1. Rating and social performance assessment of MFIs 4th Azerbaijan Micro-finance Conference Baku – 16, 17 September 2008 Aldo Moauro – MicroFinanza Rating

2. 22 Session outline Institutional profile of MicroFinanza Rating Introduction to social rating MicroFinanza Ratings Social Rating and methodology Areas of analysis Scale and global results Lessons learned

3. Institutional profile of MicroFinanza Rating

4. 44 MicroFinanza Rating Private and independent rating agency specializing in microfinance and rural finance Rating agency registered in the EU/CGAP/IADB Rating and Assessment Fund and the first specialized rating agency licensed by a national regulatory authority (Superintendence of Banks and Insurance of Ecuador) Currently working in Latin America, Africa, Asia, Central Asia, Russia and the Caucasus, Eastern Europe and the Balkans and the MENA region. Rating of different types of MFIs : Microfinance NGOs, non-bank financial institutions, savings and credit cooperatives (also multi-tier cooperative systems), microfinance banks, banks, Apex institutions Offices in Europe (Italy), Latin America (Ecuador and Nicaragua), NIS countries (Kyrgyzstan), Africa (Nairobi) Decentralization strategy (1 more office in 2008)

5. 55 Our offices Managua Quito MILAN Bishkek Nairobi

6. 66 Recent drivers A large number of investors use our reports (Blue Orchard, Deutsche Bank, Microvest, Triodos, Oikocredit, KfW, etc.) and require specific services First specialised rating agency recognized by a national regulatory authority (Superintendency of Banks and Insurance in Ecuador) and licensed to carry out credit ratings More than 270 evaluations in 45 countries Among our clients there are MFIs belonging to the major international networks such as: Finca, World Vision, Save the Children, Opportunity International, Mercy Corps, CRS, ACDI/VOCA, Aga Khan Development Network, ACCION, CARE, GRET

7. 77 Our vision: progressive transparency THE CONTEXT Different MFIs (development stage, institutional typologies, etc.) Different needs from different stakeholders (donors, social and commercial investors, regulators) OUR APPROACH Transparency graduation path (accompanying and coaching MFIs up to the rating through different products) Products diversification to meet the needs of different stakeholders

8. 88 Products diversification ASSESSMENTS AND PRE- RATING SERVICES Institutional diagnosis Mini-assessment MICROFINANCE RATING Public and private rating Updates and monitoring SOCIAL PERFORMANCE RATING (SPR) With survey and without survey SERVICES FOR INVESTORS Investment advisory report Customized services Monitoring of MFIs CREDIT RATING Opinion on the general creditworthiness of an entity TRAINING Rating and assessment methodologies

9. Introduction to social rating

10. 10 The effective translation of an organization's mission into practice and the achievement of its social goals Social performance is not just about measuring short and long term results that an MFI achieves, but also concerns the processes of the MFI, the activities it undertakes, the products it offers and the organizational values and behavior it promotes not only results but also the process to achieve these results Social performance and its measurement The social goals the mission relate to: Reaching target clients (poorer and excluded) Meeting client needs and demands Improving the lives of clients and their families

11. 11 What to measure? Performance is not incidental –Need to define desired performance –Need to measure against desired performance –What is explicitly defined and measured is what is managed Performance Management Social Performance Financial Performance Mission

12. 12 Social Performance Management ….…is the instutionalisation process of translating a mission into practice and includes: setting clear social objectives tracking social performance utilizing this information to improve the practice and performance of an MFI in relation to its social objectives. putting in place systems (products design, credit policies and procedures, HR policy and management, customer services, etc) aligned with social mission promote values and correct behaviour towards staff, clients, community and environment

13. 13 Provides an opinion on the capacity of an MFI to put its social mission into practice and to achieve its social goals. It is based on an analysis of the MFI social performance management system and an evaluation of its results (output) External and independent Quantitative and qualitative Objective Comparable Stand-alone or coupled with financial rating Social performance rating

14. 14 Logical framework Outreach Services IMPACTIMPACT Social responsibility – towards clients, community, environment, staff Social Performance Management Mission and Objectives Systems Output Intent Process and Input Output Put its mission into practice Social Rating Impact Study CHANGESCHANGES

15. 15 Social rating vs. impact study An impact study measures the change in the living conditions of one population due to the action of an MFI. Social rating does not measure impact; rather, it analyzes the objectives, systems and results of the MFI, before the impact that these may have on clients. Social Rating and impact studies are complementary tools, meaning one does not substitute the other, but they respond to different needs.

