Social Performance of Microfinance Institutions

The International Fund for Agricultural Development released a paper called, “Assessing and Managing Social Performance in Microfinance.” To date, it is the best paper I have read on the importance of a success metric for microfinance institutions other than the traditional bottom line.

To provide a little context for the paper, let me describe why grantors, governments, academics and others are attempting to measure social performance. As microfinance has matured, a number of forms of MFIs have emerged. For simplicity, the key distinction is for profit and nonprofit. (There is considerable debate over which format is more effective. I’ll leave that for another post.) The nonprofits tend to have a broader mission, and often rely on donations or subsidies of some sort to provide borrowers with additional services. In many cases, these additional services are in fact the raison d’etre of the organization, and microfinance is seen as simply a means to that core end. (See earlier post.)

And herein lies the problem. How can outside institutions fairly measure the effectiveness of a nonprofit microfinance organization whose mission has a social purpose over and above its financial purpose? The answer is to measure social performance, described in the IFAD report:

“Social performance is the effective translation of an organization’s social mission into practice. The social value of microfinance relates to the way financial services improve the lives of poor and excluded clients and their families and widen the range of opportunities for communities.”

In plain language, does the existence of an MFI improve the well being of the people in a community?

As any social scientist knows, measuring wellness indicators is extremely tricky, but a number of groups are making concerted efforts to pin down the real impact of microfinance. I am most intrigued by the work of Innovations for Poverty Action, which evaluates poverty solutions through field work and statistical analysis.

Regular measurement of Social Performance Indicators through replicable studies will allow grantors, governments, and even investors to put their money where the best value is, not only in terms of financial returns, but also in terms of social benefit. Ideally, this would foster a competitive environment among MFIs that would nudge all of them towards the methods and practices that resulted in the greatest social good.