Rating and social performance assessment of MFIs

1. Rating and social performance assessment of MFIs 4th Azerbaijan Micro-finance Conference Baku – 16, 17 September 2008 Aldo Moauro – MicroFinanza Rating

2. Session outline Institutional profile of MicroFinanza Rating Introduction to social rating MicroFinanza Rating’s Social Rating and methodology Areas of analysis Scale and global results Lessons learned 2

3. Institutional profile of MicroFinanza Rating

4. MicroFinanza Rating Private and independent rating agency specializing in microfinance and rural finance Rating agency registered in the EU/CGAP/IADB Rating and Assessment Fund and the first specialized rating agency licensed by a national regulatory authority (Superintendence of Banks and Insurance of Ecuador) Currently working in Latin America, Africa, Asia, Central Asia, Russia and the Caucasus, Eastern Europe and the Balkans and the MENA region. Rating of different types of MFIs: Microfinance NGOs, non-bank financial institutions, savings and credit cooperatives (also multi-tier cooperative systems), microfinance banks, banks, Apex institutions Offices in Europe (Italy), Latin America (Ecuador and Nicaragua), NIS countries (Kyrgyzstan), Africa (Nairobi) Decentralization strategy (1 more office in 2008) 4

5. Our offices Bishkek MILAN Managua Nairobi Quito 5

6. Recent drivers A large number of investors use our reports (Blue Orchard, Deutsche Bank, Microvest, Triodos, Oikocredit, KfW, etc.) and require specific services First specialised rating agency recognized by a national regulatory authority (Superintendency of Banks and Insurance in Ecuador) and licensed to carry out credit ratings • More than 270 evaluations in 45 countries • Among our clients there are MFIs belonging to the major international networks such as: Finca, World Vision, Save the Children, Opportunity International, Mercy Corps, CRS, ACDI/VOCA, Aga Khan Development Network, ACCION, CARE, GRET 6

7. Our vision: progressive transparency THE CONTEXT Different MFIs (development stage, institutional typologies, etc.) Different needs from different stakeholders (donors, social and commercial investors, regulators) • OUR APPROACH • Transparency graduation path(accompanying and coaching MFIs up to the rating through different products) • Products diversification to meet the needs of different stakeholders 7

8. Products diversification ASSESSMENTS AND PRE-RATING SERVICES Institutional diagnosis Mini-assessment SERVICES FOR INVESTORS Investment advisory report Customized services Monitoring of MFIs MICROFINANCE RATING Public and private rating Updates and monitoring CREDIT RATING Opinion on the general creditworthiness of an entity SOCIAL PERFORMANCE RATING (SPR) With survey and without survey TRAINING Rating and assessment methodologies 8

9. Introduction to social rating

10. Social performance and its measurement The effective translation of an organization's mission into practice and the achievement of its social goals • The social goals the mission relate to: • Reaching target clients (poorer and excluded) • Meeting client needs and demands • Improving the lives of clients and their families Social performance is not just about measuring short and long term results that an MFI achieves, but also concerns the processes of the MFI, the activities it undertakes, the products it offers and the organizational values and behavior it promotes not only results but also the process to achieve these results

11. Mission Social Performance Financial Performance PerformanceManagement What to measure? Performance is not incidental • Need to define desired performance • Need to measure against desired performance • What is explicitly definedand measured is what is managed

12. Social Performance Management ….…is the instutionalisation process of translating a mission into practice and includes: • setting clear social objectives • tracking social performance • utilizing this information to improve the practice and performance of an MFI in relation to its social objectives. • putting in place systems (products design, credit policies and procedures, HR policy and management, customer services, etc) aligned with social mission • promote values and correct behaviour towards staff, clients, community and environment

13. Social performance rating Provides an opinion on the capacity of an MFI to put its social mission into practice and to achieve its social goals. It is based on an analysis of the MFI social performance management system and an evaluation of its results (output) External and independent Quantitative and qualitative Objective Comparable Stand-alone or coupled with financial rating

14. “Put its mission into practice” Outreach Social Performance Management IMPACT Mission and Objectives Systems Output Intent Process and Input Output Services Social responsibility – towards clients, community, environment, staff Impact Study Social Rating Logical framework C H A N GES

15. Social rating vs. impact study • An impact study measures the change in the living conditions of one population due to the action of an MFI. • Social rating does not measure impact; rather, it analyzes the objectives, systems and results of the MFI, before the impact that these may have on clients. • Social Rating and impact studies are complementary tools, meaning one does not substitute the other, but they respond to different needs.

