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Table of Contents

1 Introduction 1 2 Statement of the Problems 1

2.1 Why Social Performance Measurement? 1 2.2 The Importance of SPM for Nepal 3

3 Objectives of the Paper 4 4 Methodology of the Investigation 4

4.1 Social Performance Assessment Process 4 4.2 Social Performance Assessment Tools 5

4.2.1 CERISE Social Performance Indicators (SPI) Initiative 5 4.2.2 SPA Tool 6 4.2.3 ACCION SOCIAL Tool 6 4.2.4 CGAP–Grameen–Ford Progress out of Poverty Index (PPI) 7 4.2.5 FINCA’s Client Assessment Tool 9

4.3 Social Rating 9

4.3.1 M-CRIL’s Social Rating 9 4.3.2 Microfinanza Social Rating 9 4.3.3 Planet Rating 10

4.4 Social Performance Measurement/Research in Nepal 10

4.4.1 SFCL Social Performance Research 10 4.4.2 NUBL’s Client Data Management System (CDMS) 12

5 Results and Findings 13

5.1 MFIs are able to reach out to large Numbers of Poor People (Worldwide) 13 5.2 A Number of MFIs Worldwide are able to achieve Financial Sustainability (FSS)

while reaching out to the Poor 14 5.3 Nepali MFIs can achieve their Social Objectives in a sustainable Way 14 5.4 Investment in Social Performance Research can pay out for Nepali MFIs 15 5.5 SPM is particularly important in fragile Environments 16

6 Conclusions & Recommendations 16 7 Bibliography 18 8 Annexes 19

Annex 1: SPM Indicators for SFCLs 19 Annex 2: List of Abbreviations 22

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1 Introduction With high levels of poverty in Nepal, particularly in rural areas, microfinance can and should play a key role in contributing to the improved livelihood of the poor. This requires strong microfinance service providers which are both financially sound as well as effective in reaching the (rural) poor. Only through double bottom line businesses (defined as businesses which strive to achieve measurable social and financial outcomes) can a significant contribution to poverty alleviation in Nepal be achieved. By being both commercially viable and socially oriented, microfinance can significantly contribute to Nepal’s development goals and the MDGs:

• Improved access to microfinance services leads to an intensification and diversification of micro-entrepreneurial activities, creating employment and generating income for poor people (MDG 1).

• Thanks to increases in income, poor people can afford health services (MDG 4 – 6) and parents can invest in their children’s education and training (MDG 2).

• As the main beneficiaries of microfinance services are women, microfinance contributes to women's empowerment and gender equality (MDG 3).1

2 Statement of the Problems

2.1 Why Social Performance Measurement?

As shown above microfinance can be an effective means for poverty alleviation and for achieving social and economic impact. However, this requires effective monitoring of the social performance of microfinance institutions (MFIs). Social performance can be defined as “the effective translation of an organization’s social mission into practice. Social performance is not just about measuring the outcomes, but also about the actions and corrective measures that are being taken to bring about those outcomes.”2 Social performance, therefore, looks at the entire process by which impact is created.

1 GTZ (2005) p. 4ff 2 SEEP (2006) p. 18

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Figure 1: Dimensions of Social Performance

Source: Accion (2007) p. 1

Monitoring social performance is a complex task which requires a considerable investment of time and resources. So, why is social performance measurement (SPM) so important for microfinance institutions and what are its benefits?

• Focusing on financial performance indicators alone gives an incomplete picture of the microfinance institution in question as its social impacts and the processes leading to those impacts are not factored in; even a sound financial institution can cause harm in a community, e.g. by excluding certain groups and, thus, creating conflicts within the population.

• By relying solely on financial indicators, a microfinance institution may experience a mission drift when social objectives are replaced by purely financial ones (particularly when incentive systems reward financial outcomes but not social outcomes).

• Social organizations or investors need information on social performance in order to have a basis for planning and decision-making; the lack of social performance information hinders private investment in microfinance by making information acquisition on social risks and returns more difficult and costly.

• The absence of social performance information diverts private investment in microfinance towards a relatively small number of “safe” investments; particularly large and/or high profile microfinance institutions offering relatively high financial returns, even though other microfinance institutions may yield higher returns when considering both financial and social impacts.

• Private investors in microfinance expect transparency and full disclosure, not only of financial data but also of social performance. When given multiple investment options, private investors will direct their money towards investments that can plausibly offer higher risk-adjusted and blended returns.

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All of the above implies that microfinance institutions have to understand the relationship between financial and social return and they need to develop and/or apply a set of tools in order to achieve both their financial and social goals.3

2.2 The Importance of SPM for Nepal

There are two more reasons why SPM should be of great importance to Nepal’s microfinance institutions in particular:

1. Discrimination of certain ethnic and religious groups as well as women and low caste members has led to huge disparities in income distribution in Nepal. Poverty incidence is particularly high for Dalits (47%), Terai Janajatis (36%), hill Janajatis (44%), and Muslims (41%).4 The exclusion of women, castes and ethnic groups has been identified as one of the root causes of the ten-year long ‘people’s war’ and other current conflicts. Microfinance institutions need to address these disparities and actively promote social inclusion of discriminated groups by monitoring their social performance.

2. In Nepal’s current fragile political situation microfinance practitioners need to be able to show the social impacts and benefits that they bring to the communities. In many countries worldwide politicians have misused microfinance as a topic during their election campaigns, lambasting microfinance institutions for high interest rates and ruthless business behaviour (see case study below).

Box 1 Case Study India: Conflict in Andhra - Would Social Performance Monitoring

Have Provided Early Warning? The state of Andhra Pradesh in India is home to some of the fastest growing MFIs. SPANDANA, founded in 1998, has over 800,000 clients today. SHARE has 1.5 million clients, and SKS has managed to expand to 700,000 clients in just a few years. But this fast growth has led MFIs to run up against a strong rural development program in India: the World Bank funded and government-sponsored Indira Kranti Pratham (previously known as Velugu). Indira Kranti provides a range of services, including savings and credit services, to 12 million women. The program has accused MFIs of charging excessive interest rates and of lacking transparency in its dealing with clients. MFIs in turn have felt that their high-quality service was attracting Indira Kranti clients and that hostility toward them stemmed from their competitive edge.

