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Social Performance Indicators for Microfinance Institutions (Borrower Retention Ratio)

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Social Performance Indicators

There has been a growing demand for transparency on the social performance of MFIs. However, indicators that measure social results have not been universally accepted despite microfinance’s double bottom line objectives, financial and social returns. Recently, controversies ranging from excessive profitability and usurious interest rates, to increasing client over-indebtedness and cases of client abuse have plagued the sector and called into question its social reputation. Claims that the social and development impact of microfinance may be overstated, or that it may actually be harming those it set out to help, have come to surface, forcing the industry to reevaluate itself and its social responsibility towards various stakeholders.

Initiatives such as the Social Performance Task Force (SPTF), MFTransparency, the Center for Financial Inclusion’s Smart Campaign on Client Protection Principles, along with social ratings of MFIs, have all contributed to increasing transparency and awareness of best practices.

There are many challenges in evaluating an MFI’s social performance. Not only do MFIs have a wide range of social missions and strategic objectives, but perspectives on what is “social” also vary considerably.

Some MFIs focus on serving women, the rural poor, or youth, while others want to increase access to financial services or offer non-financial services. There are situations where MFIs without an overtly social mission statement may achieve stronger social outcomes than those with very strong social missions. Understanding the contextual nuances is critical given the highly subjective nature of this aspect of microfinance. Measuring social performance is still in its infancy with few widely accepted quantitative indicators to capture the social results of an MFI’s operations.

In this blog we will look at Borrower Retention Ratio and how it can contribute towards defining the social performance status of the portfolio.

Borrower Retention Ratio

As clients should be the center of all microfinance activity it is important to get a sense of client satisfaction and evaluate an MFI’s Corporate Social Responsibility19 to the client. Institutions should adequately serve clients by considering their needs, designing appropriate products and delivering in a client-centric manner. A popular proxy to gauge client satisfaction is measuring Borrower Retention. A higher retention ratio generally represents a higher level of client satisfaction.

A distinction needs to be made between clients and borrowers. This measures the retention rates of recipients of credit products (borrowers) and not all of the clients of an institution (including savings clients). Including all clients would distort the ratio and using it as a proxy for satisfaction because of the difficulty in measuring active clients benefiting from non-loan products.

In markets with low levels of competition the Borrower Retention Ratio may remain high even if client needs are not adequately met. Borrowers may not have a choice of organizations and may be forced to remain with an MFI in spite of low satisfaction. This may distort the effectiveness of the indicator’s ability to gauge client satisfaction, which is why other indicators and metrics may also need to be considered.

Low Borrower Retention Ratios are common in highly competitive markets as MFI seek to attract new clients with more competitive loan products and terms. Aggressive tactics can cause borrowers to switch institutions.

Borrower Retention affects both operating expenses as well as portfolio quality. Attracting new customers’ costs more than retaining existing clients over time and keeping good clients exposes the MFI to fewer risks.

Even in those cases where the operating expense ratio is high, in village banking for example, new customers require additional training, while old clients are familiar with the institution and therefore cost less to maintain.

The traditional banking sector uses a similar calculation to measure customer service.

In the next blog we will look at Staff Retention Ratio and how it impacts the social performance of a MFI.

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