16. Social Performance Task Force (SPTF) • Created in March 2005, promoted by CGAP, Argidius F., Ford F. • Objective: Clearly defining social performance and addressing questions about measuring and managing social performance. • Leaders from various social performance initiatives in the microfinance industry: SEEP Network, Imp-Act Consortium, CERISE, etc Task force members are: MFIs, social investors, donors, specialized rating agencies • Agreement on a common social performance framework and to develop an action plan to move social performance forward. Two working groups were formed as a result of this meeting: a Social Performance Task Force (“SP Task Force”) and a CGAP Donor Working Group on Social Performance. • The SP Task Force is working to better communicate with the industry what is meant by social performance and address the diverse range of questions relating to social performance measurement and management.

17. Social Rating – Objectives/benefits To establish social performance as equally important as financial sustainability in microfinance To increase transparency in the microfinance field To contribute to generalizing the adoption of social performance criteria in managing microfinance institutions To provide a clear picture of MFI social performance to the board, management and staff of microfinance institutions To provide potential donors and investors with the most appropriate tools and information for making resource allocation decisions To compare social performance across MFIs 17

18. MicroFinanza Rating’s Social Rating and methodology

19. MicroFinanza Rating’s Proposal/Approach • Why two modalities? • Customised approach different stakeholders different needs • To better answer to the questions: • WHO are your (MFI) clients? • Are you really meeting their needs?

20. Direct collection of client level data • Outreach is crucial, but the information collected by MFIs is rarely sufficient to provide a complete picture of clients, • Thevalidity of proxies (loan size) has not been proved • The standardization of outreach indicators is not yet achieved, entailing limited comparability of data collected by MFI The direct collection of client data is justified • in an historical perspective: initial phase of development • by pragmatic considerations: advantages in terms of promotion of standards and creation of comparable indicators • as a learning process for the MFIs, transmission of tools

21. Added values of the ESR Enhanced Social Rating (ESR): • Permits increased transparency in microfinance • Permits increased comparability (Generate a database of comparable information to build benchmarks) • Permits reporting on the core social performance indicators (MIX) • Represents an important step towards the establishment of an effective social performance monitoring and tracking system (Direct transmission of tools to the MFI) • Provides baseline-data for impact studies on clients that may be conducted in future • Can represent the basis for a study on the actual validity of proxies as estimates for client poverty 21

22. Methodology: Areas of analysis

23. Methodology: source of information • Interviews with the staff of the MFI (HQs and branches) and with members of the BoD • Documents available at MFI level (Business plans, manuals, code of conduct, etc.) • MIS • Secondary sources: statistical studies, census and other relevant national and international surveys • Focus groups with clients: to assess service quality • Intra-group homogeneity and inter-group heterogeneity • Different sets of FG: urban/rural; group/individual loan, by products • Survey of clients: to assess outreach, quality and SR • Population of interest: recent active clients • Approach – separate external team &/or MFI field staff

24. Main contents of the survey of clients • Household members/activities (occupation, age, education) • Type of enterprises financed with micro-credit • PPI and/or income/consumption • Assets property and living condition • Access to financial service (financial exclusion) • Access to basic services • Awareness (cost and conditions of products) • Clients satisfaction

25. Poverty scorecard – PPI (1) Specific tool for each country Generally effective in both urban and rural context Estimates the poverty profile of clients Allows monitoring the poverty dynamic of clients Easy to collect, verifiable, non financial. Example: Household size Number of children attending school House characteristics Household assets Derived from a national household survey 25