16. Social Performance Task Force (SPTF) Created in March 2005, promoted by CGAP, Argidius F., Ford F. Objective: Clearly defining social performance and addressing questions about measuring and managing social performance. Leaders from various social performance initiatives in the microfinance industry: SEEP Network, Imp-Act Consortium, CERISE, etc Task force members are: MFIs, social investors, donors, specialized rating agencies Agreement on a common social performance framework and to develop an action plan to move social performance forward. Two working groups were formed as a result of this meeting: a Social Performance Task Force (SP Task Force) and a CGAP Donor Working Group on Social Performance. The SP Task Force is working to better communicate with the industry what is meant by social performance and address the diverse range of questions relating to social performance measurement and management.

17. 17 Social Rating – Objectives/benefits To establish social performance as equally important as financial sustainability in microfinance To increase transparency in the microfinance field To contribute to generalizing the adoption of social performance criteria in managing microfinance institutions To provide a clear picture of MFI social performance to the board, management and staff of microfinance institutions To provide potential donors and investors with the most appropriate tools and information for making resource allocation decisions To compare social performance across MFIs

18. MicroFinanza Ratings Social Rating and methodology

19. 19 MicroFinanza Ratings Proposal/Approach Two Modalities of Social Rating Simple Social Rating (without client survey – SR) Enhanced Social Rating (with client survey – ESR) Source of Information Data and information available at institutional level Direct investigation at the clients level : - submission of a questionnaire (representative sample of recent clients) - focus groups Output (outreach and quality of services) Outreach: proxies (loan size, % rural, % women, etc.) Service Quality: proxies (no. off products/drop-out ratio) Deeper analysis: Outreach: complete socio-economic profile (and poverty profile) Service quality: direct feedback about clients satisfaction/dissatisfaction Why two modalities? Customised approach different stakeholders different needs To better answer to the questions: - WHO are your (MFI) clients? - Are you really meeting their needs?

20. 20 Direct collection of client level data 1.Outreach is crucial, but the information collected by MFIs is rarely sufficient to provide a complete picture of clients, 2.The validity of proxies (loan size) has not been proved 3.The standardization of outreach indicators is not yet achieved, entailing limited comparability of data collected by MFI The direct collection of client data is justified –in an historical perspective: initial phase of development –by pragmatic considerations: advantages in terms of promotion of standards and creation of comparable indicators –as a learning process for the MFIs, transmission of tools

21. 21 Added values of the ESR Permits increased transparency in microfinance Permits increased comparability ( Generate a database of comparable information to build benchmarks) Permits reporting on the core social performance indicators (MIX) Represents an important step towards the establishment of an effective social performance monitoring and tracking system (Direct transmission of tools to the MFI) Provides baseline-data for impact studies on clients that may be conducted in future Can represent the basis for a study on the actual validity of proxies as estimates for client poverty Enhanced Social Rating (ESR):

22. 22 Methodology: Areas of analysis AREASUBAREA SPM SYSTEM Social Mission, Objectives and Strategy SP tracking and monitoring systems Consistency of the systems to the mission SOCIAL RESPONSIBILITY SR towards the clients SR towards the staff SR towards the community and the environment OUTREACH Operational areas Target reached QUALITY OF THE SERVICE Variety of the service Appropriateness to clients needs and attention to clients satisfaction Non-financial Services

