225 383423
J.G.Copestake@bath.ac.uk

See also

'Simple Standards or Burgeoning Benchmarks? Institutionalising Social Performance Monitoring, Assessment and Auditing of Microfinance' IDS Bulletin, 34, (4), Institute of Development Studies, Brighton, UK, by James Copestake, October 2003

'Social performance assessment of microfinance: cost-effective or costly indulgence?', Small Enterprise Development, 15 (3) by James Copestake, September 2004

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