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27. Poverty scorecard – PPI (2) Poverty assessment tools, USAID, available for the following countries: Albania, Bangladesh, Colombia, Ghana, Guatemala, Haiti, India, Indonesia, Jamaica, Kazakhstan, Madagascar, Mexico, Peru, Philippines, Tajikistan, Uganda, Vietnam - http://www.povertytools.org/USAID_Tools/USAID_Tools.htm 2. Progress Out of poverty index, available for the following countries : Bangladesh, Malawi, Bolivia, Nigeria, Haiti, Nepal, India, South Africa, Mexico, El Salvador, Morocco, Palestine, Pakistan, Nicaragua, Philippines, Kenya, Vietnam, Guatemala, Mali http://www.microfinance.com/#Poverty_Scoring 27

28. Adapt questionnaire Contact Analyze notes, data and docs Train interviewers Identify focus groups & branch Preliminary Draft report Set agenda Set survey: -counterpart -interviewers -sampling -design questionaire Proposal Supervise survey Consider feedbacks on results & social rating Docs & data Contract Meetings Branch & focus groups Final report Review survey output & set data entry Final meeting PRELIMINARY CONTRACT MISSION REPORTING 10 days 30 days 60 days Submission of questionnaires Data entry ENHANCED SOCIAL RATING PROCESS A C T I V I T I E S Report template Social data analysis tool Survey data analysis tool Benchmark Country sources database Scoring and scale Contract Proposal E-mail Preliminary word, xls Sampling tools Questionnaire Material for enterviewers’ training Checklist Material for focus group Data entry template T O O L S

29. Areas of analysis

31. Basis for the analysis of a SPM system: necessary steps in SPM • Necessity to intentionally manage social performance to be effectively able to put the mission into practice: • Set a clear mission with explicit social goals • Identify smart social goals and include them in strategic planning • Put in place a strategy to achieve them (including setting measurable targets for each social goal) • Tracking and monitoring the achievement of social targets and using results to improve social mission • Put in place systems (policy/procedure/staff management) to be able to achieve them

32. Basis for the analysis of a SPM system: Social Mission Statement (clarity and diffusion) • The existence of an unique official mission statement is strongly recommended to ensure mission implementation and diffusion • Mission has to be clear • Social mission has to be an explicit expression of the main social goals. It should clearly indicate the desired performance: • SG1: Who: outreach (priority target to be reached) • SG2: How: service offered • SG3: Why: desired impact/purpose • Has to reflect the actual prioritized target • Social Mission should be communicated clearly and consistently reinforced down the hierarchical ladder MFIs with an explicit and clear mission statement will tend to be more effective in fulfilling their social mission.

33. Good Example: “best practices”: Alsol (Mexico) MISSION STATEMENT: “To work for poverty reduction in rural and semi-urban areas, providing financial services to low income women with quality, responsibility, professionalism and respect, as well as to support them with training trough specialised institutions” The mission statement makes explicit reference to the three main recognised social goals and seem to fully reflect the target clientele prioritised by directors and managers. The identified target is quite narrow and specific. The importance attached to the offering of non-financial social services is also clearly expressed in the mission statement.

34. Good Example: “best practices”: Finca Peru ADHERENCE TO SOCIAL MISSION OF MANAGEMENT AND STAFF • Social Mission is clearly communicated and consistently reinforced • Existence of systematic channel to disperse the mission within the organisation and to new staff • The charismatic CEO, Mrs Iris Lanao Flores, keeps the management team motivated and committed to the social added value of Finca operations. • Mission declaration and the values promoted by Finca are systematically mentioned in official documents, a part of which is circulated among staff and clients. • Frequent staff meetings at branch level are taken as opportunities to refresh the mission and to reinforce its central role in daily operations

