Social Performance Infrastructure’s Big Barriers

A recent CFI blog by Gail Buyske, What’s Going On with Microfinance’s Information Infrastructure? Should We Care?, and stakeholder meetings in Washington and Europe are focusing attention on the under-utilization of data platforms and ratings and the threat this poses to maintaining transparency and continuing progress in standard setting and benchmarking, particularly in the area of social performance. This increased attention is especially pertinent as a couple initiatives wind down, most notably MFTransparency. The team at Grassroots Capital, as a very active supplier of data to multiple initiatives, a user of their outputs, and a heavy user of “in-house” data, sees the challenges from multiple perspectives.   

The industry clearly needs reliable, timely data and in particular, improved data and accepted frameworks and conventions in the area of social performance. Significant strides have been made in recent years thanks to MFT, SPTF and many other efforts. But at the same time it is essential to consolidate initiatives and promote the widest possible buy in by the broadest possible group of investors, regulators, standard setters and other industry participants. We believe that one of the major issues is that social reporting and ratings are under-enforced by investors, leading to a lack of incentives for MFIs to devote the time and resources to report social data and become rated. Simultaneously, multiple microfinance-specific initiatives are not viable given that impact investors’ interest is shifting and broadening into other sectors such as affordable housing and SME lending. In addition, MFIs’ own business models are becoming more complex. Investors, practitioners, and industry experts all need to work together at this crucial juncture to consolidate and rationalize frameworks with broader impact investment initiatives to reduce reporting burden, engage the wider impact investor community, and allow more time for what matters – improving service and benefits to poor and low income clients.

While providing benchmarks and setting goals can help MFIs improve their own performance, reporting was and still is largely investor-driven. Investors, fund managers and competitive pressure play a large and very important role in promoting social performance monitoring and reporting requirements. Transparency is encouraged if it leads to funding. The underutilization / under-compensation of data platforms and ratings reflects in part the sub-viable scale of an overly fragmented infrastructure.

The proliferation of initiatives over the years have undoubtedly advanced our ability to meaningfully report, but have also given stakeholders a pretext to hold back and "wait and see" which initiatives the industry will coalesce around as the standard. In the impact investing space, microfinance has enjoyed particular focus and support over the past twenty years and in many respects has a much more developed infrastructure than newer impact sectors. But this privileged position has its downside: our initiatives are sector specific, while many impact investors are sector agnostic and do not have the time or patience to delve into a single sector framework.

As Gail noted in her blog, microfinance has only been able to achieve success as the most mature and established business model in the impact space due to the support of this infrastructure. Grassroots believes that efforts to encourage broad agreement on a core set of microfinance social indicators is a step in the right direction. At the same time, Grassroots has also actively supported B Corp and GIIRS since their inception, because they aim to engage a broad range of impact investors. Everyone, both in the microfinance community and the broader impact community, cannot afford to take the essential infrastructure for granted. Rather we will need to make some choices and compromises to rationalize the infrastructure to reflect the evolving composition and focus of the investor community and engage the broadest possible financial support and mandate reporting requirements.

Time to Move on from Microfinance or Re-engage? Part II

The conversation around the future role of microfinance has gained significant momentum in 2015.  Through this blog, we want to continue to participate in the conversation, especially in relation to our blog from last March 2014.

Challenges are nothing new to the microfinance industry; however the effort to maintain the confidence of funders and investors may become more difficult with the release of recent publications.  At a meeting hosted by the World Bank in early March, two articles addressed this challenge in response to the Poverty Action Lab’s report, “Where Credit Is Due.” A particularly critical spin was put on that discussion in a March 3^rd  Washington Post article by Chris Blattman, which concluded that microfinance can be compared to the microwave oven; it doesn't make people better off in ways that are easy to measure, but makes life a bit more convenient, and it certainly doesn't warrant a Nobel Prize.  A somewhat more constructive consideration of the World Bank discussion came in a March 16^th Devex article by Claire Luke. Luke reports reactions to the recent publications and research from a range of practitioners, including Grassroots’ Paul DiLeo, which generally suggest that since microfinance offers an unrivaled, self-sustaining platform for reaching hundreds of millions of poor families, there is a need for research that helps practitioners improve their products and services rather than studies seeking to generate eye-catching headlines that microcredit “doesn't work.” 

This reaction was anticipated in a thoughtful March 3^rd article by Alex Counts of the Grameen Foundation, which systematically extracted lessons gleaned from the last 30 years of the development of the microfinance industry to help guide the recent surge of interest in “impact investing.”  One of Counts’ points, which resonates in the context of the Poverty Action Lab’s report, is that “it is important to remember that few if any social innovations besides microfinance have proven capable of reaching large scale and generating consistent profits.” Large scale and reliable profitability should appeal to philanthropies and impact investors alike, and should ensure a place in impact portfolios.

Other such platforms will likely emerge in the future -- mobile technologies are garnering lots of enthusiasm at the moment -- but for now Grassroots believes that the practical challenge for those wanting to deliver effective anti-poverty products and services is to combine the microfinance experience, and the unique platform it has created at great cost and effort, with the latest research to improve the efficacy and scale of efforts to address the causes and consequences of poverty.  We can use the experiences of the past 30 years in order to evaluate the best way forward, rather than allowing a focus on what hasn't worked to lead us to a dead end. 

One way that Grassroots is actively supporting this approach is through its collaboration with Freedom from Hunger that utilizes MFIs as platforms with the aim of improving women’s access to health services.  Grassroots’ Impact First equity fund is another initiative which aims to support MFIs that are using the latest research to deliver meaningful results on both bottom lines. These engagements are among a newly flourishing cohort of efforts that build on the unique accomplishments and capabilities of microfinance rather than putting the majority of emphasis on the shortcomings with the dead-end conclusion that microfinance simply doesn't work. The original objective of alleviating poverty has not changed, but the methodology needs to expand beyond microcredit to integrate health services and access to energy among many others, and to increase the likelihood of success, this agenda needs both the support and constructive engagement of researchers and investors as well as practitioners. 

The Millennium Development Goals, Grassroots Capital Management, and GIFI

Beyond 2015 – the Next Steps for the MDGs

The United Nations Millennium Development Campaign came together in 2002 and promoted the Millennium Development Goals (MDGs) in a concerted effort to mobilize global partnerships to reduce extreme poverty by 2015.  It is now the beginning of that target year and, while there has been significant progress towards the goals, poverty continues to be a major global issue. At Grassroots, we think that access to financial services can be part of a package of tools that can help people raise themselves out of poverty and our approach is designed to ensure that the potential of microfinance to benefit poor clients is, in fact, realized.   With the approach of 2015, the UN drafted a new agenda which will be officially adopted at the Special Summit on Sustainable Development in September.  The goal is to learn from the past 15 years, benchmark where we are now in relation to the goals that were set for 2015, and adopt a new agenda from now until 2030.  The new, post-2015 agenda is ‘buttressed by science and evidence” and is “built on principles of human rights, the rule of law, equality and sustainability”.  Grassroots believes that this is an opportunity for the microfinance community to recommit to its core mission of poverty reduction and align and coordinate itself with the other initiatives in support of the post-2015 MDG agenda.