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1. Introduction
In the past, evaluation and rating tools focused exclusively on the risk assessment and financial performance of microfinance institutions (MFIs). In contrast, current practitioners increasingly feel the need to measure the social performance of microfinance institutions in order to assess the achievement of the so-called double bottom line, that is, the realization of the MFI’s own social goals in a sustainable and durable way. The social rating consists of a social performance evaluation of a MFI, intended as its institutional capacity of putting its mission into practice and of achieving social and development goals. The social rating is an external, credible and accountable assessment which provides objective judgement on the social performance of the institution. The social rating is very useful both as a reporting tool for external stakeholders and as an internal management tool . It gives external stakeholders the opportunity to monitor the social efforts of their partner-MFIs and to allocate the available resources according to their social objectives. Additionally, by highlighting the strengths and weaknesses of the social performance dimensions considered, the social rating enables management to identify the strategic priorities and consequently focus on the areas that require intervention, facilitating the improvement of both the social performance and the operational and financial performance of an MFI. Furthermore, the social rating represents an important step towards the establishment/improvement of a social performance management system. Moreover, by analysing in detail the status and effectiveness of the SPM system of an MFI, social rating can also provide useful information for designing effective technical assistance intervention systems to introduce in order to track, monitor and manage social performance.

2. A common framework: the Social Performance Pathway
The social rating of Microfinanza Rating is aligned with the common framework for social rating and reporting established within the Social Performance Task Force 1 and with the pathway for social performance established by the Imp-act consortium. Social Performance

“Put its mission into practice”
Social Performance Management Outreach I M P A C T

Mission and Objectives
Intent

Systems
Process and Input

Output
Output

Services Social responsability – towards clients, environment, staff community,

Social Rating

Impact Study

(SP) is defined as an effective translation of an institution’s mission into practice. This includes both the short and long term results that an MFI achieves as well as the activities it
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The Social Performance Task Force was created in March 2005 with the aim of promoting social performance in microfinance, launched by the CGAP, the Ford Foundation and Argidius Foundation.

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undertakes, the products it offers and the organizational values and behavior it promotes (not only results but also the process to achieve these results). In contrast, impact studies measure the change in the living conditions of one population imputable to the action of the MFI. The social rating does not measure the impact of the MFI; it analyzes the intentions (social mission and social objectives), systems and results of the MFI, before the impact that it may have on clients. Social rating and impact assessment are complementary tools, one does not substitute the other, since they respond to different needs. Therefore the social rating does not assess whether the MFI has obtained a certain impact on clients, but rather whether it is likely to do so because it has implemented its social mission in a satisfactory way.

3. Our double methodology
Microfinanza Rating has developed two different types of social rating, with the objective of fulfilling the needs of the different stakeholders. The first type (Social rating without field surveys - SR) consists of a process based on the analysis of data and information available at institution level. The second type (Social Rating with field surveys – SRS) entails an in-depth field analysis, which is more demanding in terms of time and resources and therefore more expensive. SRS implies the direct collection of client level data through a variety of techniques (surveys, interviews and focus groups) conducted in the field. A common methodology is used for both products and consists of evaluating the following four areas: 1. 2. 3. 4. Social mission, system and strategy Outreach Quality of the services Social responsibility

In both cases, the values and the social behaviour of an MFI are measured in terms of social mission, strategy and procedures aimed at its achievement 2 and in terms of characteristics of the target reached, quality of the services provided and social responsibility expressed towards the staff, the clients, the community and the environment (achievement of the triple bottom line). The two social ratings main difference is the depth of the analysis for the outreach and quality of the services dimensions. The social rating without field surveys (SR) bases the substantial part of its analysis 3 on the proxies obtained from the information available at institutional level. The social rating with field surveys (SRS), in addition to considering these proxies of outreach and quality of the services (loan size, areas of operation, socioeconomic characteristics of clients, clients’ drop-out rate), investigates the dimensions directly at clients’ level. The SRS requires the submission of a questionnaire to a representative sample of clients in order to identify the social and economic profile of the population, as well as conducting several focus groups to obtain direct feedback on service quality. The inclusion of an in-depth field study is demanding in terms of time and resources; however it allows a significant enrichment of the outreach analysis 4 and of the service quality. Since complete and reliable information on the socio-economic status of clients is
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Including procedures for monitoring social performance achievements and for using collected information to improve performance (Social Performance Management) 3 If an MFI has a full SPM system in place, then direct client level information is likely to be available and more direct measures and information about the socio-economic status of the clients will be included into the analysis. 4 It allows to obtain indicators, as for example the % of people behind a certain poverty line, which generally MFIs can not provide.