23. 23 Methodology: source of information Interviews with the staff of the MFI (HQs and branches) and with members of the BoD Documents available at MFI level (Business plans, manuals, code of conduct, etc.) MIS Secondary sources: statistical studies, census and other relevant national and international surveys Focus groups with clients: to assess service quality Intra-group homogeneity and inter-group heterogeneity Different sets of FG: urban/rural; group/individual loan, by products Survey of clients: to assess outreach, quality and SR Population of interest: recent active clients Approach – separate external team &/or MFI field staff

24. 24 Main contents of the survey of clients 1Household members/activities (occupation, age, education) 2Type of enterprises financed with micro-credit 3PPI and/or income/consumption 4Assets property and living condition 5Access to financial service (financial exclusion) 6Access to basic services 7Awareness (cost and conditions of products) 8Clients satisfaction

25. 25 Poverty scorecard – PPI (1) Specific tool for each country Generally effective in both urban and rural context Estimates the poverty profile of clients Allows monitoring the poverty dynamic of clients Easy to collect, verifiable, non financial. Example: –Household size –Number of children attending school –House characteristics –Household assets Derived from a national household survey

26. 26

27. 27 Poverty scorecard – PPI (2) 1.Poverty assessment tools, USAID, available for the following countries: Albania, Bangladesh, Colombia, Ghana, Guatemala, Haiti, India, Indonesia, Jamaica, Kazakhstan, Madagascar, Mexico, Peru, Philippines, Tajikistan, Uganda, Vietnam - http://www.povertytools.org/USAID_Tools/USAID_Tools.htm http://www.povertytools.org/USAID_Tools/USAID_Tools.htm 2. Progress Out of poverty index, available for the following countries : Bangladesh, Malawi, Bolivia, Nigeria, Haiti, Nepal, India, South Africa, Mexico, El Salvador, Morocco, Palestine, Pakistan, Nicaragua, Philippines, Kenya, Vietnam, Guatemala, Mali http://www.microfinance.com/#Poverty_Scoringhttp://www.microfinance.com/#Poverty_Scoring

28. ACTIVITIESACTIVITIES TOOLSTOOLS Proposal Contract CONTRACT Contract Proposal E-mail Preliminary word, xls Sampling tools Contact Preliminary Set survey: -counterpart -interviewers -sampling -design questionaire PRELIMINARY 30 days Questionnaire Material for enterviewers training Checklist Material for focus group Data entry template Adapt questionnaire Train interviewers Identify focus groups & branch Set agenda Supervise survey Docs & data Meetings Branch & focus groups Review survey output & set data entry Final meeting MISSION Submission of questionnaires Data entry 10 days Report template Social data analysis tool Survey data analysis tool Benchmark Country sources database Scoring and scale Analyze notes, data and docs Draft report Consider feedbacks on results & social rating Final report REPORTING 60 days ENHANCED SOCIAL RATING PROCESS

29. Areas of analysis

30. 30 DIMENSIONSUBDIMENSIONSUMMARY OF ISSUES INDICATORS SPM SYSTEM Mission, social objectives and strategy Clarity of the Mission (explicit expression of the main social goals) Staff awareness and adherence of/to the mission (channel to disseminate it) Balanced (social/financial) and supportive governance Identification of SMART(Specific, Measurable, Achievable, Relevant and Time Based) social objectives, their inclusion in the strategic plan and translation in measurable targets MIS and SP tracking system Appropriateness of the MIS to monitor social performance advancements and achievement of social goals Effective tracking and monitoring of social goals (socio-economic profile, clients satisfaction/changes in living conditions): Use of poverty assessment tool(PPI, IRIS, other) Measurement and monitoring of drop-out and investigation of reasons Appropriateness of the reporting system to inform governance and management decisions related to social performance Systems adequacy to the mission Consistency of products characteristics and credit policies/procedures with the mission Consistency of personnel policies with the mission ( staff incentive, hiring, training, staff evaluation, etc) Targeting strategies and use of targeting tools : operational area/ niche of client/pro-poor methodology Market research/systems to investigate client satisfaction/Product development