The situation with Indira Kranti and the government was brewing for some time when, in December 2005, it exploded. Women’s groups demonstrated against SHARE, and the Telugu language press was full of accusations of harsh collection tactics, unethical and illegal operational practices (such as taking savings, which the MFIs are not permitted to do), high interest rates and profiteering, as well as accusations about governance structures and MFIs being run as “family businesses.” In March 2006, the Krishna District collector invoked the state Money Lenders Act to temporarily seize 50 SHARE and SPANDANA branches.

Although the situation has improved since then, the state government’s core concerns remain. It believes that MFIs’ single-minded focus on profitability and growth leads to a culture of pushing debt and ensuring strict recoveries—a culture where client welfare is inconsequential.

Many in the microfinance field do not believe in the government’s characterization of MFIs in Andhra. But they do feel that some of the MFIs lacked transparency in several areas. This

3 USAID (2005) p. 4-5 4 World Bank and DFID (2006) p. 18

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ranges from opaque governance structures to interest rate calculations. They observed that whatever social goals MFIs had set for themselves, they were only tracking and reporting on their financial performance. Aligning performance indicators to social objectives would have provided an early warning on any problems clients may have been facing. Tracking improvements in client lives would have helped demonstrate an MFI’s social mission. Source: CGAP (2007) p. 3

3 Objectives of the Paper

As shown in chapter 2 SPM is a must for any microfinance services provider in Nepal for a number of reasons. This paper is geared towards microfinance practitioners in Nepal, irrespective of whether they are social are double bottom-line businesses or not. Analysing its social impacts is a necessity also for institutions which merely have a commercial interest in microfinance, e.g. commercial banks entering the microfinance market for profit or risk diversification reasons; measuring their social impact helps these institutions vis-à-vis politicians and the public when getting blamed for high interest rates.5

This paper will show how to structure and organize SPM within individual institutions but also within the microfinance industry as a whole. It will further elaborate on SPM systems and tools available internationally and how these systems and tools are best applied. The paper will also show concrete examples of social performance assessments carried out in Nepal along with their results and findings. At the end of the paper the author will give recommendations on what needs to be done in the area of SPM development in Nepal.

4 Methodology of the Investigation

The theoretical part of this paper is based on recent documents by relevant microfinance practitioners and development partners/networks. It is aimed at giving the methodological and theoretical background concerning the issue of social performance and at describing state-of-the-art SPM systems and tools.

The paper also contains case studies from Nepal where SPM tools have been applied and discusses the results and implications of the assessments. An in depth social performance analysis of the Small Farmers’ Cooperative Limited (SFCL) Dumarwana, Bara District, by GTZ staff from the Rural Finance Nepal (RUFIN) project. This paper shows how the SPM was conducted and lays particular emphasis on how the SFCL Dumarwana has applied SPM tools to increase its outreach among the rural poor.6

4.1 Social Performance Assessment Process SPM differs from impact monitoring as it not only looks at results but also at the processes which led to the results. The process starts by looking at the intent and design of the microfinance institution by looking at its vision and mission and analysing the social objectives of the institution.7 The next step is to analyse the 5 The relatively high interest rates in microfinance are – of course – due to the higher transaction costs of reaching out to poorer customers. 6 The author would like to note that social performance research refers to a (usually one-off) analysis of the social performance of a particular institution; this is different from social performance monitoring which is a management tool used on an ongoing basis. The words social performance measurement, assessment, and monitoring are used interchangeably throughout this paper. 7 As described above not all players in the microfinance business will have social objectives.

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institution’s systems and to assess whether the MFI has procedures in place which are linked to its social goals and whether it is carrying out the necessary activities to achieve these social goals. The third step is to look at outputs and to verify whether the MFI is reaching its intended clients (usually poor and low-income households, excluded groups, etc.) and if so, how many of them. Additionally, the product range of the institution and its suitability for meeting the needs of the target group need to be analysed during this step. The forth step is to look at outcomes, i.e. whether clients have managed to improve their social and economic conditions. The impact assessment then tries to analyse to what extent these improvements can be attributed to the MFI’s activities.

Figure 2 shows the social performance assessment process and what tools can be used during the individual steps (a short description of the tools can be found hereafter): Figure 2: Tools for Assessing Social Performance

Source: CGAP (2007) p. 4

4.2 Social Performance Assessment Tools8 As shown above different tools focus on different steps of the social performance assessment; e.g. the CERISE tool focuses on intent & design, internal systems, and outputs only. Thus, in order to assess all aspects of social performance a combination of various tools is needed. The following gives an overview of five major social performance assessment tools.

4.2.1 CERISE Social Performance Indicators (SPI) Initiative The CERISE9 tool assesses the intentions and actions of institutions and whether they have the means in place to attain their social objectives. The CERISE tool uses a questionnaire and guide to examine:

1. Outreach to the poor and excluded populations. 2. Adaptation of products and services for target clients. 3. Improvement in social and political capital. 4. Corporate social responsibility (CSR).

8 The overview on the social performance assessment tools is based on CGAP’s Focus Note 41 “Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions”, p. 4ff 9 CERISE stands for Comité d’Echange, de Réflexion et d’Information sur les Systèmes d’Epargne-Crédit and is a platform for the exchange of knowledge and information on credit and savings systems

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The CERISE tool determines outreach to the poor, through indirect means, by analysing the mission statement, board and staff commitment, and targeting methods. Rather than analysing client empowerment at household and community level, the tool assesses their involvement in MFI decision making and the transparency of financial transactions. Thus the tool is easy to apply and can be administered by the MFI itself.

