Interview with Koenraad Verhagen, Argidius Foundation

Why is the Argidius Foundation interested in social performance?

The Argidius Foundation has a track record as a social investor in microfinance in Latin America and more recently in Africa. Our mission is to promote entrepreneurship among the low-income sections of the population. We have supported the commercialization of microfinance and initiatives to make MFI performance financially
transparent. While we were impressed by the MFI financial reports and growth of the sector, we gradually became aware that claims of enterprise development had been overstated and that microfinance is basically household finance, despite what brochures and anecdotal evidence said. Sector specialists now admit that access to microfinance is, in many cases, a necessary but not sufficient condition for enterprise development, especially at the “micro-level.” This is where many MFI clients carry out their small trade and service businesses,often in saturated markets with little space for expansion—and even sometimes at the expense of their neighbors.

At the same time, we realized that access to microfinance services, which more broadly includes savings and insurance, can be crucial to poor people in their daily struggle to survive, to be less vulnerable, and to maintain minimal standards of quality of life. While Argidius is particularly interested in enterprise development and employment creation, we believe generally that any development organization pursuing social objectives should formulate them clearly and develop indicators to track its results systematically. In addition, social performance reporting to stakeholders and external rating (see SEEP Progress Briefs, no. 4 and no. 6) will further help organizations be more mindful of accomplishing their stated social objectives.

However, social performance reporting has a long way to go to become general practice in microfinance, and standards of measurement to be broadly accepted. Currently, only a few MFIs have introduced social performance management systems and practice it to the benefit of their clients and their own institution. (See Progress Brief,
no. 2). At the same time, we are proud of the progress made over the past few years to develop concepts, approaches, instruments, and indicators that allow social performance to be tracked and measured professionally. The pioneering work accomplished by the Imp-Act Consortium, CERISE, USAID, M-CRIL, and the Grameen Foundation may have further ramifications in the development field, since the underlying philosophy, proposed framework, and indicators
can be adapted and applied to other sectors of development activity focusing on poverty alleviation.

What will it take to make social performance management, assessment, reporting, and rating common practice in the microfinance industry?

The prevailing mind set in microfinance needs to be changed and an incentive system introduced that supports this change.

The change in mind set implies a departure from a reductionist approach, that measures performance solely in terms of financial performance and number of people reached, to a more an integrated concept of “sustainability” that puts sustainability of client and their economic activities and livelihoods squarely in the center, and regards MFI financial sustainability as the means of ensuring the permanency of the financial services that clients need—not as an end in itself. I do not see the social merit of more poor women being caught in cycle after cycle of structural debt from “repeat borrowing” (often at high interest rates) or accumulating more debt by “multiple borrowing,” without substantial growth in their micro-business or positive change in the way they manage their money. One just has to talk to a few loan officers to learn that this is happening all over, even if the overall impact of microfinance is positive in most instances. In other words, a socially responsible MFI needs to have the instruments to assess both the positive effects and potential, unintended negative effects of lending operations. Some MFIs provide basic financial education to clients, which is crucial for credit to truly help the poor, especially not-so-poor, clients.

For systematic change to happen, social investors, including grant making organizations, need to adjust their criteria for appraisal, explicitly require “double bottom line” reporting from MFIs, and refuse to be satisfied with information that does not go beyond financial performance ratios, selective anecdotal evidence of positive change, and “number of microenterprises reached.” This subjective and non-applicable information may make them feel good about their “social” investment, but it is not sufficient for investors who
want to be well informed about “social return.” For objective assessment of performance against social objectives, we will need social rating products (see Progress Brief, no.4)—concomitant with financial rating—that objectively evaluate how well organizations are set up to accomplish their stated goals.

The fight against poverty is serious business. For the microfinance sector to realize its full potential and make a substantial contribution to achieving the MDGs, we have to equip ourselves with the instruments to evaluate performance and results. Otherwise, we may end up with “an inclusive financial sector,”—but to whose avail?

Excerpted from SEEP Social Performance Progress Brief.