Understanding the Double Bottom Line

Understanding the Double Bottom Line

July 21, 2011 at 6:24 PM - by Leah Gage - 0 comments

Yesterday, Oikocredit USA staff attended a seminar on Microfinance Investment Transparency and Evaluation, with presentations by Chuck Waterfield of MFTransparency and Sebastian von Stauffenberg of MicroRate. The recap of that event is posted here and below.

On Wednesday, July 20, Chuck Waterfield of MFTransparency and Sebastian von Stauffenberg of MicroRate explained important steps for expanding transparency and evaluation of microfinance institutions at the After Hours Seminar, sponsored by Microenterprise Development office of USAID.

On Wednesday, July 20, Chuck Waterfield of MFTransparency and Sebastian von Stauffenberg of MicroRate explained important steps for expanding transparency and evaluation of microfinance institutions at the After Hours Seminar, sponsored by Microenterprise Development office of USAID.

Defining Transparency  

Transparency in microfinance is most commonly defined as transparent pricing, terms, and conditions of loans which are accurately and understandably disclosed to a client. This is contained within the second of the Smart Campaign’s Client Protection Principles and is widely understood to be a staple of any legitimate microfinance institution. Transparency can also be understood as an MFI’s transparent and accurate reporting of expenses and activities to investors. In fact, the two definitions of transparency — that geared toward borrowers, and that geared toward investors — are strongly linked and are mutually beneficial.

While promotion of transparency is driven by a desire to alleviate poverty and protect clients from over-indebtedness and exploitation, according to MFTransparency, it is also essential to a healthy microfinance industry operating with “free market conditions where consumers and other stakeholders can make informed decisions.” Transparent pricing allows for greater competition, which leads to better efficiency of operations and more pro-client practices by MFIs, which ultimately translate to lower costs to the borrower.

Appropriate Ratings and Indicators:Sebastian noted that MicroRate’s rating system does more than evaluate a microfinance organization’s financial performance – it takes into account an organization’s operations, governance and strategy, organizational model, portfolio quality, and the financial situation in which it sits. In ratings, “there must be a clear distinction between microfinance and the rest of the market.” Indicators for an MFI would be “clearly different from that of Goldman Sachs,” for example.

Social Continuum: Sebastian also described what MicroRate calls the Social Continuum for MFIs and MIVs alike, from “Do-no-harm” to “Do Good.” Whereas “Do-no-harm” indicates the bare minimum, subscribing to client protection principles, the Principles for Investors in Inclusive Finance, and maintaining a sound financial balance sheet, “Do-Good” has yet to be defined and demands better, more specific evaluation methods. He also noted that MicroRate has seen “an extremely high correlation” between social impact and financial performance for organizations that trend toward the “Do-Good” side of the social continuum.

Transparency = Competition = Responsible Pricing: Chuck Waterfield explained why transparent pricing ultimately leads to responsible pricing and pro-client practices. Where Sebastian explained that evaluators and investors must recognize microfinance as separate from the rest of the market, Chuck explained that in fact there are multiple microfinance markets to be evaluated differently. Understanding these indicators will lead to the transparent presentation of pricing to clients, which means that MFIs compete solely through price, ultimately driving the price of microfinance down – and investment in microfinance up. “When the prices aren’t communicated between the seller and the buyer,” Chuck explained, “the market breaks down.”

Understanding Pricing: MFIs that make higher loan amounts should generally have lower operational costs and thus can charge lower rates on their loans; MFIs that make smaller loans reach poorer people, but the OCR increases as does the price of the loan. Price alone cannot be an indicator for judging the MFI’s responsibility, and certainly not its transparency.

Smarter Evaluation: More work is needed to ensure not only that transparent and responsible pricing are universally practiced by MFIs, but that evaluations of such indicators are informed and flexible enough to be accurate.  No other industry has voluntarily self-regulated the way that microfinance does, Chuck stated. This is positive for the industry as a whole – but particularly for its clients – because such improved and increased evaluation will ultimately pass lower prices onto clients.

Further questions were raised about who pays for ratings and how to mitigate a conflict of interest. As Sebastian noted, it is the MFIs who pay for their own ratings through MicroRate and this presents a conflict of interest.

As social investors become more educated about microfinance and its realities, their demands for proof of responsible investing are increasingly louder and more complex. This will help drive the industry’s evaluations to become more accurate and meet the complex demands of the microfinance industry.

Social investors in microfinance like Oikocredit are motivated by a double bottom line – both a financial and social return on their investment. These investors have invested for the double-bottom line – they believe their money is alleviating poverty and helping people while achieving a moderate financial return. As a social investment option, we at Oikocredit are committed to ensuring that our investments align with our investors’ expectations. We conduct rigorous social performance due diligence and endorse transparency initiatives such as MFTransparency by supporting country-level workshops and encouraging our investees to participate in these evaluations.

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