The pilot project: Promote development of social ratings of microfinance institutions

1. The pilot project: Promote development of social ratings of microfinance institutions Supported by the Ford Foundation Implemented by Microfinanza Rating and M-CRIL Main objectives: To develop an effective social rating methodology; To test the social ratings methodology in multiple regions of the world, with different types of MFIs; To promote greater understanding of the social ratings methodology within the field.

2. Pilot MFIs overview

3. Approach and methods for the comprehensive social rating: Obtaining client level information

4. Basic difference – Assessment of outputs Results Process Impacts Intent & values Internal Systems Out puts Outcomes 1 Outreach – who is the MFI serving? 2 Services – are they appropriate? PORTFOLIO DATA CLIENT LEVEL INFORMATION

5. 1 Outreach: who is the MFI serving? Client level information: New/recent client households % rural, semi-rural, urban, slum % /# poor - below poverty line(s) excluded: % with no formal savings/credit % socially marginal groups Other profiling: Main livelihood Women’s role in supported enterprises Daughters/sons in school (prim/sec) Quality of life indicators (housing, electricity, sanitation Indirect outreach # employed in supported enterprises – hired/non-family (full/part-time) Portfolio based information: Usually available: NB – check clients (not loans) Number of clients % rural % women % in different regions % group based/individual Average loan outstanding (as % per capita GNI) Sometimes available Average loan disbursed Average 1st loan disbursed % loans < $300/$400 (or nearest local currency) Loan distribution by sector

6. 2 Appropriate services? Client level information: Client feedback on products and services – specific features: (amounts, terms, timeliness; group systems) % also using other financial service providers – other MFIs, moneylenders Specific issues and suggestions Reasons for dropout Portfolio based information: Available: Different financial services Relative access to different products/services Range of terms Non-financial services and access (as applicable) Sometimes available Drop-out rate

7. 2 Appropriate services – aspects of social responsibility? Client level information: % clients aware of various aspects of products and services In member based organisations: % members aware of norms, rights and responsibilities Portfolio based information: Costs of services to clients: Loans - Effective interest rate [Savings – interest paid] [Insurance – premium/payout] [Non-financial services – costs] Portfolio structure: Cost of funds (FER) Operational expenses (OER) Loan loss ratio/write-off Portfolio at risk Yield on portfolio Surplus

8. Questions that the Comprehensive Social Rating can answer • What is the incidence of poverty among the clients of the MFI? • What is the degree of financial exclusion of entering clients? How many did not have previous access to credit? • How severe are the living conditions and social vulnerability of clients’ households? • Are clients satisfied with the services offered? • What are the main strengths and weaknesses in terms of adequacy of the products to clients’ needs, and why? • What is the degree of financial awareness among clients?

9. Client level information If available with MFIs: - information on client entry/1st loan appraisal forms (lots of data – not usually collated or fully completed/checked – great potential resource!) - market research – for client feedback, product development, reasons for exit - internal audit – good potential source for ‘compliance with social responsibility to clients’ Rating – verifies and uses

10. Client level information If not available with MFI Household profile and awareness: Questionnaire with sample of new/recent clients [Not older clients – may reflect change] Client feedback on services: Focus Groups with older clients 4-6 (at least 30 participants) (may be practically linked with group meetings)

11. Rating sample – recent clients Quantitative: minimum sample size – balancing precision with practicality (costs) Statistically acceptable: 95% confidence, 7-10% precision Sample number depends on a) degree of variation in population (not total size of population); derived from expected proportion of key indicator in the population. Taking this as incidence of poverty: 33%-50% And: b) sampling approach (how random: for rating – cluster based) EDA TECHNICAL NOTE • Sample size : 127 – 192 in 3-5 selected clusters • Higher precision 5% (higher costs) - Larger sample >500

12. Field work for client level information 6 sided questionnaire (with PPI) (Income/spend data adds 2 more sides) Team of 5 field investigators each complete 6-8 questionnaires/day – in 5-7 days + supervision/checking – with Focus Groups • May be conducted independently by MFI team, then verified as part of social rating • Or – field work as part of social rating involving MFI staff

13. Examples of field level findings

14. Poverty outreach in context Comparing national data and MFI mission MFIs with poverty focused mission MFIs with poverty focused mission

15. Client feedback IMPORTANCE RANK Survey on clients, Finca Perú 1. Saving 2. Relation LO 3. Training 4. Meetings 5. Requirements 6. Loan amount 7. Time to issue a loan 8. Group 9. Loan term 10. Repayment schedule 11. Cost 12. Installment

16. Comparing results of simple versus comprehensive social rating

17. Comparing proxies with client level information • Doubts on the outreach and quality proxies (loan size, client drop-out rate) • Field/client data provides direct information: poverty profile of clients, customer satisfaction and consumer protection.