31. 31 Basis for the analysis of a SPM system: necessary steps in SPM Necessity to intentionally manage social performance to be effectively able to put the mission into practice: Set a clear mission with explicit social goals Identify smart social goals and include them in strategic planning Put in place a strategy to achieve them (including setting measurable targets for each social goal) Tracking and monitoring the achievement of social targets and using results to improve social mission Put in place systems (policy/procedure/staff management) to be able to achieve them

32. 32 Basis for the analysis of a SPM system: Social Mission Statement (clarity and diffusion) The existence of an unique official mission statement is strongly recommended to ensure mission implementation and diffusion Mission has to be clear Social mission has to be an explicit expression of the main social goals. It should clearly indicate the desired performance: SG1: Who : outreach (priority target to be reached) SG2: How : service offered SG3: Why : desired impact/purpose Has to reflect the actual prioritized target Social Mission should be communicated clearly and consistently reinforced down the hierarchical ladder MFIs with an explicit and clear mission statement will tend to be more effective in fulfilling their social mission.

33. 33 Good Example: best practices: Alsol (Mexico) The mission statement makes explicit reference to the three main recognised social goals and seem to fully reflect the target clientele prioritised by directors and managers. The identified target is quite narrow and specific. The importance attached to the offering of non-financial social services is also clearly expressed in the mission statement. MISSION STATEMENT: To work for poverty reduction in rural and semi-urban areas, providing financial services to low income women with quality, responsibility, professionalism and respect, as well as to support them with training trough specialised institutions

34. 34 Good Example: best practices: Finca Peru ADHERENCE TO SOCIAL MISSION OF MANAGEMENT AND STAFF Social Mission is clearly communicated and consistently reinforced Existence of systematic channel to disperse the mission within the organisation and to new staff The charismatic CEO, Mrs Iris Lanao Flores, keeps the management team motivated and committed to the social added value of Finca operations. Mission declaration and the values promoted by Finca are systematically mentioned in official documents, a part of which is circulated among staff and clients. Frequent staff meetings at branch level are taken as opportunities to refresh the mission and to reinforce its central role in daily operations

35. 35 Good Example: best practices: FDL (Nicaragua) STRATEGY Social objectives are formalized in the strategic plan: Increase the portfolio dedicated to small agricultural and livestock entrepreneurs Increase the outreach to lower income microentrepreneurs (group loan methodology) Improve offer of non-financial services (through alliances with nfs providers) Increase the retention of good clients (reducing drop-out ratio) Quite good quantification of social goals into measurable targets 60% of the outstanding portfolio dedicated to agricultural and livestock businesses; Increase the % of group lending (fixing targets in terms of number of groups for branches) and adaptation of this methodology in two additional branches, Tipitapa and Estelì; Consolidate the development and investment portfolio (long term loans for fixed capital) for the agricultural and livestock sector, increasing it from 17% to 20% of the total portfolio; Reduce the drop-out rate from 21.7% to 18%;

36. 36 Dimensions of analysis: SPM SYSTEM (MISSION, STRATEGY AND SYSTEMS) 1. SOCIAL MISSION, SOCIAL OBJECTIVES AND STRATEGY Very supportive governance structure Strong adherence to social mission of management and senior staff Lack of systematic channel to disperse the mission within new staff Social objectives are formalized in the strategic plan: - Increase the portfolio dedicated to small agricultural and livestock entrepreneurs - Increase the outreach to lower income microentrepreneurs (group loan methodology) - Improve offer of non-financial services (through alliances with nfs providers) - Increase the retention of good clients (reducing drop-out ratio) Improvable quantification of social goals into measurable targets

37. 37 2. MIS AND SP TRACKING SYSTEM The assessment and monitoring of performance towards social objectives is quite satisfactory (tracking of clients profile and changes) Tracking drop-out ratio but no systematic investigation of reasons for drop-out 3. SYSTEMS ADEQUACY TO THE MISSION Systems for facilitating the access to FDLs services to poor households (group lending/soft guarantee) Strong consistency of systems and practices to social mission (adequate bonus system, staff performance evaluation, conduction of satisfaction survey) Dimensions of analysis: SPM SYSTEM (MISSION, STRATEGY AND SYSTEMS)