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rarely available in the MIS of MFIs, in the majority of cases the direct collection of primary information at the client level is the only possibility to go beyond estimations such as loan size (poverty proxies), of which validity has not yet been proven. SRS can have several additional values as it: Represents an important step towards the establishment of an effective social performance tracking system (MIS): the information presented in the social rating, especially the direct observation of clients’ socio-economic characteristics and satisfaction, can be a crucial input for the development of an internal monitoring and tracking system. The social rating can facilitate the identification and incorporation in the MIS of indicators for the monitoring and evaluation of the social performance (poverty profile of clients) and social impact of an MFI (baseline design). 5 Provides baseline-data for impact studies on clients that may be conducted in future. Investigates the actual validity of the most commonly used proxies as estimates of clients’ poverty profile. Both social ratings provide quantitative and qualitative analysis of the MFI’s strengths and weaknesses as identified in each of the four assessment areas. The analysis take into account the context in which the MFI operates and all relevant environmental factors. The picture these tools provide will be as objective as possible, and should allow comparisons to other MFIs and benchmarking across the microfinance industry.

4. Structure
The social rating structure for both products (SR and SRS) is composed of five sections: the first describes the social and economic context of the country, while the following four sections assess the components of the social performance of the MFI. Section Content summary
0. Socio-economic context Socio-economic development of the country and degree of inequality in society, compared to regional performance. Progress towards the Millennium Development Goals. Social mission of the MFI and governance and the management capacity to set objectives, design strategies and establish systems/procedures to achieve it. Areas of operation and poverty/exclusion profile of the clientele in terms of level of income/consumption, education, access to basic services, housing conditions, assets, living conditions, etc. Variety of the services, appropriateness to clients’ needs, transparency and client satisfaction. Policies and procedures contributing to an overall positive impact on society (corporate social responsibility), respect of ethical codes and promotion of positive values. Social responsibility is analysed at four levels: towards clients, staff, community and environment.

1.

Mission, Systems and Strategy

2.

Outreach

3.

Quality of Services

4.

Social Responsibility

A detailed description of the methodology used in the four assessment areas of the social rating is provided below.

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it can also provide useful information for the designing of technical assistance interventions aimed at putting in place effective systems to track, measuring and monitoring social performance.

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5. Methodology and indicators by area of assessment
5.1 MISSION, STRATEGY AND SYSTEMS
In this first dimension we assess the status and effectiveness of the MFI Social Performance Management (SPM) system, namely the “institutionalization process of translating mission into practice, which includes setting clear social objectives, tracking social performance and using this information to improve practice and the performance of an MFI in relation to its social objectives 6 ”. The aim of this dimension is to analyze the MFI’s intent (as expressed in its mission, social objectives and strategy) and systems, including the internal processes’ consistency with the MFI’s social mission and their effectiveness at aligning operations with social mission and objectives. The capacity of the MFI to effectively collect and use social performance information is also assessed. The main indicators considered in this area are the qualitative indicators shown in the table below:
DIMENSION SUBDIMENSION SUMMARY OF ISSUES / INDICATORS Clarity of mission Clear definition of target clientele Mission orientation (towards poor 7 , non poor, very poor; towards people without access to financial services; relevance of direct / indirect job creation) Translation of intents expressed in the mission into SMART 8 social objectives Staff awareness of mission and target clientele and alignment to the social objectives of the MFI Strategy adequacy to combine social and financial performance Diversity within the governance structure (balance of social and financial experiences /skills) Inclusion of social goals in the strategic planning (s.p.) and discussions about social issues during the s.p. process Existence of an effective strategy to achieve the identified social goals Top management and BoD demonstrate leadership on social mission Processes to communicate social mission within the organization (emphasis on social mission during hiring and training process) Effective collection and monitoring of social information (appropriateness of the MIS to monitor social performance advancements and achievement of social goals) Appropriateness of the reporting system to inform governance and management decisions related to social performance Actual use of the information collected to make decisions Adequate internal processes aimed at aligning policies and actions with social mission: Social performance (SP) tracking system Targeting strategies and use of targeting tools: operational area/ niche of client/pro-poor methodology Methods applied to attract new clients Market research/client satisfaction survey undertaken (Actions taken: changes in product due to client