4.2.2 SPA Tool10 The SPA tool mainly builds upon financial and client information which MFIs regularly collect and uses it as proxies for the social performance assessment. The SPA tool includes a scorecard with a set of indicators monitoring six dimensions of outreach: breadth, depth, length, scope, cost, and worth of outreach to clients and the community:

• Breadth of outreach includes the number of borrowers, the percentage of clients with non-enterprise loans, and voluntary savers as a percentage of borrowers.

• Depth of outreach measures average loan size, percentage of female clients, and percentage of rural clients.

• Length of outreach assesses financial performance - profitability and portfolio quality.

• Scope of outreach includes the number of distinct enterprise loan products, number of other financial services, the type of savings offered, and the percentage of clients with three or more products or services.

• Cost of outreach calculates the financial costs in providing services, including number of days taken to process loans and number of staff visits.

• Worth of outreach measures client retention rate, loan loss rate, and portfolio growth that can be attributed to clients.

A number of indicators which are connected to outreach to the community have to be collected through interviews. The indicators include percentage of operating revenues reinvested back into the community, staff turnover, female–male employee ratio among professional-level staff, benefits to employees, and transparency and management access for clients.

Besides the scorecard, an independent audit team judges the effectiveness of institutional mission, management and leadership, hiring and training, monitoring systems, incentive systems, and strategic planning. The findings of both the scorecard and the audit of the institution’s processes both find entry in the final social performance report.

Thus, the SPA tool assess whether key performance indicators are consistent with social performance, and whether internal processes are designed and implemented in a way that aligns policies, behaviours, and outcomes with the MFI’s stated social mission.

4.2.3 ACCION SOCIAL Tool SOCIAL is an acronym for the six elements of social performance that the ACCION tool seeks to capture: Social mission, Outreach, Client service, Information transparency, Association with the community, and Labour climate:

• Social mission: articulation of mission; evidence of understanding & commitment to mission; measurement of fulfilment of social mission

10 The SPA tool was developed by Gary Woller with funding from USAID.

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• Outreach: coverage; depth of outreach; products and services for underserved clients

• Client service: client satisfaction; adequacy of products and services being offered; use of mechanisms to obtain feedback from clients

• Information transparency/ Consumer protection: transparency; efforts to ensure consumer protection

• Association with the community: relations with surrounding community; contribution to the well being of the community

• Labour climate: staff satisfaction; mechanisms to gain feedback from staff

It is designed to complement the financial assessment provided by CAMEL11 by putting an emphasis on the ability of an MFI to fulfil its social mission.

The assessment is implemented by interviewing management, staff, board members and clients and reviewing strategies, business plans, and minutes of board meetings. Data provided by the MFI is validated through comparisons with external surveys, national data, MIX data, market studies, and other secondary information. The tool also creates geographic coverage maps to determine both the breadth and depth of coverage.

4.2.4 CGAP–Grameen–Ford Progress out of Poverty Index (PPI) The idea behind the PPI is to have globally comparable client-level indicators that can identify the economic levels of clients and demonstrate changes in their conditions. The tool used is a country specific “poverty scorecard” which is based on a statistical analysis of national household expenditure surveys.12 The tool (co-branded by CGAP, Grameen, and Ford) is named the Progress out of Poverty Index (PPI) because it can be used over time to determine improvements in client economic levels and their ultimate graduation out of poverty.

Every scorecard uses a small set of simple, easily observable indicators to estimate the share of clients who are below an established poverty line. The MFI or an external evaluator visits clients at home and obtains scores for each question. The scores are then compared to a previously constructed “poverty likelihood” table to determine the percentage of clients falling below the poverty line. The following table shows a simple poverty scorecard for India. A total score of e.g. 5 points means that there is a 96.3% likelihood that the person in question is poor, while a score of 10 points represents an 81.7% likelihood.

11 CAMEL is an assessment tool developed by ACCION which evaluates the financial and managerial soundness of microfinance institutions. CAMEL is an acronym for five measurements of a financial institution: Capital adequacy, Asset quality, Management, Earnings, and Liquidity management. 12 Country specific “poverty scorecards” have already been developed for Bangladesh, Bolivia, Haiti, India, Mexico, Pakistan, and Philippines (see http://www.microfinancegateway.org/fulltext/results.php?ft_keywords=poverty+scorecard&ft_junction=all&Submit=Go&ft_fields%5B%5D=all).

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Table 1: A simple poverty scorecard for India No Questions Points Actual

Score 1 How many children aged 0 to 17 are in the household?

≥ 5 4 3 2 1 0

0 8 11 17 22 31

2 What is the household's primary energy source for cooking? Firewood and chips, charcoal, or none Any other fuel

0 8

3 Does the household own a television? No Yes

0 4

4 How many hectares of land does the household own? Urban, any amount Rural, 0 to 0.4 Rural, 0.41 to 2 Rural, >2

0 4 7 10

5 What is the principal occupation of the household? Agricultural labourers Operators and labourers, bricklayers, construction workers Cultivators, farmers, fishers, hunters, loggers, unknown Sales workers, service workers, transport equipment operators Professional, technical, clerical, administrative, managerial, executive, teachers

0 6 8 11 13

6 How many almirah/dressing tables does the household own? None One Two or more

0 2 9

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Is the residence all pucca (burnt bricks, stone, cement, concrete, jack board/cement-plastered reeds, timber, tiles, galvanized tin or asbestos cement sheets)?

