Social Performance and Impact Measurement in Microfinance:

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Johannes Majewski, GTZHanover, 17th of June 2010

Measurement in Microfinance: The story behind

What is Microfinance?

Microfinance refers to the provision of financial services encompassing loans, savings, insurance,

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services encompassing loans, savings, insurance, remittances to low-income clients, including

consumers and the self-employed, who traditionally lack access to (semi-) formal providers.

From the 50s to the 70s: subsidizing farmers‘ activ ities

Assumption

• Credit is required to finance input in order to manage the green revolution

Approach

• Provision of directed subsidized credits to poor farmers

• Creation of special

Results

• Poor famers lacked access to credit

• Erosion of capital base of rural and development banks due to

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revolution adequately but framers are to poor to pay market interest rates

special cooperatives and Agricultural development banks

• Implementation of lending quotas

banks due to poor loan recovery and low interest rates

• High transaction costs and administrative complexities made lending difficult

The 80s and 90s: Moving attention to the financial institutions

� The new paradigm: The financial systems approach highlighting the need of sustainable institutions through looking on the whole financial systems

� Development:

� The 80s: social approaches are still dominating the sector

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� The 90s: commercial microfinance is increasing scale

Controversial discussion on commercial versus social goals

Beginning of the new century: A decade for the cl ients

� Rising interest by investors in microfinance

� Almost 100 MIVs managing over 5 billion USD as assets

� Securitization of subordinated microfinance credit

� The case of Compartamos

Did we overdo it with

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� New attention for the client:

� Ability of the client to take informed decisions (Financial capability)

� Protection the interests of the clients

� Review of social performance of financial service providers

Did we overdo it with commercialization ?

Social Performance: An overview

� SP refers to the effective translation of an institution‘s social mission goals into practice in line with accepted social values. Major concerns:

�Managing for results

�Understanding client needs

�Reporting to external stakeholders

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�Reporting to external stakeholders

� SPM = Process to monitor processes and use information to improve overall organizational social performance

Ratings and regulation to foster compliance with so cial performance criteria

Impact Assessment: A new approach

� Unclear impacts of MF over the past decades have led to discussion concerning the most feasible approach

� Limitations of past studies as it was extremely hard to use a correlation to prove a causation when studying complex social systems

� New method of impact study: randomized controlled trials (RCTs): Randomly offering some people financial services, while withholding it

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Randomly offering some people financial services, while withholding it from others

Impact of microfinance: careful judgement

First results of impact assessment encouraging: Several studies show increase in household income, improvement in asset position, increase in savings, increase in employment, increase in consumption expenditure and poverty reduction etc.

Lessons learnt:

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Lessons learnt: � Money is fungible� Microfinance is not a one fits all solution for poverty eradication� Proper cash flow management is crucial for the poor

Still more research required

Thank you for your attention!

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GTZ Financial Systems Development

Thank you for your attention!

Johannes MajewskiJohannes.Majewski@gtz.de