Five Elements of A Social MFI

Portfolios of the Poor demonstrated in detail how important well designed financial services can be to the poor and excluded. Microfinance has developed financial products and distribution processes that if used correctly, can contribute to poverty alleviation by promoting financial inclusion as part of a broad development process.  The safeguards introduced by the SMART campaign and national codes of conduct can help ensure that the needs of other stakeholders – shareholders, management – do not predominate at the expense of the vulnerable clients.

David Roodman has carefully reviewed the evidence and concluded that microfinance has so far failed to demonstrate positive impact on most of its stated goals, in particular with respect to poverty elimination.  He argues that it has been successful with respect to institution building, and further takes pains to specify that the institutional success was not primarily one of growth and scale but of “development”, defined as a rich network of interconnections and feedback with the surrounding economy and financial system.

But MFIs have the potential to go well beyond financial inclusion, and many do so by combining financial services with other non-financial interventions in coordinated programs to eliminate poverty and its manifestations.  These “social first” strategies are consistent with research by Banerjee and Duflo at MIT, who argue that there are many interventions or “nudges” that can have significant impacts on poverty. Some, like home visits explaining health initiatives, or weather insurance, could conceivably be built into the business model of a profit-maximizing provider. In other cases, MFIs may be well positioned to implement these nudges, like giving girls school uniforms to prolong attendance, but these are unlikely to be fully justified on the grounds of increasing shareholder value.
 
So what does a "social first" MFI look like?

Social first MFIs are, ideally, institutions committed to assembling coordinated interventions in pursuit of poverty elimination, sustainable communities, and economic justice. They have the human resources, monitoring systems, and capital markets relationships to pursue these missions in a disciplined, rigorous, constantly innovative way. While they – or at least a subsidiary – will look a lot like any other financial institution, at a strategic level they opportunistically employ financial services as a tool to help achieve their poverty elimination/ community development goals.

While many specific models can be imagined and, in fact, observed, I would suggest that five elements must be present:

• Promoters must be willing to commit to specific and explicit social goals as their priority in the context of a sustainable institution.
• Impact oriented features of governance and corporate structure such as conditional self perpetuating boards or differential voting structures that enshrine the social priorities at the forefront of their performance as sustainable institutions.
• Capital, in particular, equity capital that shares these goals and is willing to absorb less than market returns and liquidity if necessary. Explicit caps on ROE or the equivalent may be adopted.
• Locating the MFI at the center of a coordinated web of poverty oriented interventions including the financial services it provides directly alongside non-financial interventions targeting health, education, livelihood development that it may identify and help deliver or facilitate.
• Specific metrics to enable success or failure to be monitored. Openness and access to research on poverty and impacts of various interventions so as to refine and improve their effectiveness in meeting their social objectives.

Financial performance to date suggests that MFIs that focus on financial inclusion can fit, if not always comfortably, within a profit maximizing double-bottom line model. Their corporate structures and management will be largely identical to conventional structures and practice. But poverty elimination MFIs are unlikely to be able to comfortably fit within standard shareholder structures and practices because they will typically need to engage low or unprofitable interventions alongside their profitable offerings. While many of these will be complementary non-financial services, even some financial services, such as low balance or daily collection savings accounts will also likely fit better in a social-first than a financial first institution.

The reevaluation of MF has been a very constructive exercise for the industry, and we should pat ourselves on the head for being open – mostly – about our failures, listening to critics, and incorporating the latest research results into our business planning and product design. But the debunking process can go too far, and at this point probably has. Rather we should recognize and continue to support the role that microfinance can play in spreading the impact and benefits of economic development through financial inclusion while reinvigorating the poverty elimination mission by better aligning corporate structures and impact investors to support this core goal.