Microfinance and social performance: Are universal industry standards possible?

Last month I had the opportunity to attend the annual Social Performance Task Force (SPTF) conference in Jordan. Comprised of over 1,000 members from all over the world and from every microfinance stakeholder group – practitioners, donors and investors (multilateral, bilateral and private), global, national and regional associations, technical assistance providers, rating agencies, academics and researchers, and others – the task force has been around since 2005. Initiated by CGAP, the Ford Foundation and others, the task force seeks to hold the microfinance industry to its promise to advance customers’ social well-being.

This year’s conference saw the launch of the Universal Standards for Social Performance Management. The Universal Standards, agreed upon after broad industry consultation, are a set of management best practices designed to help microfinance organizations deliver on their socihttp://www.sptf.info/sp-standards-2al mission.

The six pillars of social performance management

These standards take a common sense approach for any organization to achieve its objectives. In practice, the standards set out a framework based on six pillars:

  1. Define and monitor social goals – This section highlights the need for microfinance institutions (MFIs) to have a clear social mission, with clearly defined and measurable outcomes and outputs to track an institution’s social performance.
  2. Ensure board, management and employee commitment to social performance – The standards highlight the need for all stakeholders (boards, management and employees) to be engaged in the social mission of an organization. As CGAP has noted in a recent series, strong governance is a key criterion, meaning boards must hold senior management accountable for making progress towards an MFI’s social goals, not simply its financial goals.
  3. Treat clients responsibly – This section borrows heavily from the SMART Campaign’s Client Protection Principles. It highlights management practices designed to prioritize client needs, and calls for adequate client protections to be built in at all stages of an institution’s growth.
  4. Design products, services, delivery models and channels that meet clients’ needs and preferences – This section is an extension of Section 3 and outlines best practices to ensure that the products and services of a MFI do not cause a unintended harm client such as over-indebtedness.
  5. Treat employees responsibly – In this section the standards outline best practices to manage and monitor employees.
  6. Balance financial and social performance – In this final section of the standards, SPTF lays out management practices to ensure responsible financial growth that doesn’t sacrifice an organization’s social mission.

A standard for financial performance: Ranges and upper limits versus fixed targets

On my first review of the standards, I readily agreed with the first five items on the list. The sixth, balancing social and financial performance, gave me pause – not because I disagreed with its intent, but because, on its face, an industrywide standard for financial performance seems almost impossible. Given the varied conditions, stages of growth, regulatory environments and geographies where each MFI operates, what general standard for financial performance could exist? For instance, you couldn’t expect the growth rates of an Indonesian start-up to be similar to those of an established MFI in India.

But on this front, the task force opted not to prescribe a hard and fast rule on acceptable growth rates or returns. Instead, they outlined a best practice which dictates that the board of each MFI should set acceptable growth and return within a target range.

This idea of a range is key. Boards typically set a fixed number as a growth target. By asking boards to set target ranges instead of a fixed number SPTF is implicitly asking that they recognize the possibility of an upper limit to acceptable growth. Why? The task force’s recommendation was prompted by an instance in which unusually high growth numbers at a specific branch spurred an investigation that unearthed fraudulent practices. There is a recognition of the danger or prioritizing financial expansion at the expense of social performance.  In stating this spring that Mohammad Yunus was right about the challenges of “bringing private capital into social enterprise,” Vikram Akula, the founder and sometime chair of SKS Microfinance – once the poster child for microfinance’s potential and later tied to the Andhra Pradesh crisis – acknowledged as much.

Distributed accountability and the next phase of industry maturity

The most promising aspect of the standards the task force laid out is that they are designed to position all stakeholders – not just MFIs – as accountable for achieving the social outcomes of microfinance. They lay out a framework for investors and donors to direct their capital to organizations that have strong social performance practices, rather than just to those with the highest bottom lines. They seek to encourage boards, management and employees to work together to achieve social outcomes. They give observers such as social rating groups, networks and associations a starting point for consistently assessing social performance.

For now, it’s reasonable to expect that most institutions will need time to meet all standards. The very real and time consuming challenges that MFIs face on the ground – getting out and building organizations one client at a time, meeting weekly with clients to collect payments, developing operational infrastructure to create transparency for boards on a shoestring budget – mean it will be a gradual process. And while we need to hold institutions accountable for getting on board, we also need to recognize that the industry is still relatively young, and that this next stage of maturity will take some time.

At this point in time, an MFI’s failure to meet newly adopted (and voluntary) standards doesn’t mean that the organization or its management is lax in achieving its social mission. What it does mean is that, in an industry that’s been beset by a number of challenges since 2010, the next phase of hard work – instilling a consistent framework for effective social performance management – is just beginning.

Learn more about our work on social performance indicators.