No Yes

0 5

8 Does the household own a pressure cooker or pressure pan? No Yes

0 5

9 Does the household own a sewing machine? No Yes

0 6

10 How many electric fans does the household own? None One or two Three or more

0 5 10

Source: Schreiner (2006) p. 37

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4.2.5 FINCA’s Client Assessment Tool FINCA implemented its FINCA Client Assessment Tool (FCAT) in 2003. It is a comprehensive assessment tool that includes demographic information, loan information, household expenditures, asset accumulation, social metrics (health, housing, and education), business metrics, client satisfaction and exit interview questions. The assessment is carried out annually by research fellows deployed in the field who conduct 30 - 45 minute interviews with clients using handheld devices to capture clients’ responses.

4.3 Social Rating13 Three microfinance rating agencies (Planet Rating, Microfinanza Rating, and M-CRIL) are introducing social rating as a complementary product to credit rating.

4.3.1 M-CRIL’s Social Rating The aim of M-CRIL’s social performance rating tool is to assess “the likelihood of an MFI achieving its social mission in line with accepted social values”. The analysis covers both organizational systems as well as results (including client-level indicators). The tool analyses whether mission statements, policies, and internal systems are suitable to fulfil the institution’s social mission and whether there are mechanisms in place for staff and client protection.

In addition, short household surveys are conducted to determine whether the poor and excluded are being served and whether clients have improved their social and economic conditions.

The M-CRIL tool is the largest of the assessment tools because it encompasses all dimensions (intent, activities, output, outcome, and impact) of social performance.

4.3.2 Microfinanza Social Rating Microfinanza Rating has created two different types of social rating:

1. Social Rating Survey: this rating is similar to the one done by M-CRIL rating. It too covers the whole range of social performance dimensions, including the social and economic context in which the institution works; its mission, strategies, and systems; the quality of its services; its social responsibility; and client-level information. In this rating, Microfinanza Rating surveys clients directly.

2. Social Rating: this is a simplified version of the Social Rating Survey and excludes direct client surveys. Instead, the rating assesses information available at the institutional level (including staff interviews). But it too provides diagnostic information on how well the institution is achieving its social mission by meeting its social responsibility goals and providing quality services to its clients, especially the poor.

13 The description of the social ratings by M-CRIL and Microfinanza Rating is based on CGAP’s Focus Note 41 “Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions”, p. 8-9; the information on Planet Ratings is taken from the Planet Finance Homepage: http://www.planetrating.com/EN/rating_performance.php

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4.3.3 Planet Rating Differing from the ratings by M-CRIL and Microfinanza, Planet Rating relies completely on data available at the MFI level. The rating is based on an analysis of internal processes, documents and information and on socio-economic and sectorial national/regional data. It covers four major areas:

1. Institutionalisation of the social mission. 2. Targeting and service offering. 3. Outreach. 4. Social responsibility.

4.4 Social Performance Measurement/Research in Nepal As shown above, a number of useful tools have been developed and implemented over the last few years. As in almost all other areas of microfinance, these concepts and methods need to be adapted to the Nepali context.14 SPM must always make reference to the country context. Furthermore, it needs to take into account the mission and model of each MFI: specific indicators may be adjusted (or omitted) depending on the MFI model. For example, indirect indicators of outreach (e.g., hired employment in credit-supported enterprises) are applicable to MFIs that do not focus on the poor, but aim to provide finance to micro- and small enterprises.15

So far, no comprehensive SPM has been carried out for the microfinance industry in Nepal. Nevertheless, all major and a number of smaller microfinance players are carrying out some sort of SPM. The following paragraphs highlight two assessments conducted and the tools used by different stakeholders in Nepal, namely GTZ, and Nirdhan Utthan Bank Ltd. (NUBL).

4.4.1 SFCL Social Performance Research In 2007, GTZ tested some SPM tools in order to improve its monitoring and evaluation concerning the Small Farmer’s Cooperatives Ltd (SFCL).16 It is important to follow a structured approach when carrying out this kind of social performance research in order to get unbiased results which enable the MFI to improve its client targeting and to better fulfil its social mission. The following is an example of how such an SP research can be structured:17

1. Deciding on your objectives for the research: the first step is to decide what information you want to obtain. Possible questions here would be who uses the institution’s services and who is excluded? Or why are clients leaving the institution and fail to fully utilize its services? Or what is the effect of the institution’s products and services on current clients?

2. Deciding on what resources to utilize for the research: this step is of particular importance if the SP research is carried out by the MFI itself; conducting research always entails a considerable use of time and/or financial resources. But as will be shown later in this paper proper SP

14 For example, a simple “poverty scorecard” for Nepal could be developed using the poverty scorecard developed for the Indian market. 15 Sinha (2006) p. 1 16 SFCLs are the main beneficiaries of the joint Agricultural Development Bank of Nepal Ltd. (ADBL), Small Farmers Development Bank Ltd. (SFDBL) and GTZ project “Rural Finance Nepal” (RUFIN). For more information on the project see http://www.gtz.de/en/weltweit/asien-pazifik/nepal/20635.htm or http://www.microfinance.org.np/ 17 The following research plan is based on Imp-Act (2005), p. 2ff. and was used in a similar form during the GTZ’s social performance research for the SFCLs.

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research can contribute significantly in strengthening the financial position of an MFI (through an increased customer base, savings mobilization, loan portfolio, and decreased client drop-outs).

3. Planning the research: these steps comprise of developing (or simply choosing) research tools, agreeing on the methodology for using the tools (including sample size and selection), training staff in the use of the tools, and preparing detailed data collection plans.18 Furthermore, decisions on data cleaning and entry, and data analysis have to be made.

4. Selecting the sample: the size and structure of the sample are important factors in order to get unbiased and meaningful results. As a rule, it will be necessary to select quite large sample sizes for survey work (usually at least 100 respondents) and smaller samples (e.g. less than 30 individuals or groups) for qualitative techniques. Regarding the structure, it can be interesting to organize focus group discussions (FGD) with people who are not yet members of an MFI in order to understand why certain people are excluded.

5. Conducting the research: the research should adhere to the guidelines and data collection plans developed during step 3. An important issue here is to respect the privacy of clients; you have to clearly and carefully explain to participants of the survey the purpose and the anticipated consequences of the research, as well as how the data will be used and stored.