38. 38 DIMENSIONSUBDIMENSIONSUMMARY OF ISSUES INDICATORS SOCIAL RESPONSIBILITY (SR) Towards staff Existence of a formal code of conduct governing actions towards employees % women at management and staff level Staff satisfaction and labor climate ( Staff turn-over, etc) Salaries in line with the levels of the financial sector Effectiveness, fairness and transparency of the incentive system Career and training opportunities Security level of labor conditions Conduction of staff satisfaction surveys and relative results Towards clients Existence of a formal code of conduct governing actions towards clients (customer protection code) Strategic approach to women empowerment Measures to face risk of over-indebtedness Element of Customer Protection : Pro-active mechanisms for obtaining client complaints and responding to them (grievance mechanisms) Use of communication methods appropriate to clients capacity and financial awareness Transparency of products and methodologies Clear communication of products conditions (oral and written) Clients awareness of the products offer and conditions Clients awareness of the effective interest rate Towards community and environment Values promoted in the community Community investment (% of operating revenue) Existence and effective implementation of an environmental policy Environment as a field of interest for the future development Activities whose financing is prohibited (negative impact on environment or community)

39. 39 Dimensions of analysis: SOCIAL RESPONSIBILITY Toward Staff: Quite high staff turnover in particular for administrative staff (no bonus system for them) Existence of an ethical code of conduct Good labor climate reflecting adequate human resources policies Transparent incentive scheme Non-monetary benefits (scholarship; internal credits) Conduction of personnel satisfaction and labor climate survey Training and other actions to foster gender equality among staff Lack of a person dedicated to the training function, a need to be strengthened; Lack of career plans for staff The base salary level is slightly lower than that offered by the regulated financial sector

40. 40 Dimensions of analysis: SOCIAL RESPONSIBILITY Toward Clients : strategy to address gender barriers and to promote women empowerment (group loans/training to staff about gender issues) FDL does not charge clients with high costs (real portfolio yield 19%) Problem of over-indebtedness to be better monitored and managed Improvable client protection measures: the complex structure of the cost of loans and the lack of complete written documents given to clients are among the main reasons limiting the overall transparency - Existence of formal grievance channels (suggestion box; product development department receiving clients coming to HQ), but not adequately advertised Foreign exchange risk born by clients Toward Community and Environment: No formalized written formal policy but… Environment as an explicit field of interest (not financing agricultural activity in area bordering the forest) Actions for preserving environment (green package product)

41. 41 Example of indicators

42. DIMENSIONSUBDIMENSIONSUMMARY OF ISSUES INDICATORS OUTREACH Operational areas Coverage of the national territory Operational Area: rural/ urban; not served by formal financial intermediaries; affected by adverse climatic events socio-economic position respect to the national average (in terms of HDI, MDG; unemployment rate, etc.) Target reached (breadth and depth of outreach) Breadth of outreach (active clients, gross loan/saving portfolio, growth) Social Vulnerability profile of clients and its household members (gender, ethnical affiliation, occupation, education, no. of different sources of income, etc.) Financed activities and employment support (sector, no. employees, etc) Economic Poverty Profile (PPI) Access to basic services (water, sewage system, electricity, health serv.) Access to financial services/Financial Exclusion Assets ownership (house, land, other relevant in the context) Loan size analysis

43. 43 Dimensions of analysis: OUTREACH - MIS

44. 44 Dimensions of analysis: OUTREACH - Survey: poverty rate To be compared with national average

45. 45 OUTREACH - Survey: Property of Asset/Social Poverty/access to financial services

46. 46 Example of indicators

47. 47 Example of indicators (2)

48. 48 DIMENSIONSUBDIMENSIONSUMMARY OF ISSUES INDICATORS QUALITY OF THE SERVICE Variety Number and kind of credit products Supply of other financial services Supply of non-financial services Appropriateness and client satisfaction Flexibility Appropriateness of the supply of services to the clients needs Client Satisfaction/Dissatisfaction.. Its perception respect to: Service Delivery Cost Guarantee Amount Term Repayment frequency Customer care (relation with personnel) Time to disburse a loan Simplicity of documentations and procedures to get a credit Drop-out rate and its reasons Non –financial services -Variety -Quality

