1. Pursuing Financial and Social Goals: Initial findings on trade-offs and synergies. Adrian Gonzalez, MIX – SPTF Meetings, Bern, June 30 th 2009

2. Expected trade-offs and synergies  Identify expected relationships between SP and FP based on conventional wisdom, case studies and general observations  Test hypothesis with regression analysis (OLS)  Control for factors already known to impact FP results under study  Average loan size, age, MFI size, lending methodology, deposit mobilization  All results from regression analysis, not correlation analysis  Correlation only test relationship between 2 variables at the time  Regression “isolate the effect” of other variables included in regression known to affect FP outcomes  other SPs and controls

3. Expected trade-offs and synergies  Regression Analysis for each FP  Controls: age, loan size as % of GNIPC, MFI size, deposit mobilization, lending methodology, % urban borrowers. Targeting V. Poor or Poor Q. 1 Non- Financial Services Q. 3c SP training Q. 4-5 Client Retention Q. 7 Social Resp. to clients (CPP principles) Q. 8 Social Resp. to Staff Q. 10a-b -Borrowers per staff (Productivity) ----++-+ -Portfolio at Risk over 30 Days -Write-off Ratio (Portfolio Quality) ----- - Operating Expense % GLP (Efficiency) ++++--++ Cost per Borrower as % of GNIPC (Efficiency) ++++--++ Green: SynergiesRed:Trade-offs

4. Summary of Actual Results Targeting V. Poor or Poor Q. 1 Non- Financial Services Q. 3c SP training Q. 4-5 Client Retention Q. 7 Social Resp. to clients (CPP principles) Q. 8 Social Resp. to Staff Q. 10a-b -Borrowers per staff (Productivity) ++ + -Portfolio at Risk over 30 Days -Write-off Ratio (Portfolio Quality) - -* Operating Expense % GLP (Efficiency) + + + Cost per Borrower as % of GNIPC (Efficiency) + +- + Green: SynergiesRed:Trade-offsYellow Inconclusive, larger sample, more details needed

5. Takeaways:  Several expected trade-offs and synergies between SP and FP can be confirmed:  Efficiency trade-offs for targeting the poorest, SP training and social responsibility (SR) to staff  Productivity synergies for SP training and SR to staff  Productivity and efficiency synergies for client retention  Investments in human capital (SP training and SR) go hand-in-hand with higher staff productivity and better portfolio quality, but lower efficiency  SP training and HR policies have stronger synergies and weaker tradeoffs with FP  Serving the poor/very poor comes at a cost in terms of efficiency, but not of risk or productivity  even after considering differences in loan sizes

6. Implications  For MFIs  Improving client retention improves financial performance  Process discipline and staff support pay off  For funders  You cannot ignore MFI investments in staff training, incentives and human resource policies, whether you are socially or financially driven  For critics of high interest rates/high costs  Exclusive targeting of very poor/poor borrowers increases the average cost of loans to the borrowers  For SPTF / Researchers  Need to control for SP-factors known to influence FP, in order to better understand differences in FP  Need to refine questions that have ambiguous attribution  (e.g. SP training versus general training effects)

7. Productivity - Borrowers per Staff  MFIs with training on social performance exhibit higher staff productivity  Training on one topic, like social performance, likely indicates broader staff training, and the results may reflect this fact  Staff appraisals also correlate to higher productivity, while specific social performance incentives do not  Same caveat as with training applies  MFIs with more HR policies showed greater work productivity, with an additional 6-7 borrowers for each policy  Higher drop out rates are associated with lower productivity  Difference of 20 pp. dropout  Difference of 12-17 borrowers per staff

8. Productivity: Borrowers per Staff Human resource policies: clear salary scale based upon market salaries, medical insurance for all staff, pension contribution, practices and procedures which ensure safety of the staff, equal pay for men and women with equivalent skill levels, staff participation in decisions that affect them, anti discrimination policies, and anti harassment policy

9. Portfolio quality – PAR30 and WOR  Loan officers at MFIs with SP training maintain better performing portfolios, with PAR30 and WOR 1.5 pp lower  Social performance training and broader training likely reinforces good client selection and management practices  Impossible to isolate effect from “general training” versus “SP training only”  Similar effect for Write-off Ratio (WOR)  MFIs with more policies for safeguarding data have better portfolio quality, with an additional 0.3 percentage points improvement in PAR30 for every policy  No effect for Write-off Ratio  Policies for safeguarding data related with better MIS and stronger MFIs in general

10. Portfolio quality: Portfolio at Risk over 30 Days as % of Loan Portfolio Policies safeguarding data: written policy and procedures regarding treatment of client personal data in place, internal audit reviews security of locations and electronic systems where client data is stored, the IT system is secure and password protected, staff explains to clients how their data will be used, client consents is require prior to sharing data outside the institution, client say review and correct their information, clients are instructed on how to safeguard access codes and PIN numbers.

11. Results: Efficiency - Operating Expense % Loan Portfolio  Client targeting at different levels of poverty yields different operating costs  Results highlight the cost advantages of reaching diverse client segments with credit  Reaching poorer clients adds to an MFI’s costs, irrespective of loan sizes or methodologies employed  Disbursing 100 loans of $100 is more expensive than 10 loans of $1,000  Disbursing $100 loans ONLY to the poor is more expensive than disbursing them without particular target  Staff incentives increase the average cost per dollar lent  MFIs may recoup these costs with gains in productivity (not directly found, but indirect through other Social Resp. effects)

12. Efficiency: Operating Expense % Loan Portfolio 1/ Similar effect for “loan officer incentives related with SP”.

13. Results: Efficiency – Cost per Borrower % of GNIPC  Client targeting at different levels of poverty yields different cost per borrower % of GNIPC  Results highlight the trade-offs of reaching very poor or poor clients  Reaching poorer clients adds to an MFI’s costs, irrespective of loan sizes or methodologies employed  Staff incentives increase the average cost of servicing one individual borrower  MFIs may recoup these costs with gains in productivity  Higher drop out rates increase the cost per borrower  Difference of 20 percentage points in drop out rates  Difference of 2% of GNIPC (Bolivia~= $34, India~=$20)

14. Efficiency: Cost per Borrower % GNIPC

15. Additional Resources:  “Microfinance Synergies and Trade-offs” (2010), MIX data Brief No. 6, forthcoming.  http:// www.themix.org/publications/search/results/taxonomy%3A17 http:// www.themix.org/publications/search/results/taxonomy%3A17  agonzalez@themix.org for preliminary draft. agonzalez@themix.org  http://www.spblog.org/ http://www.spblog.org/  For updated on research and preliminary results  “MIX Research Agenda: Linkages between Social Performance and Financial Performance”  http://www.spblog.org/2010/03/mix-research-agenda-linkages- between-social-performance-and-financial-performance.html http://www.spblog.org/2010/03/mix-research-agenda-linkages- between-social-performance-and-financial-performance.html