6. Analysing the data: a critical aspect is to transform the data gathered into useful information. This requires ensuring that the team conducting the assessment possesses the necessary analytical skills to perform this task.

7. Writing the report: the last step is to process the information collected and presenting it in a short and concise way. It is important to remember what objectives had been outlined during step 1 (this includes who the target audience is) in order to write a balanced report.

The GTZ team in Nepal followed the steps mentioned above during the social performance research conducted in 2007. The methodology followed primarily a qualitative method which involved using a mix of secondary research followed by board members/employee’s workshops, group discussions and an in depth interview with the SFCL manager. The research draws heavily on the findings of five focus group discussions (FGD) which were conducted with:

1. members of the steering committee 2. female clients 3. clients from socially excluded groups 4. a mixed group 5. a group of people who were not members of the SFCL.19

The information was collected in the following for core areas (on the basis of pre-defined indicators which can be found in Annex 1: SPM Indicators for SFCLs).

1. Outreach to the poor and excluded 2. Adaptation of the services and products to the target clients 3. Improved social and political capital of clients 4. Social Responsibility of the institution 20

18 An overview on nine research tools can be found in Imp-Act (2005), p. 7-8 19 Pant and Shrestha (2007) p. 3 20 Pant and Shrestha (2007) p. 6

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4.4.2 NUBL’s Client Data Management System (CDMS) Since 2002 Nirdhan Utthan Bank Ltd. has developed a very comprehensive client data management system (which incorporates elements of SPM) in order to better understand their customers and to verify whether NUBL reaches out to the people it intends to, the poor.21

The CDMS involves all staff of NUBL, from the main data collectors, i.e. the loan officers, to the compilers of data, i.e. branch and area managers, to the top management and the monitoring unit, which analyse and use the data.22

The system consists of various tools to regularly monitor NUBL’s customers with a particular focus on assessing whether its clients are able to significantly improve their livelihood situation. The system monitors five areas to assess in what poverty category its customers fall:

1. Education ranking 2. Land ownership ranking 3. Housing ranking 4. Living standards ranking 5. Food sufficiency ranking

In each category the evaluator asks (and verifies) a number of questions. For example for the housing ranking: Table 2: NUBL’s housing ranking

Area Variables Points

Wall for cement joint brick or stone wall for mud joint brick or stone wall for uncooked brick wall for mud-wall or bamboo (tati) wall for straw or santhi wall

5 4 3 2 1

Roof for RCC or RBC roof for tin or stone or cement tile roof for mud tile roof for Khar roof for straw roof

5 4 3 2 1

Water source

for houses with drinking water source such as personal water-tap, tube-well or dug-well for houses with drinking water from community group owned and managed water facility such as community tube-well, dug-well, tap-stands for houses with drinking water from common and not well managed water sources

3

2

1 Toilet for HH that uses at least sanitary pan

for HH that uses pit latrine None for lower than above

2 1

Source: NUBL (2004) p. 8

Based on above results customers are categorized into A, B, C, D, and E (category A having the highest scores. The poverty rating of the customer is then made using either a two-dimensional model (e.g. using only the results from the housing ranking

21 NUBL (2004) p. 2 22 NUBL (2004) p. 3-4

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and the land ownership ranking) or a multi-dimensional model.23 Of particular interest for this assessment is to see whether customers managed to upgrade over the years.

The CDMS comprise of three more additional parts:

1. Client empowerment monitoring which looks into such aspects as: influence in household decisions, participation in social and community organizations, participation in public processes and political institutions, self-confidence in accessing public services, and harmony at home.

2. Client drop-out monitoring which looks at the reasons why customers choose to terminate their relationship with NUBL.

3. Customer satisfaction monitoring through regular market research.24

CDMS has already been piloted in two branch offices in Bhairahawa and Kotihawa (both in the Bhairahawa area). The people from NUBL involved in this process find that the CDMS has proven very valuable in helping to better understand their customers and analysing how well NUBL manages to reach out to the poor. The information gathered through the system helps the staff concerned to improve their products and procedures.

The biggest challenges in the development of the CDMS were (a) to develop meaningful indicators for the poverty ranking, (b) to design easy-to-use software which can process all the data inputted and (c) to convince staff and customers of the importance of the tool. In particular, the last issue needs to be addressed carefully; loan officers have to carry out customer interviews and might be unhappy about the extra workload. Only if they see the benefits of the CDMS they will buy in and apply the tools properly. The customers also need to have the tool carefully explained to them, otherwise might be reluctant to answer the interviewer’s questions.25

5 Results and Findings As shown in the previous chapters, SPM has become an important aspect for management of MFIs. With increased scrutiny of microfinance by the public and politicians as well as increased involvement of private investment in this area, social performance is (or, better, should be) high on the agenda of policymakers, microfinance practitioners and international development partners.

But, as has also been shown, SPM is a complex process which requires a substantial investment of resources and in new skills. The justification for such an investment lies in the need to substantiate the double bottom line in microfinance. Experience around the world has also shown that the substantial investment in SPM may pay off through greater loyalty of clients (and even staff motivation).26

5.1 MFIs are able to reach out to large Numbers of Poor People (Worldwide)

Unfortunately, a common framework encompassing all microfinance services providers has not yet been developed worldwide (or for the Nepali context, for that matter). But assessments of social performance and impact show that there “are over 750 million accounts in various classes of financial institutions that are generally aimed at markets below the level of commercial banks, and that a substantial fraction

23 NUBL (2004) p. 5ff 24 NUBL (2004) p. 11ff 25 This assessment was given by Mr. Prabin Dahal, Senior Manager of Nirdhan Utthan Bank Limited 26 Sinha (2006) p. 1

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of these institutions' clients are probably poor or near-poor.”27 This by no means implies that microfinance has already reached all poor people: CGAP estimates the figure for potential microfinance clients to be 3 billion people. 28 Additionally, the question arises how many microfinance institutions are able to achieve the double bottom line, i.e. reaching out to the poor and operate in a financially sustainable way?

