Microfinance for Bankers and Investors_6

160 • Microfinance for Bankers and Investors GRI calls itself the “de facto global standard for reporting” and claims over 1,500 businesses and other organizations as users.1 Included in its active list are more than 60 banks and financial institutions, including a number of banks that appear in this book: ANZ Bank, Banco Bradesco, Citibank, and Deutsche Bank. The GRI may one day fulfill its aims, but it still has a long way to go before it becomes a widely recognized and used global standard. The GRI approach sensibly cuts through some of the greatest difficulties in social reporting. To cope with variation in social goals from one company to another, GRI allows each company to select the indicators it will report from a long list of possibilities. It provides guidance on a process for defining appropri-ate indicators with reference to key stakeholders. It supports the differentiation of goals by providing industry-specific supplements—lists of proposed indicators that are especially relevant for certain types of industries. A proliferation of indi-cators arises from GRI’s attempt to incorporate not just corporate citizenship goals, but to respond to every variety of social purpose, a thankless task. Its finan-cial sector supplement, now under revision, is considering a proposed list of indi-cators that addresses financial inclusion concerns. The GRI also attempts to make sure that its process is more than just a public relations exercise. It requires that each reporting company provide narrative statements on social goals and strategies, as well as an explanation of how social-performance indicators are used in corporate management and governance. A major challenge for the GRI and other social reporting frameworks is to make their reports useful to stakeholders. Ideally, reports would be pored over by management, board members, and investors. Customers, employees, media, and community leaders would read them, too—at least the executive summary. Unless social reports provide information that is compelling for these stake-holders, they will not add much genuine accountability. At present, however, there is so much flexibility that a company can present a glowing picture by selecting only indicators it scores well on. If a company wants to use GRI as window dressing rather than take a serious look at its social performance, it can. GRI is among the best processes available for measuring corporate citizenship, but it remains flawed. The Equator Principles The Equator Principles get one step closer to inclusive finance. They were created by the International Finance Company and World Bank, which joined leading financial institutions to create voluntary guidelines for project Measuring the Social Bottom Line • 161 finance. Project finance loans provide funding for major new installations such as power plants or factories, which are often controversial, especially on environmental grounds. The Equator Principles are social and environmen-tal screens applied by financial institutions before approving project finance loans.2 More than 60 leading financial institutions have signed on to the Equa-tor Principles and the governing process that maintains them. These princi-ples cover the environmental impact of businesses financed, prohibit the financing of certain socially detrimental businesses (vice, weapons), and examine labor practices (no sweatshops or child labor). Efforts are under way, for example, by the Dutch development bank FMO to apply the same type of guidelines to inclusive finance. These efforts run straight into the problems of scale and informality that characterize most of inclusive finance. Microenterprise loans are too small to allow for individual policing, and the informal family businesses of the self-employed do not con-form to formal-sector labor standards. Using the Equator Principles to measure the social value of inclusive finance is like putting on a shoe on the wrong foot. Social Assessment for Inclusive Finance When we move beyond corporate citizenship to strategic social goals for inclu-sive finance, we find recurring themes that allow some common measurement. The shoe may be a slightly better fit, but still far from perfect. One of the best approaches is happening inside the GRI, which is consid-ering a set of financial inclusion indicators within its general financial-sector supplement. Some of the indicators proposed are: • Physical location of branches and customer service points • Outreach to marginal populations, including low-income, disabled, and disadvantaged population groups • Customer satisfaction among these groups • Responsible lending practices and investment advice (following proconsumer policies) • Financial literacy efforts • Product range (microfinance, remittances, community investment)3 These indicators focus on the basic questions: whom do you serve and how well do you serve them? This is a common sense approach. It avoids the thorny issue of ultimate impact, which we will address later. It includes a combination 162 • Microfinance for Bankers and Investors of quantitative, objective indicators (people and products) and qualitative, sub-jective indicators (customer satisfaction, consumer protection). Counting Clients Counting clients is the single most important measure for institutions serious about inclusive finance. It is so basic that it almost goes without saying, and it is also dead easy to track. Microfinance institutions have long measured their success first by the number of active clients and second by some indi-cation of how poor those clients are, usually using average loan size as a proxy. Mainstream financial institutions, however, prefer to track monetary volumes. Information technology can easily provide information on clients, sliced many ways, but habits of mind among managers and analysts are slow to change, and these indicators still lag in most financial reports. Progress Out of Poverty Index Counting clients does not give you much information on who a provider is reaching. One way to go deeper is to conduct periodic surveys of client socio-economic status. The microfinance community embarked on a collective effort to develop ways to measure client