Last
week, the Social Performance Task Force (SPTF) held its annual meeting in
Panama City, Panama. A large part of our attention at this meeting was on
better defining “balanced returns” – the balance between the social and
financial performance of MFIs and investors and how this ultimately affects the
end-clients. Grassroots has been focusing on this balance dating back to
the early days of microfinance investing and actively supportive of the SPTF’s
ongoing work to develop guidance and indicators on this controversial topic. A
few key highlights below:
Spirit
of Cooperation
In
operationalizing the balanced return concept, some investors – including
Grassroots – believe in setting indicative thresholds for key indicators, such
as ROE, ROA and Opex, while others find this approach problematic given the
many factors that need to be taken into consideration (exs: country and
regional differences). The differing approaches led to energetic debates, but
for the most part any disagreements were outshined by the willingness of
participants to maintain an open dialogue and roll up our sleeves to further
conversations around the feasibility of employing indicators grounded in deeper
analysis of client margins and MFI programs. Impressively, over the course of
just one month, the heads of a number of the most prominent investment managers
were able to produce a working paper expressing the main tendencies of the
industry regarding balanced returns. Although the working paper is still in
progress and presents two different views rather than one position, it is
useful in serving as a basis for further discussion and highlighting the
differences among our large group of social investors and their level of
comfort with regards to MFI profits and its influence on client well being.
Transparency
There
was some concern that presenting two views would denote lack of unity among the
industry. We actually welcome the different viewpoints and feel there is room
for different approaches, provided there is clarity on what is being proposed.
The discussions on expectations and approaches reflect the range of investment
options developing in the industry. Transparency will enable better informed
choices: investors can determine which vehicles best suit their needs and MFIs
can choose which partners are most aligned with their own mission and
objectives, resulting in a more efficient, better performing industry and
improved products and services for microfinance borrowers. This
transparency is key to ensuring that MFI investors and stakeholders are more
tightly aligned and avoid later disagreements that can cause problems with
investors, the board, and the MFI's strategy and operations.
The
Call for Better Client-level Data
An
overarching theme throughout the SPTF meetings was the need for MFIs and
investors to develop better data on client level business margins so that we
can better assess to what extent clients benefit (or not) from their MFI loans.
Whether you think there are trade-offs between financial and social
returns, or you believe that the market will eventually sort it out, or you’re
not sure – more data on client returns is essential to the ongoing debate and
the development of a balanced return framework. At Grassroots, we believe
efficient MFIs can deliver higher social returns or more impactful
loans/products to their clients when they have closely aligned capital
/investors that prioritize such outcomes.
We welcome the renewed focus on the client through initiatives like the SPTF, Truelift, and the Pro Poor Community of Practice that work to achieve positive and enduring change in the lives of poor people. We are working on a project that supports MFIs that deliver products and services that most effectively improve client well-being. These MFIs will include leaders in developing social metrics and performance systems and analyzing the relationship between their program costs to client returns. We hope these MFIs will be important partners in helping investors better understand the impact of their services on client businesses and where we should set profitability thresholds for further scrutiny and engagement so that we ensure that clients benefit from financial inclusion. While we work on collecting data, we will continue to collaborate with likeminded investors about how to improve the “indicative thresholds" approach so that we don't ignore the underlying relationship between MFIs and their client's profitability and well being.
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