5.2 A Number of MFIs Worldwide are able to achieve Financial Sustainability (FSS) while reaching out to the Poor

A number of successful MFIs who actively target the poor and excluded have emerged worldwide over the last couple of/few decades. But an in-depth analysis conducted by M-CRIL on 27 MFIs in Bangladesh, India and Myanmar could not find a strong correlation between financial sustainability (measured as FSS) and poverty outreach, meaning that institutions were not automatically sustainable when they reached out to the poor, but rather that it was only possible for a number of well-managed institutions to be so. Figure 3: Comparing depth of outreach and financial sustainability

Source: Sinha and Brar (2005) p. 3

5.3 Nepali MFIs can achieve their Social Objectives in a sustainable Way

There is more than anecdotal evidence that a number of Nepali MFIs are fulfilling their social mission whilst operating on a sustainable basis. Unfortunately, no comprehensive studies have been carried out in this area. Additionally, no common understanding about poverty and social performance measurement or what microfinance encompasses has been developed so far.

27 CGAP (2004) p. 1 28 CGAP (2004) p. 13

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GTZ carried out a social performance assessment of one of its beneficiary MFIs in 2007. The study concluded that of the 1,672 households reached by SFCL Dumarwana, Bara District, by July 2007 a high proportion were to be considered as poor. 74% of its customers were women, 50% came from socially excluded groups, 50% were landless tenants and 25% were illiterate individuals (the categories are not mutually exclusive).29 The study team found that Dumarwana SFCL really gives a clear example of how an MFI can positively touch all three dimensions of sustainable development (economic, social and environmental)

The SFCL had been instrumental in bringing together the different ethnic groups in the VDC and thus contributed to maintaining social peace even during the People’s War. Thanks to its good social performance, the SFCL has not only survived the conflict unharmed, but even managed to grow during those difficult times. 30

Households which were members of the SFCL had significantly better access to savings and credit than their non-member counterparts. Almost all of the SFCL members were able to generate income from more than two livelihood sources. This led to higher incomes (compared to non-member households) which had a favourable impact on their expenditures on food, education and health. 31

Another research conducted by the Centre for Micro-Finance (Pvt) Ltd (CMF) as part of the worldwide SPM initiative Imp-Act32 showed that MFIs can operate sustainably even in the hilly districts of Nepal which – in general - are more difficult to access for microfinance services providers than the Tarai (lowlands). The four microfinance cooperatives which were assessed assisted communities not only to increase their income but also to, e.g. build up social capital or increase female participation in decision-making processes in their households. However, the research also showed that the cooperatives still had difficulties in reaching out to the (ultra) poor in their communities.33

5.4 Investment in Social Performance Research can pay out for Nepali MFIs

As stated at the beginning of this chapter, measuring social performance requires both time and financial investment. Experiences worldwide, however, show that MFIs can benefit tremendously from such exercises not only in terms of being able to better fulfil their social mission but also financially.

This same experience was had by MFIs in Nepal which also conducted social performance analyses. The following case study shows in what ways MFIs can benefit from SPM: Box 2: Expansion of SFCL Dumarwana based on SP research results After conducting a household survey in 2005/06 the SFCL Dumarwana realized it had not yet managed to reach out to all of the poor in its VDC and decided to increase its outreach both within its existing area of operation (i.e. VDC Dumarwana) as well as in the adjoining VDC Pipra.34 The SFCL developed a vision to include only women from Dalit, ethnic and backward communities as new members in order to fulfil its social mission to serve the poorest of the poor villagers. The SFCL management proposed to its board to apply a solidarity group model with collateral-free loans (with five members each where `first two members receive loans;

29 Pant and Shrestha (2007) p. 2 30 Pant and Shrestha (2007) p. 2 31 Pant and Shrestha (2007) p. 7 32 See http://www2.ids.ac.uk/impact/ 33 Sharma et al. (2005) p. 50ff 34 VDC stands for Village Development Committee and is an administrative unit in Nepal.

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after their repayment two more members receive loans, and, finally, the group leader receives a loan).

In the beginning, the board members were very sceptical about this idea and raised several questions such as: “Why only women?”, “Why collateral free loans?” as well as many more. Some board members feared that this new policy would create problems in the future. However, after long discussions the board was convinced that the new policy would both help the SFCL to achieve its social goals as well as strengthen its financial position through increased membership and business. The new policy was passed and SFCL Dumarwana started its business expansion; GTZ together with its partners ADBL and SFDBL supported this process by providing advice on how to best increase business and provided incentives for the fastest and strongest growing SFCLs during the fiscal year 2006/07.

Within one year SFCL Dumarwana was able to increase its membership by 94% and the number of borrowers by 43%. The SFCL board and management learnt that in order to serve very poor (particularly excluded and disadvantaged groups), one has to go to these people’s doorsteps, otherwise it is difficult to reach out to them. The SFCL also discovered that repayment rates for collateral-free loans were higher than for collateralised loans as the customer relation is much closer with people who are usually excluded from participation in microfinance or other schemes. Therefore, through analysing its customer base and reaching out to formerly un-served poor, the SFCL is now in a much stronger financial position and, also, better fulfils its social mission. Source: Roshan Shakya, Microfinance Advisor, GTZ Nepal