35. Good Example: “best practices”: FDL (Nicaragua) STRATEGY • Social objectives are formalized in the strategic plan: • Increase the portfolio dedicated to small agricultural and livestock entrepreneurs • Increase the outreach to lower income microentrepreneurs (group loan methodology) • Improve offer of non-financial services (through alliances with nfs providers) • Increase the retention of good clients (reducing drop-out ratio) • Quite good quantification of social goals into measurable targets • 60% of the outstanding portfolio dedicated to agricultural and livestock businesses; • Increase the % of group lending (fixing targets in terms of number of groups for branches) and adaptation of this methodology in two additional branches, Tipitapa and Estelì; • Consolidate the development and investment portfolio (long term loans for fixed capital) for the agricultural and livestock sector, increasing it from 17% to 20% of the total portfolio; • Reduce the drop-out rate from 21.7% to 18%;

36. Dimensions of analysis: SPM SYSTEM (MISSION, STRATEGY AND SYSTEMS) 1. SOCIAL MISSION, SOCIAL OBJECTIVES AND STRATEGY • Very supportive governance structure • Strong adherence to social mission of management and senior staff • Lack of systematic channel to disperse the mission within new staff • Social objectives are formalized in the strategic plan: • Increase the portfolio dedicated to small agricultural and livestock entrepreneurs • Increase the outreach to lower income microentrepreneurs (group loan methodology) • Improve offer of non-financial services (through alliances with nfs providers) • Increase the retention of good clients (reducing drop-out ratio) • Improvable quantification of social goals into measurable targets

37. Dimensions of analysis: SPM SYSTEM (MISSION, STRATEGY AND SYSTEMS) 2. MIS AND SP TRACKING SYSTEM • The assessment and monitoring of performance towards social objectives is quite satisfactory (tracking of clients profile and changes) • Tracking drop-out ratio but no systematic investigation of reasons for drop-out 3. SYSTEMS’ ADEQUACY TO THE MISSION • Systems for facilitating the access to FDL’s services to poor households (group lending/soft guarantee) • Strong consistency of systems and practices to social mission (adequate bonus system, staff performance evaluation, conduction of satisfaction survey)

39. Dimensions of analysis: SOCIAL RESPONSIBILITY • Toward Staff: • Quite high staff turnover in particular for administrative staff (no bonus system for them) • Existence of an ethical code of conduct • Good labor climate reflecting adequate human resources policies • Transparent incentive scheme • Non-monetary benefits (scholarship; internal credits) • Conduction of personnel satisfaction and labor climate survey • Training and other actions to foster gender equality among staff • Lack of a person dedicated to the training function, a need to be strengthened; Lack of career plans for staff • The base salary level is slightly lower than that offered by the regulated financial sector

40. Dimensions of analysis: SOCIAL RESPONSIBILITY • Toward Clients: • strategy to address gender barriers and to promote women empowerment (group loans/training to staff about gender issues) • FDL does not charge clients with high costs (real portfolio yield 19%) • Problem of over-indebtedness to be better monitored and managed • Improvable client protection measures: • the complex structure of the cost of loans and the lack of complete written documents given to clients are among the main reasons limiting the overall transparency - Existence of formal grievance channels (suggestion box; product development department receiving clients coming to HQ), but not adequately advertised • Foreign exchange risk born by clients Toward Community and Environment: • No formalized written formal policy but… • Environment as an explicit field of interest (not financing agricultural activity in area bordering the forest) • Actions for preserving environment (green package product)

41. Example of indicators

43. Dimensions of analysis: OUTREACH - MIS

44. Dimensions of analysis: OUTREACH - Survey: poverty rate • To be compared with national average

45. OUTREACH - Survey: Property of Asset/Social Poverty/access to financial services

46. Example of indicators

47. Example of indicators (2)

49. Dimensions of analysis: QUALITY of the SERVICE • Example from FDL- Nicaragua case: • Large variety of credit products • Flexibility of loans conditions • Offer of non-financial services • Constant effort for innovation • Cost quite low • BUT • Saving and insurance not available • Long time for disbursement • No tools to assess the quality of non-financial services

50. Example of indicators