Copenhagen Business School May 2012 Microfinance & the Double Bottom Line A study on how the Microfinance Sector can prevent Mission-Drift Author: Michael Fhima Cand.Merc.Int Supervisor: Peter Wad Number of pages : 111 Number of units: 179.862 Master Thesis Contents Acknowledgements………………………………………………………………………………………..3 Abbreviations and explanations………………………………………………………………………….4 Introduction……………………………………………………………………………………………….5 Research Question………………………………………………………………………………...6 Definitions and Explanations …………………………………………………………………….7 Delimitation……………………………………………………………………………………….7 Structure of thesis…………………………………………………………………………………7 Methodology………………………………………………………………………………………………9 Research purpose………………………………………………………………………………….9 Research design…………………………………………………………………………………...9 Data gathering……………………………………………………………………………………10 Primary data……………………………………………………………………………..10 Secondary data…………………………………………………………………………..10 Methodological approach in two research papers………………………………………………...11 ‘State of Practice in Social Performance Reporting and Management’…………………12 ‘Microfinance Synergies and Trade-offs’……………………………………………….12 Data Structure…………………………………………………………………………………….13 Research strategy…………………………………………………………………………………13 Choice of theories………………………………………………………………………………………...14 CSR in GCV – Principal / Agent…………………………………………………………………14 Governing through Standards…………………………………………………………………….17 Multistakeholder CSR…………………………………………………………………………….18 Theoretical Framework…………………………………………………………………………...19 Validity and reliabilty……………………………………………………………………………..19 Microfinance……………………………………………………………………………………………..20 Background……………………………………………………………………………………....20 Funding structure………………………………………………………………………..22 Types of foreign investors…………………………………………………………….....23 Donors and investors different motives in investment choices……………………….....24 Banana Skins Report 2010………………………………………………………………….........28 Impact of microfinance…………………………………………………………………………..30 Mission drift……………………………………………………………………………………………...33 Rapid growth in the microfinance industry………………………………………………………34 IPO…………………………………………………………………………………….....36 From non-profit to for-profit………………………………………………………….....37 Synergies and Trade-offs………………………………………………………………..40 Social performance and Portfolio Quality……………………………………………....42 Role of governments…………………………………………………………………....45 Back to Client focus…………………………………………………………………………………….46 Social performance initiatives…………………………………………………………………..46 Social Performance Management……………………………………………………………….46 The Social Performance Management Practice based guide…………………………...48 Tools developed………………………………………………………………………...49 The Smart Campaign……………………………………………………………………………49 Client Protection Principles………………………………………………………….....50 1 Seven steps when implementing the Principles………………………………………51 MFTransparency……………………………………………………………………………....51 Confusing interest rates, hidden fees and complicated agreements………………......51 Product awareness…………………………………………………………………....52 Principles for Investors in Inclusive Finance (PIIF)…………………………………………..53 Responsible finance…………………………………………………………………..54 Role of funders in promoting responsible finance……………………………………55 Microfinance Information Exchange………………………………………………………….56 Does microfinance rating assessment make sense?......................................................57 Survey of 405 MFIs in social performance management…………………………………………..59 Results and key findings………………………………………………………………………59 Governance and organizational structure………………………………………….....60 Mission achievement…………………………………………………………………62 Translating social mission into measurable outcomes……………………………......63 Strategic alignment…………………………………………………………………...64 Information systems……………………………………………………………….....65 Client protection……………………………………………………………………...66 Transparent and responsible pricing…………………………………………………68 Other principles………………………………………………………………………68 Responsibility to the environment and the community……………………………...70 Investor support……………………………………………………………………...71 Technical assistance……………………………………………………………….....72 Discussion……………………………………………………………………………………………73 Conclusion…………………………………………………………………………………………...78 References……………………………………………………………………………………………84 Appendices…………………………………………………………………………………………...89 2 Acknowledgements I give special thanks to the people who have helped me throughout the proces I am extremely grateful for all the respondensts taking the time to contribute to my research and making it possible I wish to thank my supervisor Peter Wad for guiding me through some difficult steps and providing me knowledge on how write the thesis and moreover helping with the