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Social Performance Indicators for Microfinance Institutions (Social Efficiency Index)

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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 Social Efficiency Index and how it can contribute towards defining the social performance status of the portfolio.

Social Efficiency Index

This index is a proxy for how efficiently the institution is providing loans while neutralizing the effects of average loan size on efficiency (both operating expense ratio and cost per borrower are each heavily influenced by the loan size). The Operating Expense Ratio favors MFIs with larger loans, while the Cost per Borrower favors MFIs with smaller loans.

The Social Efficiency Index allows for a more direct comparison of different types of MFIs with different credit methodologies.

The Social Efficiency Index is calculated by multiplying the Operating Expense Ratio by Cost per Borrower.

The Operating Expense Ratio is calculated by dividing all expenses related to the operation of the institution by the annual average gross loan portfolio. The Cost per Borrower Ratio is calculated by dividing all expenses related to the operation of the institution by the average number of active borrowers for the period.

MFIs should be careful with factors that affect cost of borrowing, but are not directly related to the money that is lent. For example, MFIs that provide complementary services such as health or training will increase the operating expenses but are not directly related to the cost of providing the loan. These costs should be separated out in order to be able to compare MFIs that do not provide these services.

Also, MFIs provide other financial services such as deposits or insurance, which may increase operating expenses but are not directly related to the lending services. The costs of these other financial services may place the MFI at a relative disadvantaged with other MFIs that do not offer these services.

This index is not used in the traditional banking sector.

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