Microfinance was born out of an impulse by social entrepreneurs and development practitioners (and others, including self-help groups of poor people themselves) who wanted to do something about the lack of access to affordable and reliable financial services (especially loans) by the poor. Mohammad Yunnus and Stuart Rutherford, two action-researchers working in Bangladesh, proved to the world that poor people are perfectly capable of repaying loans and saving money. A social bottom line was the original impetus for the microfinance revolution, but it was an increasingly stronger financial bottom line that fueled it. Non-governmental organizations offering microfinance services began to transform into for-profit licensed financial institutions and commercial banks started to develop their own micro-finance arms, motivated by corporate social responsibility and increasingly as part of their core business strategy as well. The resulting emphasis on financial performance and the growing commercialization of microfinance led many to worry that the original social mission of microfinance was being pushed to the background.
Back to “Social Finance”? Social Performance Management
Without arguing that microfinance institutions needed to adopt commercial principles and maximize their efficiency (even though those alone don’t necessarily result in financial self-sufficiency) in order to reach not millions but billions of low-income people without access to reliable financial services, social performance activists began a movement designed to counter a perceived mission drift and to proactively monitor and manage for social performance. The resulting social performance movement aims to safeguard the social bottom line in microfinance institutions, especially their focus on serving poor and very poor people and their role in reducing poverty.
One of the most prominent goals of (re)introducing social performance management on the agenda of MFI managers and boards, is to balance the financial and social bottom lines of MFIs; the social bottom line (or the net social benefit from operations) includes not losing focus on serving poor clients and even very poor clients (living on less than USD 1.25 a day) and monitoring to what extent poor clients move out of poverty. Social performance is more than that, though, as it includes all management actions and organizational structures to work towards desired social outcomes. In response to this renewed interest in managing for social performance a Social Performance Task Force (SPTF) was formed, which among other things achieved a wide consensus on social bottom line standards and indicators for MFIs to report on.
The Microfinance Information Exchange (MIX), a leading microfinance financial information provider, played a key role in creating a common set of core social performance indicators for the microfinance industry and is on its way to add social performance benchmarks to already widely reported financial benchmarks. These social indicators measure social performance ranging from intent (mission, goals, governance), internal systems (e.g. product range, staff incentives), social responsibility to clients, community and environment (the triple bottom line), to outputs and outcomes. Social outcomes to be measured include the extent to which reporting MFIs are reaching women, clients in underserved geographic areas, as well as poor and very poor clients. In addition to these outreach indicators, social performance reports include sections on access to non-financial services, education status of clients’ children and whether or not clients escape poverty after 3 to 5 years. So far, more than 20% of around 1,800 MFIs registered on MIX Market have submitted social performance reports and this number is growing. The financial bottom line continues to wear the pants for now, but its social bottom line partner is getting more empowered by the day.
Does access to microfinance result in poverty alleviation?
This has been the subject of a long debate well known to microfinance professionals but perhaps less so to CSR experts. What most people seem to agree on presently is that microfinance is not a cure-all neither is its impact on poverty alleviation easily measured or quantified. Many impact studies carried out in the past have been criticized because of methodological concerns (often due to a not perfectly random selection of a control group), and all too often microfinance has relied on anecdotal evidence to make a case for poverty alleviation (and encourage the public to donate money). Everyone is familiar with statements that microcredit lifts poor people out of poverty by helping them to finance microenterprises and increase incomes. A CGAP publication earlier this year responded to this debate by looking at the available credible data and concluded that the evidence so far (provided by methodologically sound randomized control trials) does not unequivocally suggest that access to microfinance lifts poor people out of poverty, even though some short-term welfare improvements have been shown.
Even taking into consideration that credible evidence is hard to come by and is currently virtually absent for long-term impact research (it seems reasonable to expect that changes in poverty are slow and might be more visible after prolonged access to microfinance), this conclusion has been disappointing for some, not surprising to others. Richard Rosenberg, the author of the CCAP paper, suggests that we might have been looking for impact of microfinance in the wrong place: rather than financing income generating activities, microfinance services help people to smooth consumption and produce lump sums (saved or borrowed) to pay for large expenses, whether they be unexpected challenges (such as sickness) or opportunities (such as purchasing bulk food items at low prices for sale or own consumption). These social benefits might come short of lifting people out of poverty, but if they can be provided in a financially self-sustainable way and socially responsible way, who really cares who wears the pants?
So access to microfinance does not result in poverty alleviation?
While awaiting more evidence that microfinance (including not just loans, but also savings, insurance and remittances) might alleviate poverty by itself, it might be more realistic to consider its contribution as one component of a poverty alleviation process. It is easy to see (without preempting the need for rigorous data) how microfinance, both as a protective (cash flow smoothing) as well as a promotional (financing productive activities) tool, can play an important complementary role to various anti-poverty strategies, often implemented in partnership between non-government and for-profit players, especially those seeking to source from or sell to Bottom-of-the-Pyramid markets. When micro-entrepreneurs and others in the value chain have access to value chain financing, they will be able to scale up, improve or diversify their products or services, benefiting medium and large companies at the other end of value chains as well.
Unlike microfinance in general, these activities are geared specifically at increasing income generation and not just income smoothing. In the case of ultra poor people who cannot meet their most basic needs, access to finance becomes especially powerful if integrated (by microfinance providers themselves or in partnership with others) with improved access to basic needs in the form of food security, healthcare and education. A growing number of micro-finance institutions are offering healthcare education, healthcare financing and access to healthcare providers. Such partnerships are usually win-win-win as they offer an existing market channel to healthcare providers, improve health conditions of clients and reduce dropouts and loan loss provisions.
