Presented by Benjamin Blum

 Industry Participants  Social Performance  Transaction Costs  The Role of Donors  Microfinance Investment Vehicles Rationale and Role of Private/Socially Motivated Investors in MFIs 2

% of MFIsRegulationFuture Tier 11-2%Most are regulatedMature and best strong financial and operational track records Tier 28%Mostly NGOs; may convert to regulated entity Successful but smaller, younger and less well known at or near profitability Tier 320%Nearly all NGOs; some will progress up Shortcomings due to young organization, lack of capital, approaching profitability Tier470%Some will progress up weak institutions or microfinance is not primary focus; unprofitable Rationale and Role of Private/Socially Motivated Investors in MFIs 3 Source: Meehan (2004)  Industry Participants

Public Investors >50% Government & Networks Microfinance Institutions Individual InvestorsPrivate Investors Microfinance Investment Vehicles 82% (Oikocredit, Grameen Foundation) 4 Rationale and Role of Private/Socially Motivated Investors in MFIs Source: Goodman (2004), CGAP (2008), Latortue et al. (2006)  Industry Participants

 Dramatic Increase of institutional investors  Drivers of the Hype  Most is funneled to tier 1 MFIs  International Banks (commitment categories):  No involvement  Corporate social responsibility  Dual strategy (dual returns  ideal match)  Dual strategy in separate business unit  Normal business with social impact  Normal commercial business (FN + SP) Rationale and Role of Private/Socially Motivated Investors in MFIs 5 Source: ING (2008)  Industry Participants

 Scholars have build a framework for measuring and assess impact and outreach  (Yaron(1994), Schreiner(2002), Zeller, Lapenu and Greely(2003), and Hishigsuren(2007)  Specialized Rating Agencies  (MicroRate, Planet Rating, M-Cril)  Social Performance Task Force (SPTF)  Established in 2005 (by CGAP, Ford Foundation, Argidius Foundation Rationale and Role of Private/Socially Motivated Investors in MFIs 6 Source: Engels (2010)  Social Performance

 Difficulties  Wide range of relevant categories  Scarce data availability  Social performance measurement is NOT social impact measurement Zeller, Lapenu & Greely (2003)  (SP) measures outreach of programs  (SIM) measures change in welfare and quality of life Rationale and Role of Private/Socially Motivated Investors in MFIs 7 Source: Engels (2010)  Social Performance

 Remember! The smaller the farmer – the higher the TC!  MFIs serving the hardest-to-reach segments  Have the greatest social impact  Have the highest Transaction Costs  Lowest profitability !!  Need for social investment Rationale and Role of Private/Socially Motivated Investors in MFIs 8 Source: (2005)  Transaction Costs

 Moving away from Subsidizing Transaction costs  Grants:  for institutional capacity building  to cover operating shortfalls  for loan capital or equity  Guarantees for commercial banks  Technical assistance, etc. Rationale and Role of Private/Socially Motivated Investors in MFIs 9 Source: Ledgerwood (1998)  Donors

 Coordination among them and  Creation of consistent strategy based on:  Market segmentation  Comparative advantage of each  Focus on (internal) capacity building  Induce formal financial market linkages  Involve in policy dialogue  Advise Finance Ministries  Disseminate best practices among MFIs !!! Rationale and Role of Private/Socially Motivated Investors in MFIs 10 Source: Ledgerwood (1998) Yanovitch and Macray (1996)  Donors

 Ex. ‘ResponsAbility’ Social Investment Fund  Credit Swiss  Aiming Socially Responsible Investors (SRI)  Minimum subscription – US$ 1,000  Return 1 year %  Financial support for poor entrepreneurially talented people in developing nations  environmental and governance criteria and social considerations Rationale and Role of Private/Socially Motivated Investors in MFIs 11 Source:  ResponsAbility

Rationale and Role of Private/Socially Motivated Investors in MFIs 12  The end Source: Rosenberg (2010) The strongest incentive to repay is usually not group pressure, but rather the borrowers’ desire to keep access to a highly valued service, one whose future availability they can count on as long as they keep their end of the bargain.

 First Rating Agencies in 1996 (today 13)  To provide investors with information  to compare the performance of MFI  To improve efficiency of MFI  Guidelines: 1. Sustainability 2. Liability management 3. Portfolio quality 4. Efficiency Rationale and Role of Private/Socially Motivated Investors in MFIs 13 Source: CGAP (2003), Engels (2010)  Financial Performance

Indicator categoryWhat the indicators measure 1. Mission and social goals The MFI's stated commitment to its social mission, its target market and development objectives 2. Governance Whether members of the Board of Directors have been trained in social performance management and the presence of a formal Board committee that monitors social performance 3. Range of products and servicesBoth financial and non-financial products and services offered by the MFI 4. Social responsibility to clients The number of Smart Campaign Client Protection Principles applied by the MFI 5. Transparency of cost of services to clientsHow the MFI states its interest rates 6. Human resources and staff incentives The MFI's policy regarding social responsibility to staff. This includes: human resource policies in place, board and staff composition, staff turnover rate, and staff incentives linked to social performance goals 7. Social responsibility to the environment Whether the MFI has policies and initiatives in place to mitigate the environmental impact of financed enterprises 8. Poverty outreach Poverty levels of clients at entry and their movement out of poverty over time 9. Client outreach by lending methodologyThe type of lending methodology(-ies) employed by the MFI 10. Enterprises financed and employment creation The number of enterprises financed by the MFI and employment opportunities created by the enterprises financed 11. Client retention rateThe client retention rate of the MFI Rationale and Role of Private/Socially Motivated Investors in MFIs 14 Source: SPTF (2011)  Social Performance

 On Breadth and depth of outreach  Member-based orgs (cooperatives) in Peru and solidarity group based (NGO-MFIs) lending in Bangladesh perform best ₁  MFIs in rural areas, that target women + using poverty targeting indicators may have higher poverty outreach ₁  MFI plus providers (offering also nonfinancial services)  (1) NGOs  (2) unregulated by banking authorities  (3) entities mainly using village bank methodologies  Reach out to poorer and higher number of women borrowers ₂ Rationale and Role of Private/Socially Motivated Investors in MFIs 15 Source: ₁ Zeller & Johannsen (2006), ₂ Lensink and Mearslans (2009)  Social Performance