structure and the method. I also wish to thank Flemming Kramp for the interview and the email-correspondence, he gave me insigths and was helpful when needed. Moreover, I wish to thank Peter Blum Jensen for inviting me to the Danish Forum for Microfinance course and providing me with materials. The last two persons I wish to thank is Barbara Gähwiler from CGAP for email-correspondence and providing me with the latest research papers and Karen Iversen for helping with the structure and set up. 3 Abbreviations & explanations Due Diligence - "Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It’s a process of examining a company’s performance. It is typically performed by or on behalf of investors who are primarily interested in verifying that performance is accurately reflected in the financial statements. MFIs – MFIs are specialised financial institutions that focus on providing financial services to microentreprises and poor households. MFIs may both be formal financial institutions structured as traditional banks and regulated by the central bank, and semiformal institutions such as NGOs; None Bank Financial Institutions (NBFI); or member based organisations such as SACCOs. CGAP - The Consultative Group to Assist the Poor - is a consortium of 33 public and private development agencies working together to expand access to financial services for the poor in developing countries. CGAP was created in 1995 by these aid agencies and industry leaders to help create permanent financial services for the poor on a large scale (often referred to as microfinance). MIX - Microfinance Information Exchange, Inc. (commonly known by its acronym MIX) is a non-profit organization that acts as a business information provider in the microfinance sector. Founded by the Consultative Group to Assist the Poor (CGAP) and sponsored by the Bill and Melinda Gates Foundation, CGAP, Citi Foundation, Deutsche Bank Foundation, IFAD, and Omidyar Network, MIX is headquartered in Washington DC, and has regional offices in Peru, Morocco, and India. NPM - In January 2003 thirteen organisations agreed to formalise their efforts to co-ordinate and work together and jointly established the Netherlands Platform for Microfinance. In 2011 the Platform has grown to 16 organisations. NGOs – Non-governmental organisations, are non-profit, civil society organisations not affiliated with any government and devoted to managing resources and implementing projects, with goal of addressing social and socioeconomic problems. NGO-MFIs are NGOs specialised in provision of microfinance. MIV- An intermediary that mobilizes funds from investors to MFIs in the developing countries (will be elaborated in the thesis). 4 APR - The term annual percentage rate, also called nominal APR, and the term effective APR, also called EAR, describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate Smart Campaign - The Smart Campaign is a global effort to unite microfinance leaders around a common goal: to keep clients as the driving force of the industry (will be elaborated later in the thesis). SPM - The Social Performance Management (SPM) Principles for microfinance have emerged from an industry- wide initiative aimed at making microfinance more effective in achieving its social mission. The Principles reflect a consensus among a wide range of stakeholders (including microfinance institutions, networks, donors, investors and support organizations) who commit to taking practical action to achieve their social mission by managing their social performance. SPTF - The Social Performance Task Force consists of over 1,000 members from all over the world and from every microfinance stakeholder group: practitioners, donors and investors (multilateral, bilateral, and private), global, national and regional associations, technical assistance providers, rating agencies, academics and researchers, and other. Initiatives were taken in the microfinance industry to come to agreement on a common social performance framework and to develop an action plan to move social performance forward. Introduction In April 2007, Banco Compartamos (MFI in Mexico) held a public offering of its stock in which insiders sold 30 percent of their holdings. The sale was over-subscribed by 13 times, and Compartamos was soon worth $1.6 billion. For the supporters of Compartamos, its public offering heralds a future in which microfinance routinely attracts investment from the private sector, freeing it from the ghetto of high-minded, donor-supported initiatives. Comportarmos grew from 60,000 customers to over 800,000, quickly making it one of the largest “microlenders” in Latin America.