49. 49 Dimensions of analysis: QUALITY of the SERVICE Example from FDL- Nicaragua case: Large variety of credit products Flexibility of loans conditions Offer of non-financial services Constant effort for innovation Cost quite low BUT Saving and insurance not available Long time for disbursement No tools to assess the quality of non-financial services

50. 50 Example of indicators

51. Scale and global analysis

52. 52 Rating scale and outreach Outreach: to be included in the grade or described? –described: 1.reaching development goals is not necessarily a direct function of depth of outreach (impact of financing SME on the employment of the poorest) 2.stakeholders can have different priorities in terms of outreach (women, refugees, ethnic minorities; micro; SME) –evaluated: 1.Coherence with the mission (actual outreach vs. intended outreach) AREAWEIGHT SPM SYSTEM 30% SOCIAL RESPONSIBILITY 20% OUTREACH 25% QUALITY OF THE SERVICE 25%

53. 53 Synthesis of the results

54. 54

55. 55 Detailed judgment by area

56. 56 Outreach description

57. Feedback from MFIs and Lessons learned

58. 58 Social Rating Projects: our experiences so far 3 simple social ratings (Latin America and ECA) 5 enhanced social ratings in Latin America (Nicaragua, Mexico, Perù, Chile) supported by Ford Foundation 3 enhanced social ratings in Latin America (Ecuador and Perù) supported by Oikocredit Additional 4 enhanced social ratings (Latin America, Eastern Europe, Africa) Several social ratings already planned for 2008 (with various actors including Oikocredit, Aga Khan Agency for Microfinance, social investors/MFIs/donors) in Latin America and Central Asia New project: 6 social ratings supported by CordAid on 3 continents Rated MFIs include Banco Solidario Ecuador, FIE Bolivia, FDL Nicaragua

59. 59 Lessons learned Strong interest in social rating, resulting from the willingness to: Improve the SPM and achieve social objectives Align with social stakeholders expectations Basis for a revision of mission statement Basis for rethinking strategies Enrichment of tools available at institution level to track poverty profile of clients (Strong interest in PPI tool, frequently unknown) MFI involvement and willingness to participate is crucial Need to grow MFI awareness about what is a social performance assessment and its conceptual framework. Learning about social performance is a process: Distinction between social impact and performance not clear Areas of assessment of social rating not yet internalized Confusion among tools available

60. 60 Lessons learned (2) Existence of synergies between SPA and technical assistance to strengthen the SPMS Weakness of loan size proxy to estimate poverty necessity to develop tools to measure and monitor the poverty level of clients Outreach indicators to be adapted to the type of target served (i.e. physical versus juridical persons) We can go toward standards and comparable indicators ….but long way

61. 61 Thank you!!! MF Rating HQ Corso Sempione, 65 20149 Milan – Italy Tel: +39-02-3656.5019 Fax: +39-02-3656.5018 MF Rating South America Calle Pasaje El Jardín #152 y Avenida 6 de Diciembre, Quito – Ecuador Tel.: +593-2-2248.114 MF Rating Central America Costado Nor-oeste Parque El Dorado Casa 116. Residencial El Dorado, Managua – Nicaragua Tel.: +505-2480.858 MF Rating Central Asia, the Caucasus and Russia 231, Tynystanova Str., apt. 14 720011, Bishkek, Kyrgyz Republic Tel: +996-312 68 2997 MF Rating Africa c/o Prima Apartments, Gichugu Road, Kileleshwa, Nairobi - Kenya Tel: +254 (0)20 300 6423; Mob: +254 (0)737 43 9297 Antenna in Brussels Rue de la Victoire 101, Brusseles - Belgium Tel.: +32-2-539.2422 www.microfinanzarating.comwww.microfinanzarating.com info@microfinanzarating.cominfo@microfinanzarating.com