In keeping with the theme of investor frameworks, I was just perusing a report published in June 2007 by Standard & Poor’s that documents the Microfinance Rating Methodology created by (you guessed it) the Microfinance Rating Methodology Working Group. The report is called “Microfinance: Taking Root In The Global Capital Markets” and was sent to me by Cynthia Stone, previously the Chair of Standard & Poor’s’ Emerging Markets Council, whom I met recently at SoCap ‘08. The impetus to recommend a set of rating criteria came from the fact that experts estimate that existing MFIs have reached only about 1/15 of the 1.5 billion total potential borrowers (the world’s “working poor”—and even this figure leaves another 1.5 billion people* who are not categorized by experts as candidates for microfinance).
A whole lot more MFI capacity is needed, and “a significant global expansion of microfinance will require the resources of the mainstream capital markets….” Those capital markets require that investors have tools to understand the risks and rewards of microfinance.
In other words, investors whose fiduciary mandates have nothing to do with ending poverty are now establishing frameworks by which to evaluate the invest-ability of MFIs.
At least in the case of this working group and it appears Standard & Poor’s, they are doing so in collaboration with social investors, and this report has a lot of great information and recommendations, but I’ll excerpt one line that runs particularly deep. The working group concluded that one of the questions that should be reviewed in evaluating the governance of an MFI is: “Are the owners subject to political instructions or influence or will they pursue policies that reflect that reflect (sic) the objectives of their organization at the expense of the MFI?” Depending how you define “influence” and “at the expense of,” this question opens up a whole lot of room for culture clashes between mission and non-mission driven investors in the governance of MFIs.
Deep definitional issues are thrusting microfinance into a kind of identity crisis, in which institutions have to articulate with a precision never before needed what makes them MFIs, why they ought to be that and not something that might better conform to the expectations of (non-social) capital investors, and how they can prove they really are what they say and not just pretending.
It also exposes a gap that didn’t matter so much before non-mission aligned investors came into the picture, but one the entire social capital markets are beginning to face: there simply aren’t universally adopted systems in place to quantitatively measure, manage and communicate to the capital markets either MFIs’ social performance, or how their social and financial performance are interrelated.
For decades this was much less of an issue between microfinance investors and MFIs. Mission-driven investors who were the original MFI investors simply knew it was working—they had not only seen it with their own eyes, they trusted the integrity of their MFI partners. Frankly, it was almost an insult to ask a founder who had been living among the poor on a shoestring herself for decades whether she had actually made “enough progress” toward ending poverty. But those days are ending fast, and not just in the microfinance world.
When an industry needs to increase the capital that underpins its mission-achieving ability by a factor of 2x, 5X, 10X or more—that is, when an industry moves to actually address the entirety of a large-scale social or environmental problem— there simply have to be management and oversight tools that assess whether or not real progress is being made on that problem, and whether it is being made efficiently.
A lot in the world has changed in the year and a half since this S&P report was published, not least of which is a fresh awakening to the difficulty actually taking one’s own advice when it comes to assessing whether the management and oversight of risk are adequate, even in the case of conventional credit risk analysis. It seems that the human factor has been insufficiently taken into consideration by conventional methodologies. It is up to us all to make sure the definition of the new governance methodologies consider the well-being of people to be a required part of “return on investment.”
*Solutions that can help these people escape poverty are being tackled by other entities such as Aflatoun.
This entry was originally published on the Skoll Foundation’s SocialEdge.org website on our other blog – SVT on Impact.