Assessment of financial performance of microfinance organisations (MFOs) is far from perfect, but it is fair to say that it is institutionalised.
Rules and norms govern these activities sufficiently strongly that: (a) almost nobody questions why it should be done, and (b) agreed standards and routines govern how. The key question to be explored here is whether it would be desirable to achieve a similar degree of institutionalisation for goal setting, monitoring, assessment and auditing of the social performance of MFOs, and if so how to go about it. Social performance refers mainly to the direct impact (physical, social, economic, political, cultural, psychological) that MFOs have on the activities and well-being of users of their services. But wider impact, on other family members, employees, business associates, competitors, neighbours, those excluded from using services, and institutions governing society more generally, are also important. Thus social performance also includes the impact of microfinance on poverty.
The terminology of financial and social performance of an organisation is linked in turn to the concept of the “double bottom line”, and the view that MFOs should aim at becoming both viable commercial organisations and catalysts of social development (Tulchin 2003). This is a bold but fragile dream, easily subverted by populists and cynics alike. The view taken here is that generalisation about overall impact of microfinance, or lack of it, matters less than small steps in the right direction. This includes steps towards institutionalising a hard-headed culture of learning how to improve social performance, both within MFOs and across the microfinance industry/community.
The term “social performance” echoes the recurrent preoccupation within public policy with defining goals, assessing performance against those goals, and ensuring that there are strong feedback or performance management systems to help organisations monitor, reflect upon and improve practice. But, given the diversity and complexity of MFOs, it is important that striving for consistency, both within and between MFOs, is reconciled with the need for flexibility. For example, greater consistency in measuring the poverty of clients would be welcome, but not if one indicator becomes too dominant a criterion by which social performance of all MFOs is judged. The general problem is to avoid unthinking replication of what is naively regarded as universal best practice. For example, the Grameen Bank has recently been through a quite radical process of “re-engineering” (Yunus 2002), but other MFOs may be right to opt for more gradual change.
Benchmarks set standards of good practice to which members of a peer reference group are encouraged to aspire. They vary widely in scope and ambition. At one extreme a benchmark may consist of little more than a checklist of questions against which an organisation can be assessed. But benchmarks may also help to bring about greater clarity and consistency in definition of terms, measurement of indicators, methods for evaluating performance against agreed yardsticks, and systems of quality assurance. The concept is already established in microfinance with respect to financial performance (see especially MiX 2002), where the scope for agreement on quantitative standards are greater. But the idea of agreeing on a more general social performance benchmark is also advancing rapidly (see Zeller et al. 2003).
A benchmark has the potential to increase efficiency, quality and transparency of a peer group or network of organisations (Copestake 2002a). However, the tool also carries with it real dangers. For example, benefits can be outweighed by the costs of setting up, monitoring and complying with it (Power 1997). Benchmarks can also foster an undesirable degree of uniformity, and be used as a weapon by those with power to impose their vision on others. Thus, while suggesting a rational, technical approach to development, the process of benchmarking is unavoidably political and risky. Much depends upon the level of detail to which a benchmark aspires. This article argues in favour of keeping standards simple, thereby developing a benchmark to which the vast majority of MFOs can subscribe. This is compatible with an evolutionary process of continuous improvement in social performance based more on peer pressure, that is likely to be more effective than one dictated by donors, international consultants and regulators.
Care is also needed in thinking through the political processes by which compliance with a benchmark is monitored and enforced. There is little doubt that sponsors of microfinance will use any agreed social performance benchmark to make decisions about resource allocation. If compliance with a benchmark can be reliably audited then it can help to reduce the lack of clarity, cost and inconsistency of current performance assessment and resource allocation processes. If not, then the benchmark can set up a conflict between better performance and the appearance of better performance.
A first step in developing a simple standard for social performance of microfinance is to distinguish between internal and external requirements. The internal agenda is how to institutionalise a culture of concern with social as well as financial performance. The external agenda is to develop systems for sharing credible evidence about social performance with other stakeholders, including investors, donors, and regulators. This distinction can be clarified by comparing social and financial performance measurement (see Table 1).
This article starts with the internal agenda. Section 2 proposes a unified framework for selection of goals and indicators. Section 3 proposes a minimalist system for monitoring changes in client status, and Section 4 explores options for impact assessment. Section 5 starts by exploring factors affecting the quality and effectiveness of social performance assessment. It argues that external stakeholders should rely less on independent impact assessment studies, and more on periodic audits designed to reinforce internal social performance. The main arguments of the article are summarised in Section 6.
This article comes from the IDS Bulletin 34.4 (2003) Part II: Institutionalising Social Performance 5. Simple Standards or Burgeoning Benchmarks? Institutionalising Social Performance Monitoring, Assessment and Auditing of Microfinance