5.5 SPM is particularly important in fragile Environments SPM has become an important management tool for MFIs worldwide. There is a point to be made that SPM is even more vital for Nepali MFIs for two reasons: (1) to protect themselves against accusations from politicians and the public that microfinance is not helping the poor, and (2) to steer clear from threats of conflict parties who either try to extort money or accuse them of being partial, for example by excluding certain groups from accessing their services. Box 3: Importance of SPM in conflict or war environments During the People’s War, the Kewalpur SFCL, a women-only SFCL, received massive threats by the Maoist People’s Liberation Army (PLA). In response to this, the SFCL organized village meetings where they educated the villagers about the purpose of the cooperative (serving the poor and excluded) and its principles (e.g. open membership, social inclusion, women empowerment). This was intended to let the Maoists living in the village know about how and why the cooperative is helping the village. The women of the SFCL also engaged in direct dialogues with Maoists and even asked them how they could further improve their institution. The Maoists - unable to counter the women’s arguments - left the cooperative unharmed. Source: Shrestha (2007) p. 4

6 Conclusions & Recommendations This paper shows that SPM is a must for microfinance institutions: the simple assumption that microfinance will “somehow” trickle down to poor people is not enough in these times where the use of public funds or social investment is under much scrutiny by the public and the investors themselves.

Results from SPM worldwide prove that microfinance can indeed achieve the double bottom line. Also in Nepal a number of microfinance players are able to reach out to large numbers of poor and excluded groups while at the same time generate enough profits to sustain operations in the long run. However, no common standards are applied which makes comparison between institutions difficult and, possibly, creates market distortions as politicians, investors, and international development partners do not have sufficient information to make informed decisions about where to put their funds. Additionally, the MIS systems of many MFIs (both regarding financial as well

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as social performance) are not yet well enough developed to provide this kind of information.

The paper has shown a number of SPM methods and tools which have been tested worldwide and/or in Nepal. MFIs and other microfinance stakeholders need to analyse the suitability of the various methods and tools for their specific purposes and make adjustments, where needed. The provision of social performance information based on proper analysis will help them (1) to strengthen their own financial position and better fulfil their social mission, and (2) to provide them with empirical evidence from the field that microfinance indeed reaches out to the poor and helps them to better their lives. The latter will not only help them improve their image amongst the general public but can also assist them in attracting more investment or refinance, either by government institutions, financial institutions, development partners and/or social investors.

In order to achieve all of the above, the author would like to give a number of recommendations:

1. Investment in MIS: microfinance institutions, possibly supported by government and development partners, have to invest in their MIS and monitoring systems. Only institutions with well-designed customer databases and the capacity to analyse the information gathered will be able to implement SPM.

2. Design of suitable SPM tools for Nepal: the methods and tools described in this paper have to be scrutinized for their suitability for the Nepali perspective and - in a second step - the tools selected have to be adapted to the context. Microfinance institutions can either build up the necessary human resources internally or by outsourcing it to specialized microfinance support institutions or apex bodies.

3. Joint understanding of SPM: the Nepali microfinance industry has to develop common standards for SPM. A starting point should be to come up with joint definitions of e.g. poverty; the development of a simple ‘poverty scorecard’ as described in table 4 can be a starting point.

4. Dissemination of SPM results: the results from SPM have to be disseminated to the general public (e.g. through the media), to policymakers (e.g. through joint seminars) and to prospective investors (e.g. through the microfinance marketplaces like the MIX MARKET35). This will help to create an improved image of microfinance in general, a more favourable (policy) environment, and, hopefully, increased investment in MFIs.

5. Regulations on Social Investment: microfinance institutions are currently not entitled to attract foreign equity investment. Only after the Central Bank (NRB) removes this barrier will Nepali MFIs have access to the large pool of funds which are currently being invested in microfinance. Thus, a change in regulations concerning foreign investment has the potential to strengthen the capital base of Nepali MFIs and will – at the same time – foster them to become more transparent in terms of social and financial performance as international investors will look very carefully at whether a prospective MFI achieves the double bottom line or not.

35 See http://www.mixmarket.org/

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7 Bibliography

Accion: “In Sight 24: Guidelines to Evaluate Social Performance”, Boston, 2007

CGAP: “Occasional Paper No. 8 - Financial Institutions with a ‘Double Bottom Line’: Implications for the Future of Microfinance”, CGAP Washington, 2004

CGAP: „Focus Note No. 41 - Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions”, CGAP, Washington, 2007

GTZ: „Der Beitrag von Mikrofinanzierung zur Erreichungder Millennium Development Goals (MDGs) und des Aktionsprogramms Armut 2015 - Die Erfahrungen der GTZ“, GTZ, Eschborn, 2005

Imp-Act: „Planning Research to Assess Social Performance – Guide for Managers”, Imp-Act Secretariat, Institute of Development Studies, University of Sussex, Brighton, 2005

NUBL: “Approaches and tools for Client Data Monitoring Systems (CDMS)”, Nirdhan Utthan Bank Ltd., Kathmandu, 2004

Pant, Anupa and Roshan Shrestha: “Assessment of Social Performance and Social Impact of Dumarwana SFCL”, GTZ, Kathmandu, 2007 (unpublished)

Schreiner, Mark: „A Simple Poverty Scorecard for India”, Washington University in Saint Louis, Saint Louis, 2006

SEEP: „Social Performance Glossary“, SEEP, Washington, 2006

Sharma, Namratta; Roshan Shrestha and Navraj Simkhada: “Impact Assessment of SACCOs in Nepal’s Hill Districts”, Centre for Micro-Finance (Pvt) Ltd, Kathmandu, 2005

Shrestha, Roshan: “Community Participation and Conflict Management: The Case of Small Farmer Co-operatives Ltd.”, GTZ, Kathmandu, 2007 (paper presented at the “International Conference on Sustainable Development in Conflict Environment: Challenges and Opportunities” organized by CECI in Kathmandu, Nepal, on January 18, 2007)

Sinha, Frances and Amrit Brar: “M-CRIL Technical Note 3: Can MFIs achieve the Double Bottom Line?”, M-CRIL, Gurgaon, 2005

Sinha, Frances: “Social Rating and Social Performance Reporting in Microfinance - Towards a Common Framework”, EDA/M-CRIL, Argidius Foundation, and the SEEP Network, Washington, 2006