Mission and social objectives

Strategy

MISSION, STRATEGY AND SYSTEMS (SPM)

Systems’ adequacy to the mission

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As defined by the Imp-Act consortium. Poverty is defined as the lack of, or the inability to achieve, a socially acceptable standard of living (ref: World Bank) 8 SMART: Specific, Measurable, Achievable, Relevant and Time Based

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feedbacks) Measurement and monitoring of drop-out and investigation of reasons (Action taken: drop-out information use) Impact studies carried out Use of poverty assessment tool (scorecard, other) Consistency of personnel policies to the mission: staff incentive schemes, hiring and training policy Consistency of products characteristics in term of mission: collateral requirements/lending methodology/minmax loan size Rescheduling and refinancing policy Existence of specific measure to achieve the mission: cross-subsidization among branches/products

The indicators and the depth of analysis in this area are the same for both types of social ratings.

5.2 OUTREACH
Outreach analysis identifies the target actually reached by the institution, providing a definition of the poverty/exclusion profile of clients and of their socio-economic condition. However, in the majority of the cases, complete and reliable information on the socioeconomic level of the clients is not available from the SIG of the MFI. For this reason, in the case of the social rating without field survey (SR), the indicators taken into account will mostly be proxies of the poverty level of clients. In particular, according to the information available at institutional level, the indicators taken into account can include: the disbursed loan size and the savings balance (for MFIs collecting savings), considered both at aggregate and disaggregate level (by gender, sector of activity, geographical location, ethnic affiliation, loan cycle, etc.). In addition to the loan disbursed, the annualized yearly loan variable, which neutralizes the effects of different terms on the loan size and allows comparability is considered to assess the loan size. In addition to the poverty level of the clients, the analysis also defines the MFI operational locations, considering for example their relative degree of poverty by comparing socio-economic indicators available for the regions served by the MFI with the national average of the same indicators. The degree of depth of the analysis for this area varies consistently for the two social ratings. The followings are the indicators considered for both social rating products:
DIMENSION SUBDIMENSION SUMMARY OF ISSUES / INDICATORS Coverage of the national territory Concentration in poorer areas: rural / urban areas; areas not served by formal financial intermediaries; areas frequently affected by adverse climatic events; areas with a socio-economic position worse than the national average in terms of HDI, HPI, gender related socio-economic indicators, access to basic services, employment, and any other indicator available in recent national and international household surveys No. of active borrowers and savers in the past 3 years, growth rates Outstanding portfolio in the past three years (absolute and expressed in PPP US$), growth rates Disbursed loan size: range, average amount, median and first quartile (also as % of per capita GDP), trends over the past 2 years

Operational areas

OUTREACH (RESULT - 1)

Target reached: breadth and depth of outreach

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Annualized loan size: range broadness, average amount, median and first quartile (in absolute terms and as % of per capita GDP), trends over the past 2 years Saving deposit size: range broadness of the saving balances, average balance, median and first quartile (in absolute terms and as % of per capita GDP), trends over the past 2 years Demographic characteristics of clients: sex, age, size of household, number of economic dependents, etc. Social characteristics of the clients: % of women, ethnic minorities, young persons, illiterate individuals, landless tenants, and other groups highly affected by poverty (if available at MIS level).