poverty, coping with the absence of hard data on incomes and assets.4 Some of the microfinance organizations most devoted to reaching the very poor have incorporated the resulting poverty data in their client intake process. The Grameen Foundation, for example, has developed the Progress out of Poverty Index (PPI), a set of 10 questions that predict whether a family is very poor.5 Given that poverty measurement is easily mired in academic com-plexity, a simple approach is essential if a tool is to make a difference in real life. Grameen has taken the detailed work of many researchers to devise this index, one of the most user-friendly poverty measurement tools now available for inclusive finance. Loan officers apply the index when they sign up new clients and periodi-cally thereafter, determining whether a family has moved out of poverty over time. The PPI asks about children, schooling, housing, land, energy use, employment, and consumer goods. Questions are tailored to each country, because while these elements are fairly universal indicators of poverty, they show up differently in each location. In Pakistan, the PPI researchers found that ownership of a motorcycle was a good predictor of a family’s status, while in Bolivia furniture and telephones turned out to be better predictors. Measuring the Social Bottom Line • 163 It should be noted that what the PPI does not do is measure the impact of financial services on clients. Social Ratings Another approach, which recognizes the institution-specific nature of social goals, and skirts the lack of consensus on how to measure poverty, is the social rating. Social ratings examine an institution’s processes, essentially asking whether the institution has credible ways of pursuing its stated social aims. ACCION International’s social assessment framework, the “SOCIAL,” attempts to incorporate both the generic corporate citizenship issues with finance-specific issues, all placed in the context of the company’s own goals. Other specialized microfinance raters, such as M-CRIL and MicroRate, are walking a similar path. These ratings are highly subjective, however, which makes it difficult for them to set up comparative scoring. At present they are more useful as management tools than as ratings that speak clearly to investors and other external stakeholders. Impact Ultimately, we would like to know whether financial inclusion makes people better off. This is the question of impact. Clients do not use financial services as ends in themselves, but to achieve other goals, like higher income, financial security, or a better standard of living. The impact question is particularly important for public donors and philanthropists who must decide whether to donate to inclusive finance or to something else—like primary education or rural roads. The question also matters for socially responsible investors. Microfinance investment vehicles like those described in Chapters 9 and 14 need evidence of social impact to report to their own investors. Triodos Bank, for one, has made major efforts to get the microfinance banks in which it invests to join the GRI. Impact is the hardest nut of social-performance monitoring, because of the problem of attribution. With tools like the PPI, lenders can tell whether loans are reaching the poor, and even whether the poor are becoming richer. But they cannot attribute changes to the use of financial services. What if the economy was growing, and as a result everyone’s income grew? What if the family’s daughter moved to America and began sending remittances? How do we know whether the loans made a difference? 164 • Microfinance for Bankers and Investors Formal studies that academics recognize as having sufficient statistical rigor to address attribution require control groups and measurement over time. The “gold standard” for impact evaluation, according to statisticians, is a random-ized control trial (RCT), modeled after clinical drug tests and championed by the Massachusetts Institute of Technology Poverty Action Lab. Clients are ran-domly assigned to the treatment group (a loan) or the no-treatment group. If there is a statistically significant difference in outcomes between the groups, we infer that the loan made the difference. RCTs are expensive and time con-suming, costing as much as $1.5 million and requiring years to complete. Moreover, this approach only demonstrates impact in virgin territory where no other service providers operate. Anthropologist Ann Dunham Soetoro, better known today as Barack Obama’s mother, dealt with this problem as far back as the early 1990s, when she worked for Bank Rakyat Indonesia. She saw that it was uninteresting to find out whether a loan from BRI had more impact than a loan from BKK, a provin-cial loan program.6 When clients already have access to credit from another provider, it is impossible to construct a meaningful no-treatment group. Qualitative studies are much more revealing. While quantitative studies zero in on a few key numbers, qualitative studies can provide a rich picture of how financial services affect clients. Such techniques—including focus groups, in-depth interviews, and other market research tools—help explain how impact happens, and at the same time provide useful insights for improving products and service delivery. Organizations like MicroSave and Microfinance Oppor-tunities and projects like the Financial Diaries provide guides to adapting mainstream market research techniques to bottom-of-the-pyramid clients. The Best Measure Is Face-to-Face I want to end on a personal note by recommending an entirely unscientific approach to social indicators: visiting clients. Business executives who wish to develop a deep understanding of their market, and at the same time to increase their motivation to pursue social aims, can do nothing more impor-tant than talking with clients in their homes and workplaces. Each of the clients described in the beginning of this book is a real person whom I met and whose story moved and inspired me. I think back to them time and again when considering what paths make sense for building the inclusive-finance industry. Listening to clients puts the two bottom lines in proper perspective. ... - tailieumienphi.vn