First published in the 2018 Microfinance Barometer which e-MFP is proud to partner.

Since the dawn of the commercialization of microfinance nearly two decades ago, investment in microfinance has been made on a widely-accepted premise: investors will receive a ‘market rate’ financial return, while pursuing a socially-motivated strategy. This premise is so widespread that it has taken on the allure of all groupthink – becoming an accepted truism, without necessarily being true.

The double-bottom line – the equal focus on financial and social return – can be deceptive. The dilemma is that while financial return has a clear target, social return is more nebulous. What social return is really being promised? Is serving a certain segment of clients enough? Do additional products need to be offered? What about financial education?

There are cases that call for difficult decisions and real choices. Consider: many social investors measure impact by the amount of money invested, even though their funds may often stand in competition with locally-raised deposits, which themselves are at least as socially beneficial as credit. By undermining their investee’s incentives to raise local deposits, well-meaning investment may lead to reduced – and even negative – social returns.

Or consider interest rates. Large loans tend to have lower rates than small loans, often while generating higher profits. So an MFI that moves upmarket to serve wealthier customers will appear to deliver both higher financial return (bigger profits) and social return (lower interest rates). But this is specious: the ‘double’ return is achieved by shifting away from Bottom of the Pyramid population, the precise target population that the institution was set up to serve in the first place.

A simplistic retort is to invert things – that only when investors are willing to lower their financial return targets can they be reassured of having achieved positive social return. This, too, is wrong. There are countless examples where even well-intended charity causes more harm than good.

Picking the high-hanging fruit

The truth is that ensuring social return is difficult. Delivering a true double bottom line is possible, but requires dealing with the complex uncertainties hidden behind that nebulous social return. What social mission is the institution trying to pursue, and is it actually succeeding in doing so? Who are its clients? Are the institution’s services truly offering what’s needed, and is the institution effective at separating cases where it does good, from those where it actually does nothing, and even causes harm?

Despite these difficulties, recent efforts to analyse and evaluate the complexity of the double bottom line are encouraging.

Unsurprisingly given its dual mission, the microfinance sector has in fact been at the forefront of developing real-world social return metrics, encapsulated by the work of the Social Performance Task Force’s SPI4 tool. Such tools have contributed to the emergence of a class of committed social investors that recognizes the true complexity and necessity of the double bottom line and has invested in and focused on measuring not only financial but also social ‘profitability’ in an empirical manner.

The outcome of these efforts has been to show that financial and social returns can be complementary and mutually beneficial. Increased focus on Social Performance Management (SPM) can improve efficiencies, allow for lower margins, reduce staff turnover and deepen the organization’s understanding of its clients’ needs, giving it a competitive advantage that is difficult to duplicate. This can then support higher financial profitability. Meanwhile, a strong social focus may lead investors to new markets that others assume unprofitable. In many ways, a strong SPM focus is reminiscent of the 1950s-60s Japanese manufacturing revolution pioneered by W. Edwards Deming: investing in a metrics-driven system can yield long-lasting returns, in this case, both social and financial.

Humility and incentives: Understanding why social impact matters

Above all, social responsibility requires humility. Setting the goal of “outreach” without recognizing market capacity and realistic limits can lead to an excess of even well-designed products. Credit in particular has this risk: too much credit is often worse than no credit at all.

Humility also comprises willingness to think about demand-driven and not just ‘we-know-best’ supply-driven solutions. But doing that requires serious, long-term investment in SPM capabilities that only committed social investors are willing to make.

Beyond humility, from a behavioural perspective it is the incentives that matter. Investors that believe in an illusory automatic link between financial profitability and social impact are more likely to take social impact for granted. This pernicious syllogism – a. I am funding microfinance; b. microfinance is Good; therefore c. I am doing Good – has dominated the narrative since the industry’s beginning. But in reality, the experience of MFIs around the world shows that financial profitability is the easier threshold to clear; it is the Doing Good that is much the harder part.

Ensuring social impact demands investment, attention, monitoring and evaluation and – sometimes – tradeoffs in financial return. That being said, the very fact the question is asked – not just in the Barometer, but in boardrooms industry-wide – illustrates how far we have come.

Check out the other Microfinance Barometer articles here

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