The submission of a complete questionnaire to a sample of clients, which characterizes the social rating with survey (SRS), allows a complete and multidimensional definition of the poverty profile of clients and the disclosure of crucial indicators which otherwise would be difficulty to obtain, such as the % of clients below national and international poverty line, the illiteracy incidence, the prevalence of food and health insecurity, the living and housing conditions, etc. When available for the country of interest, the poverty scorecard tool (PPI) is included in the study. The poverty scorecard (PPI) is a country-specific tool derived from national household surveys, which assigns poverty likelihood levels to the population of interest. It is an internationally certified tool allowing the identification of the poverty level (drawing client profiles according to different poverty thresholds) and following its evolution across given lines (extreme and not extreme). Therefore, in addition to the indicators considered for both social rating products, the SRS allows the deepening of the analysis through the following issues/indicators:
DIMENSION SUBDIMENSION Operational areas SUMMARY OF ISSUES / INDICATORS Degree of remoteness (time-distance from marketplace, hospital, school) Financing of activities in the informal sector and any other category relevant in the context as proxy of poverty % of clients living below the national poverty line (income or expenditure based) % of clients living below the international poverty line (1 PPP US$ /day and 2 US$ PPP /day % of clients illiterate and with only primary education % of primary school (and secondary) age boys/girls attending school % clients with inadequate housing conditions (no. of rooms, walls, floor and roof) % of clients without access to basic services (potable water, sewage system, electricity) % clients without food security (no. of meals per day, experience of food shortage) % clients without access to adequate health services % clients without access to formal or semi-formal financial services % clients without house property % clients without land property % clients without liquid savings Degree of vulnerability of households: no. of different sources of income, strategy adopted in case of crisis

OUTREACH (RESULT - 1) Target reached: breadth and depth of outreach

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5.3 QUALITY OF SERVICES
The assessment of the quality of the services is very important as it is recognized that, in order to achieve a high level of social performance, it is not sufficient to merely provide financial services to the target population. Rather, it is necessary to also offer a variety 9 of quality products which meet the needs of the clients, paying attention to their satisfaction and maintaining operational transparency. Therefore, the effort to improve the social welfare of clients is also assessed on the basis of service quality and client satisfaction. The followings are the main indicators considered for both social ratings:
DIMENSION SUBDIMENSION SUMMARY OF ISSUES / INDICATORS No. of different credit products Financing of production, start-up business, consumption, etc. Supply of other financial services (savings, microinsurance, payment services, etc.) Supply of non-financial services (directly or indirectly through partner organizations) Flexibility: broadness of the range of loan size, flexibility of terms, grace periods, variety of collateral types accepted Cost of the loan: nominal rate compared to national lending rate, effective interest rate, real portfolio yield Adequacy of the method to assess the applicant’s repayment capacity (tools in place to decrease the risk of over-indebtedness) Share of active clients in third or later loan cycles and dropout ratio Clear communication of products’ conditions (oral and written) Clear explanation of the method for interest calculation and disclosure of the effective interest rate Contract and receipts given to clients for any transaction and cash movement Internal control performed by the MFI Disclosure of MFI financial results to stakeholders (including personnel and clients)

Variety

QUALITY OF THE SERVICE (RESULT - 2)

Appropriateness

Transparency

In the case of the SRS, the appropriateness of the services will be investigated by gathering direct information from clients about their satisfaction, the flexibility of products, the extent to which credit services are tailored to their businesses and the actual quality of the relation and communication between clients and the MFI’s staff. The interviews and focus groups with clients are aimed at deeply investigating the perceptions of clients regarding the appropriateness of products’ conditions, the completeness of the products’ offer, the relation with the organization and other specific reasons of satisfaction or dissatisfaction. The assessment of the transparency issue in the financial relation is based both on the design of financial transactions and the supporting documents, and on the information collected directly from clients about their awareness of the products’ conditions (included in the survey).

The SRS allows us to enrich the analysis with the following issues/indicators:

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The variety of the service depends on the number of financial and non-financial products offered with significantly different characteristics.