18. Weak correlation of proxies to poverty level Also tested: % women, average loan disbursed, average first loan size Validity of loan size as proxy of outreach depth: limited to a very broad definition of the target of an MFI

20. Reasons of weakness of the loan size proxy The loan size validity is severely affected when: • the loan destination is consumption; • there are fixed maximum amounts established by policy; • clients borrow several loans from various MFIs. Loan borrowed from an MFI is just a part of the total client indebtedness. Low amounts borrowed not necessarily associated to poverty

21. Comparing client drop out and direct feedback on client satisfaction Issues of the client drop-out ratio: - factors, other than clients leaving the MFI, which influence the ratio (growth); - reasons, other than client dissatisfaction, leading to the fact that clients do not take subsequent loans such as resting, no need, default, traveling etc.

22. Comprehensive Social Rating answers to the question about client financial awareness Mechanisms in place to foster consumer protection in the MFI not automatically translate into client financial awareness Correspondence in 4 cases. BUT financial awareness mainly dependis on client education level, market maturity, complexity of products

23. Added value of the Comprehensive Social Rating • Completeness • Comparability • Depth of analysis • Dissemination of standards • And • Suggestions for MFI to enhance its monitoring system: • Disseminates tools and techniques to measure client socio-economic profile and satisfaction • Provides inputs for enhancing its SP management and tracking systems (set of indicators) . • Increases transparency - data does not exist otherwise (so far) • MFIs can use to report on client level social performance indicators - MIX • Permits to increase comparability -generate a database for benchmarking- • Synergy for assessing outcomes: rating survey results can be used as a baseline • Investigate the actual validity of the outreach and quality proxies.

24. Feedback from MFIs • Strong interest in social rating; willingness to understand if they are achieving their social mission; • More comprehensive view of an MFI, trying to achieve social goals in a financially sustainable manner. • Aligning with the expectations of investors and donors, facilitating the access to funding or other opportunities, possibly with better conditions; • MFIs manage to increase their awareness on social performance going through and being fully involved in the social rating process; • Social Rating provides a good basis to improve their SPM systems, giving points to take forward such as: • revision of mission statement and strategy; • willingness to start using the PPI on a regular basis, after getting familiar with the tool; • consider improvements in product design based on feedback on clients’ satisfaction.

25. Open issues

26. Issue1 MFI data • Moving towards social reporting by MFIs and social performance management (market research, risk management/internal audit): to include key information at client level • Social rating will verify and use MFI data

27. Issue 2 Benchmarking Best practices – emerging for intent/values and for systems: • scope and clarity of mission statement with key terms defined, and communicated within organisation • clear, formal statement of key components of social responsibility • systems aligned with mission and values: • area and client selection, product development; • staff training and incentives; • MIS–portfolio analysis, client level information, • quality and use; • internal audit – includes compliance on social responsibility

28. Issue 3 Benchmarking results - outreach Have to allow for different models of microfinance, different missions, in different contexts • Approach includes • reference national context, (average data) • additional indicators related to depth of outreach: • - number poor as well as %, and • - number of hired employees in supported enterprises • score alignment of outreach results to target identified in the mission

29. Issue 4 – Social Rating scale • Weighting the dimensions of social performance – relative significance? M-CRIL & Microfinanza – similar approach • Rating scales based on: • quality of social performance management system, • effective scope and mechanisms for social responsibility –client protection-, • client awareness and satisfaction, • depth and breadth of outreach (alignment to context-mission)

30. Resources involved in Social Rating • The different effort required by the two products is reflected in the large added value of the Comprehensive Social Rating • Clearly, the time required is reflected in the cost (US$ 5,000-9,000 for Simple Social Rating; US$ 12,000-20,000 for Comprehensive Social Rating, rating team of 2 people) • Both Rating Agencies envisage a reduction of costs that will follow the further consolidation, efficiency gains, internal dissemination of the expertise. • The cost is reduced if: • the Social Rating is conducted along with a Financial Rating; • the MFI is fully in charge of collecting client level information; • (currently very rare) the MFI collects client level data or has a complete and reliable system to track the poverty profile, consumer protection and satisfaction of clients; results of a Comprehensive Social proceed obtained with data verification.