Emphasis on Analysis and Improving Operations, not just Collection and Reporting

Collecting social data is not the objective; rather it is selecting those metrics that best support the Board's ability to design and oversee social strategy and management's efforts to execute that strategy in progressively more efficient and effective ways.

 Studies, surveys, institution data, client data… there is a lot of data being collected.

The financial industry is constructed around data and the availability of data.  The information that this data provides allows financial institutions to scale, increase outreach, manage risks and enhance profitability.  Although MFIs have multiple bottom lines, their approach to data should be no different than a purely profit-maximizing institution. This importance of data in enhancing performance in each bottom line has been acknowledged in microfinance and motivates, in part, the significant time and effort expended to develop the social performance data collection tools that have launched over the past few years.  The MIX Market plays a large role in increasing the transparency of the industry and other initiatives like the forthcoming SPI4 self-assessment and the GIIRS Rating will continue to provide platforms which support social data collection.  These platforms, plus companies’ proprietary collection methods, provide the means for gathering comparable data suitable for bench-marking in a relatively efficient way. BUT in many cases, the data are not being used to manage and improve social performance, but almost exclusively for communication with external stakeholders.

Regulatory Threats to Microfinance Plus in Latin America

“Microfinance Plus,” the integration of financial and non-financial services such as health, education and savings, can help the client holistically, leading to improvements in the lives and livelihoods of clients and their families. However, MFIs offering Microfinance Plus have been facing increasingly challenging regulatory environments in a number of countries. Increased regulations will have significant consequences on MFIs and the end-clients if MFIs are forced to stop these offerings. Grassroots is dedicated to supporting the mission-driven MFIs that are working to continue offering these much-needed integrated non-financial services despite regulatory setbacks.

SPM Management and Metrics: Time to Choose

Grassroots has been very active in recent years in supporting initiatives intended to improve SPM and metrics in microfinance and the broader impact industry.  While no standardized system will meet all the needs of management and directors, there should be one solution that can largely meet their needs and also provide a framework for communicating with investors and the larger audience. Grassroots believes it is time to begin to choose which of the various tools is currently able to best fill these roles. This post shares Grassroots’ view of the current status of the SP management, metrics and ratings landscape.  An upcoming post will expand on Grassroots’ rationale for the initiatives it will choose to continue to participate in and support going forward.

Is the impact first / financial first distinction useful?

We wanted to share this post, Impact Investing: Can We Pay Her Less?, as it frames the issue of Impact First/ Financial First quite well. We find these kinds of profit vs impact choices arise constantly when managing a "social" business, particularly one with the poor or vulnerable people as the primary or sole clients or suppliers. In these cases, there is no opportunity for cross subsidy, or extracting higher margins from the relatively well-off. Decisions such as paying your suppliers less, charging your customers more, pulling the plug on a socially promising but low margin pilot, abandoning provision of services in remote or otherwise more costly areas - these choices affecting both bottom lines are faced by managers of double bottom line companies on a daily basis.
Unless managers, board members and shareholders are aligned around a clearly articulated set of social and financial priorities to guide these decisions, they will face constant battles and generate sub-optimal social (and perhaps even financial) performance.
Enabling investors to understand their own priorities and self-select for the investments that fit them best is what (albeit imperfect) labels like "Impact First" can help with. That is why Grassroots calls its most recent microfinance fund an "Impact First" fund: we want investors to understand that so long as the businesses run a healthy and sustainable profit, and the fund itself is managed to meet investors' more modest profit expectations, the priority will be on maximizing social value, whether that is incomes of suppliers, outreach of women's health services, providing low balance savings accounts, or other social objectives. For more on Grassroots' Impact First initiative, please check back with us here or on our website.

Time to Move on from Microfinance or Re-engage?

Over the past 18 months we have been noticing a growing tendency to declare microfinance either an outright failure (on social or financial grounds, or both), insufficiently “innovative”, or slipping into irrelevance in the face of new technologies and opportunities.  We’ve heard these sentiments from both industry outsiders – aspiring impact investors – and insiders, in recent industry meetings and panel discussions, both in the US and abroad. While the motives may vary, the trend is the same - investors seem to be losing interest in microfinance. 

As was the case with Mark Twain, we believe that the reports of the death of microfinance are greatly exaggerated, so we’re going to stick around.  Before explaining our continued commitment to microfinance, though, we explore some of the reasons for the apparent disillusionment and waning interest and offer our own interpretations…

Impact Investing: the need for companies and governance to manage both bottom lines

A recent MSDF blog post examines the role of impact investing in financing lower margin businesses that generate significant social value but may be transitionally or permanently "non-commercial". We believe this is a critical issue that does not receive enough attention in discussions about impact investing. The financial characteristics of different types of initiatives are instead lumped under one broad, vague "impact investing" label rather than recognizing that some initiatives may not yield commercially attractive returns but are nonetheless essential in meeting the basic needs of the underserved.  

This topic is neglected in MFI board discussions as well, where we often see a disconnect between the MFI's stated objective or mission and what the board actually focuses on. We agree with a 2012 MSDF blog post that good governance is good governance. A MFI or any double bottom line (DBL) institution shouldn't in principle require any different governance approach than a conventional company:  the board's responsibilities are to make sure the company's objectives and strategy are clear, the right senior management is in place to undertake that strategy, and excessive risks are avoided or mitigated. 

In a DBL institution, one would expect a board to spend as much time on the social bottom line as on the financial bottom line.  But in fact, in our experience on MFI boards, that is not usually the case.  Often, the explanation is "the social bottom line is too hard or expensive to measure, so we'll just skip it and assume that an un-coerced purchase equals social benefit."  But it's hard to imagine a board accepting management's contention that market share is too hard to measure, so we'll just assume that so long as we're selling product, everything must be fine.

This neglect reflects in part the actual or presumed priorities of investors and board members and an overemphasis on the financial bottom line driven by the desire to draw in a broader range of investors over the past ten years. This effort has been quite successful, so this is a good time for a course correction:  rebalance the DBL, ensure different investors' objectives are aligned with the companies in which they invest, and direct capital to where it fits best and can do the most good. Grassroots' new "impact first" fund and governance work are doing just that by supporting "impact first" MFIs through fully aligned capital and targeted assistance to improve governance, metrics, and social programs and developing the pool of "impact first" investors.