It was 6 am last Thursday when Saeed, a 42-year-old small farmer from the Sharqiya governorate, woke up to the call of the dawn prayer. Like every day, he prayed in his room, next to his wife and his three children, and had the hearty breakfast that carries him through the long hours of working the fields.
But the rest of his day was different from the norm. He had an appointment with a man who has in the past years been playing a significant role in his life: Ahmed, the loan officer representing one of the most active microfinance institutions (MFIs) in the governorate.
He was meeting Ahmed to renew his loan for the 12th time in six years and this increasing source of funds has helped transform his life: The loans have allowed him to increase his average revenue as well as find a way out of the uncertain and swinging cash flows that previously made his life difficult.
This increasing capacity to plan has benefited his wife, who can now afford regular diabetes medication, and their three young children, who enrolled in school after Saeed attended several awareness-raising sessions that were organized by Ahmed.
Saeed’s story resembles that of hundreds of thousands of micro-borrowers in Egypt and more than a hundred million around the world. It’s the story of microfinance, this industry that stands at the cross section of finance and social development in trying to achieve a double bottom line: reaching out to the poor through profitable financial services.
The issue of the double bottom line has been debated for a long time — whether MFIs face a trade-off between providing services to the poor and achieving financial sustainability.
As MFIs commercialize, the debate becomes more focused around concerns of mission drift. In other words, as MFIs pursue financial sustainability, does this mean that they necessarily shift up-market, reducing their costs by providing larger loan and savings products, in more accessible areas, instead of the smaller, more flexible products needed by the poor? Are financially sustainable MFIs therefore less likely to target and serve poor clients?
A response to this question has been demonstrated over the last five years based on empirical evidence from Latin America, South Asia and Africa. Financial sustainability and “bottom of the pyramid” objectives can be combined provided that MFIs achieve a balanced portfolio mix and ensure they have social objectives embedded in their operations.
The question is how to measure such an achievement? Social impact — through long term studies — is definitely the best response, but social development is a “journey, not a destination.”
Starting from the late 1990s, MFIs, donors, and stakeholders became more focused on achieving double bottom line results, and as a result, techniques have been developed to assess whether an MFI is achieving both financial and social results.
Enter the social rating, an independent assessment of an organization’s social performance, i.e. how effective the MFI has been in translating that mission into practice, in line with general social goals, using a standardized rating scale. The social rating process and scale are similar to those used for financial ratings.
In microfinance today, accepted social goals and MFI social missions take a variety of forms, but in general include: extending financial services to under-served areas, offering financial services to persons previously excluded from the banking sector, supporting micro and small enterprises, social responsibility issues, contributing to gender equity, reducing poverty, reducing vulnerability among the poor, bringing marginal groups into mainstream society, and facilitating job creation.
Ideally, a social rating would complement a credit rating, which focuses on profitability and institutional capacity. The combination of financial and social analyses should enable potential — especially “social” — investors to place funds in organizations that best serve the double bottom line of meeting an altruistic mission while demonstrating sound financial management.
Hence, as in the case of credit ratings, social ratings aim to serve several functions and both ultimately aim to facilitate the flow of capital into the microfinance industry. Why should an MFI seek to undergo a social rating on top of a credit rating then? Well, the answer seems to be straightforward: A social rating should be ideally placed to facilitate social investment. Also, by participating in the rating process, MFIs develop an understanding of key data and issues that affect their social performance and aspects to address to further improve.
While there is no doubt within the community of microfinance stakeholders that social ratings help keep MFIs focused on their bottom line objective, MFIs are still concerned about the difficulty in balancing commitment to social goals with the ever-present pressure to perform well financially in order to gain greater access to funds and expand.
From that perspective, it is still unclear whether donors and/or investors will value social performance as much as financial performance when deciding where to place their money. Let’s bet they will!
Hicham Bayali is the Program Manager of IFC’s Microfinance Advisory Services Program in the Middle East and North Africa. He has over 12 years of experience in investment banking and microfinance. This article was written exclusively for Daily News Egypt.
The findings, interpretations and conclusions expressed in this article are the authors own and do not necessarily reflect the views of IFC, a member of the World Bank Group.