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DIMENSION

SUBDIMENSION

SUMMARY OF ISSUES / INDICATORS Overall level of clients’ satisfaction with respect to various aspects of service quality (survey) Perceptions of clients (focus group) about: - Appropriateness of the supply of services - Adequacy of the products conditions - Relation with the personnel of the MFI - Communication flow: accessibility, participation and involvement of clients - Loan repayment schedule adequacy to the business cycle cash flow - Clients’ willingness to build a long term relationship - Time to disburse a loan - Cost of the loan: financial cost and opportunity cost of meetings, visits, etc. Clients’ awareness of the products’ offer and conditions (group loan size, interest rate, penalties, other costs, interest on savings, etc) Clients awareness of the method for interest calculation and disclosure of the effective interest rate Adequacy of communication and explanation of the global cost of credit to clients Clients have receipts for financial transactions

Appropriateness and clients’ satisfaction QUALITY OF THE SERVICE (RESULT - 2)

Transparency

5.4 SOCIAL RESPONSIBILITY
In this last dimension of the social performance the analysis focuses on the policies and procedures implemented by the MFI which might contribute to an overall positive impact on society. The approach towards clients, staff, the community and environment, the existence of a corporate social responsibility policy, the respect of ethical codes and the promotion of positive values (human rights, democracy and solidarity) are evaluated. Furthermore, in order to give a complete picture of the social performance of the institution, the social values expressed in its relations with the personnel in terms of work conditions, and human resources development policies are taken into account.
DIMENSION SUBDIMENSION SUMMARY OF ISSUES / INDICATORS Existence of a formal code of conduct governing actions towards employees Salaries in line with the levels of the financial sector Effectiv., fairness and transparency of the bonus system Career and training opportunities Security level of labor conditions (% personnel insured) % women (+ other categories subject to labor discrimination in the specific context) at management and staff level Staff satisfaction and labor climate Conduction of staff satisfaction surveys and relative results Attitude towards clients empowerment Strategic approach to women empowerment Involvement of clients in the definition of products Pro-active mechanisms for obtaining any client complaints and responding to them Use of communication methods appropriate to clients capacity (LOs knowledge of local language, culture, social rules; ethnic affiliation of LOs, relation with illiterate clients) Existence of clients representatives Transparency of products and methodologies Values promoted in the community Activities financed

SOCIAL RESPONSIBILITY (SR)

Towards staff

Towards clients

Towards community

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Towards environment

Community investment (% of operating revenue) Attitude towards social structures: adapting / impacting Environmental policies related to type of activities financed Experience gained in environmental issues through past projects Environment as a field of interest for the future development

6. Social Rating Report
The social rating report includes: • • • • • A first section with an executive summary, where the main social performance indicators and qualitative judgements are pointed out; An introductory description of the MFI, with explanations of main characteristics and operations and a summary of its financial performance; A chapter describing the socio-economic 10 and political context of the country; A chapter for each of the four dimensions analyzed (mission, strategy and systems, outreach, quality of the services and social responsibility); A conclusive chapter highlighting the most important strengths and weaknesses for each area.

Together with other social-economic indicators, MDGs will also be considered and starting from the millennium development goals set for 2015, the actual speed of the progress towards them is assessed compared to the required speed to reach the goals. Moreover a benchmark analysis of human development indicators will be carried out considering countries belonging to the same geographical area and to the same income range.

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7. Social Rating Process and Activities
The social rating process and the activities undertaken during its implementation are described in the graph below:

Microfinanza Rating sends standard formats to be filled by the MFI with updated information and other relevant documents SR: 2 analysts of Microfinanza Rating visit the institution for 3 to 5 working days. Activities: interviews and meetings with managers, employees and directors, data and info collection, visit to the branches, meetings with clients and other relevant stakeholders
SR

Preliminary analysis

SRS: 2 analysts of Microfinanza Rating visit the institution for 7 to 10 working days. In addition to the activities of the SR: conduction of individual interviews to a sample of clients; conduction of focus groups with selected clients The analysts prepare the draft rating report and transmit it to the client for feedbacks

S SR

Visit to the MFI

Draft Report

The analysts present the draft report and client’s feedbacks to the Rating Committee for discussion. The final report is prepared and sent to the client

Social Rating Committee

Social Rating Report

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