How should a microfinance institution (MFI) measure performance?  Should they focus solely on the most common method, financial performance, or are things like client retention rates and social indicators also important?  While traditional financial indicators, like client repayment rate, are important in a drive to create a sustainable MFI, they do not measure the entire success of an MFI.  Even client retention is not a perfect measure; are clients continuing to use services because they are good, or driven to by necessity to make payments on spiraling indebtedness?  Measuring social performance, or looking at how a MFI is translating their social mission into a reality, is also key in determining if the loans they give to their clients are really having a positive impact on their lives.  Fondo Esperanza (FE) recently partnered with Santiago, Chile based Universidad Alberto Hurtado to do just that: study the effects on the lives of FE borrowers from the microfinance services they receive.

I want to begin with the fact that the main purpose of  this blog is not to go into an in-depth evaluation of results of the FE/UAH study (though I will share some of the key points), but rather to look how a social performance study can be constructed by a single institution and the type of information that can be collected.   The Social Performance Task Force defines social performance as “the effective translation of an institution’s social mission into practice in line with accepted social values such as serving larger numbers of poor and excluded people, improving the quality and appropriateness of financial services, creating benefits for clients, and improving social responsibility of an MFI.”  With this definition is important to begin the process by looking at the organization’s mission, which is exactly where FE began:

Supporting vulnerable male and female entrepreneurs through financial services, training and networking in order to improve the living conditions of the clients, their families and communities.

Kiva borrower Raquel inside her fruit and vegetable store in the Lo Espejo neighborhood of Santiago, Chile.

The general objective of the study, released in December of 2010, was to generate social indicators that estimate the short and long-term effects of services provided by FE on the quality of life of their clients.  The specific objectives include 1) define what social indicators permit a proper evaluation of the impact on clients lives 2) evaluate these defined social indicators over a 2 year period, and finally 3) evaluate the impact on the lives of FE clients and the changes in their quality of life while comparing them to a control group.  After researching international impact studies, creating a set of indicators and running a test group, FE and UAH worked together to collect and analyze the data.  The data collected focused on 4 main indices:

1. Business Development: skills (25%), growth (25%) and profits (50%)
2. Socioeconomic Well-Being: household income (60%), Individual’s social security/health forecast (20%) and savings (20%)
3. Empowerment: self-esteem (30%), locus of control (10%), decision-making power (40%), leadership (20%)
4. Social Capital: networks (65%), confidence (20%), participation in organizations (15%)

Data was collected on new clients, clients about to start the fourth cycle of loans with FE (1 year as a member of a Communal Bank) and clients beginning the seventh cycle, or a total of 2 years of loans.  300 clients were interviewed and included in the study, being asked a variety of questions in regards to each above the above 4 indices.  Here are the results:

To approximate the impact that FE´s programs have had on the lives of their clients, a control group was formed to make a comparisons from the 2009 Social Protection survey.  The aim of the comparison was to find a group of people with a very similar profile to a FE borrower, and thus may have participated in a FE program, but have not done so.  The profile used included: female, over 18 years of age, independently employed, and with a monthly income between approximately $30-400.  With this part of the study FE was not only able to see if there were changes within their only clients over their time in a FE program, but also how they would compare to someone without any participation in their programs whatsoever.  Questions to compare the groups focused on topics such as:

  • Frequency of the use of a budget
  • Ability to secure funds in the case of an emergency or crisis
  •  Network of financing (friends, bank, savings, family)
  • Participation in organizations
  • Self-esteem
  • Job training

Bernarda, Aida, Monica, Eliana, and Viviana are Kiva borrowers as part of the Compartiendo Esfuerzo (Sharing Effort) Communal Bank in La Cisterna neighborhood of Santiago, Chile

The study touched on a large number of areas, but here are some of the general conclusion:

  • There was an evolution from the client entering the FE program through the seventh cycle in every category, with the strongest growth seen in socioeconomic well-being, which moves from 58% to 90% over the two years borrowing with FE.
  • When comparing FE clients to the control group, the FE clients had higher levels of association, better financial networking opportunities, and a higher ability to handle shocks from a crisis or disaster, generally because of higher savings levels.
  • FE were received a much higher level (25% to 5%) compared to the control group, a high increase in social capital.

So what did FE gain by completing this process?  To begin, they have developed a system to continually reevaluate their organization in the future and see if changes to their programming can further the goal of improving the social and economic well-being of their clients.  Rather than look at simple numbers (like client retention rate), they have a tool with a variety of information that the management can use to guide the institution.  They also plan to use the results as a baseline in the development of a tool to evaluate all clients from the time they enter the FE programming to further monitor the impact of borrowing and social training on a client by client basis.  FE would also like to reach out to other MFIs within their network to share the results of the impact study, while at the same time looking for synergies that could allow all of them to perform at a higher level.

What other benefits could measuring social performance have for a MFI?  To begin, it offers an alternative view for investors and donors to gauge the impact an organization is having on lives of their clients.  While MFIs and the microfinance industry continue to look for ways to be sustainable, good social performance can be an important variable in the decision-making process of donors and investors when allocating funds and subsidies.  It also allows an organization to take a step back and evaluate if their programming is really meeting the social mission they intend to meet, and if they are not doing so, focus on the areas where they can improve to meet those goals.

Partnering with a university and developing an internal survey of social indicators is not the only way to conduct a social performance survey–social performance is one of the hot topics in microfinance today and there are a variety of tools already available for MFIs to begin this process.  Kiva has been using Kiva Fellows all over the world to help partner MFIs complete the Cerise Social Performance Indicators Initiative (I am working on it FE as we speak), an audit designed specifically for this reason.  If you are interested in learning more about social performance and the work being completed within the microfinance industry, please visit some of the links below I consulted while writing this blog.

Microfinance Gateway

CGAP

Social Performance Task Force

MIX Market

John Gwillim is part of KF15, serving with Fondo Esperanza in Santiago, Chile.  He also worked with Fundación Mario Santo Domingo as part of KF14 in Barranquilla, Colombia.

Interested in making a loan to a Chilean entrepreneur today?  View all loans currently fundraising for FE here.  Also please visit the FE Field Partner page, or join the Fondo Esperanza and/or Chile lending teams.


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