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 Staff Retention Ratio and how it can contribute towards defining the social performance status of the portfolio.
Staff Retention Ratio
An institution’s responsibility towards its staff is another key area of social performance and Corporate Social Responsibility. Short of interviewing or surveying clients, the Staff Retention Ratio provides a quantitative measure of staff satisfaction with the MFI. The lower the ratio, the more the personnel are satisfied with their jobs.
Staff turnover on its own will not provide a complete picture of how satisfied personnel are with their jobs. In cases where the MFI has had a crisis and must let go of staff, this ratio is not applicable. The Staff Turnover Ratio will be higher in competitive markets where MFIs seek to hire trained staff from other MFIs.
It should be noted that most MFIs experience the greatest turnover during the first year of employment – this is especially valid for loan officers. During the staff induction training period, which generally takes between one and three months, loan officers often realize that the job is not for them. A more sophisticated analysis of this ratio removes the training period and begins the employment once induction is complete.
In general, MFIs use variable pay to encourage loan collections and good asset quality. However, the experience of leading MFIs suggests that incentives should play an important role but should not be excessive.
In the traditional banking sector the equivalent ratio is called the Employee Turnover ratio. It provides a similar measurement of employees leaving the bank and is an important ratio for the Human Resources department because high turnover is costly and can influence an unstable work environment.
In the next blog we will look at Social Efficiency Index and how it impacts the social performance of a MFI.