USAID: “Proposal for a Social Performance Measurement Framework in Microfinance: The Six Aspects of Outreach”, USAID, Washington, 2005

World Bank and DFID: “Unequal Citizens: “Gender, Caste and Ethnic Exclusion in Nepal – Summary”, World Bank and DFID, Kathmandu, 2006

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8 Annexes

Annex 1: SPM Indicators for SFCLs Indicators to measure the social performance of SFCLs 1. Outreach to the poor and excluded 1.1. Mission and objectives of the SFCL Does the SFCL have a social mission and objectives? 1.2. Geographic and socio-economic focus in client-group targeting

Does the SFCL provide loans to: • urban areas • rural areas • workers with insecure status • socially excluded • women • illiterate individuals

1.3. Methods and tools for targeting What tools are applied to improve the depth of poverty outreach of the SFCL?

1.4. Size of transaction What is the average size of transaction? 1.5. Collateral

Does the SFCL agree to provide loans only secured by ‘social’ collateral?

2. Adaptation of the services and products to the target clients 2.1. Range of services

How many different loan products does the SFCL provide? Does the SFCL provide consumer /emergency loans? How many different voluntary savings products does the SFCL

provide? Does the SFCL provide insurance products? Is there any flexibility concerning repayment?

2.2. Quality of services In rural areas, what is the maximum distance between clients and the financial institution? How often does the credit committee come together to approve loans? Has the SFCL ever conducted any market surveys in order to improve the quality of services to the clients? What is the percentage of client drop-outs or inactive clients over the last 12 months? Has the SFCL ever conducted any surveys on client drop-out?

2.3. Non-financial services accessible to the clients Does the SFCL provide or support access to the following non financial services?

• Non financial services related to financial and economical management of the loan: business training, management of family budget, access to market, innovation, etc.?

• Non financial services related to social needs: literacy training, health services, access to social workers, etc.?

2.4. Participation

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Has the SFCL ever used tools to involve its clients in the design of the services provided?

3. Improvement of social and political capital of clients 3.1. Transparency

Does the loan statement differentiate between the amount of the principal and the amount of the interest and fees to be paid in order to give information to the borrowers which is easy to understand? Do clients receive written statements for every loan transactions? Do clients receive written statements for every savings transactions? Do clients have access to the SFCL’s annual accounts?

3.2. Clients representatives Do clients of the SFCL elect representatives to an representative body? Do these bodies have an effective impact on decision-making and actions of the SFCL management? How often do these bodies meet staff managers? Is there a system of rotation of the elected members? Is there a system of training for representatives / elected members? What is the percentage of women among client representatives?

3.3. Empowerment Does the SFCL provide leadership training for clients? Does the SFCL have power to influence decisions concerning policies of the local government? Are any SFCL’s leaders elected to the VDC? Is the SFCL mobilizing any VDC funds?

4. Social responsibility of the institution 4.1. Human resources policy

What is the starting salary for loan officers (p.a.)? What is the budget for training of employees (p.a.)? Do employees participate in decision making? How many employees have left the SFCL during the last 12 months?

4.2. Social responsibility towards the clients Has the SFCL ever had to change its products and services due to negative impact on social cohesion or welfare of its clients? Does the SFCL provide any type of insurance that frees the family from the burden of debt in case of death of the borrower? Does the SFCL propose specific measures in case of natural disaster?

4.3. Social responsibility towards the local community Does the SFCL take care that its actions are compatible with the local culture and values? Does the SFCL work with local loan officers who can speak the local language and know the local culture? How often has the SFCL assisted the local community through financial support for community projects? Has the SFCL ever had to change its products, services and way of functioning due to negative impact on the social cohesion or welfare of the community?

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Indicators to measure the social impact of SFCLs 1. Employment creation for the excluded

Increased part-time and permanent wage labour for the socially excluded

2. Empowerment (i.e. position of individuals in their family and communities; social capital building)

Increased ability to participate in the meetings and speak one’s mind Increased cooperation amongst group members/friends Increased cooperation between husbands and wives Increased literacy in legal matters Better access to social networks Decreased migration

3. Health related issues Improvements in toilet facilities Reduction in illness

4. Child education & other child related issues Increased awareness of the importance of equal treatment of female children Improved access to education for children Decreased prevalence of child marriages

Indicators to measure the economic impact of SFCLs 1. Increased incomes 2. Increased savings 3. Better access to food 4. Easier access to credit 5. Increased self-confidence concerning financial transactions 6. Increased female participation in income generating activities

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Annex 2: List of Abbreviations ADBL Agricultural Development Bank Limited CAMEL Capital Adequacy, Asset quality, Management, Earnings, and Liquidity

Management. CDMS Client Data Management System CERISE Comité d’Echange, de Réflexion et d’Information sur les Systèmes

d’Epargne-Crédit CGAP Consultative Group to Assist the Poor CMF Centre for Micro-Finance (Pvt) Ltd CSR Corporate Social Responsibility FCAT FINCA Client Assessment Tool FSS Financial Self-Sufficiency Ratio GTZ Deutsche Gesellschaft für Technische Zusammenarbeit - German

Technical Cooperation RUFIN Rural Finance Nepal Project M-CRIL Micro Credit Ratings International Ltd MDG Millennium Development Goals MFI Microfinance Institution MIS Management Information System NRB Nepal Rastra Bank – Central Bank of Nepal NUBL Nirdhan Utthan Bank Ltd PPI Progress out of Poverty Index SEEP Small Enterprise Education and Promotion (Network) SFCL Small Farmer Cooperative Limited SFDBL Small Farmer Development Bank Limited SOCIAL Social mission, Outreach, Client service, Information transparency,

Association with the community, and Labour climate SPM Social Performance Measurement USAID United States Agency for International Development VDC Village Development Committee