The purpose of this study is to contribute to the research on the relationships between social and financial performance of microfinance institutions. The Centre for Responsible Banking & Finance at the University of St. Andrews (UK) applies advanced statistical techniques to the in depth social performance data from Microfinanza Rating. The hypothesis that the relationship is parabolic instead of linear is broadly confirmed by the empirical results. Social performance management and social responsibility towards the staff are needed to sustain financial performance but lose their positive financial impact after a certain point (inverted U-shape). In contrast, building client protection systems from scratch can be costly, but the efforts pay off once the “minimum critical mass” of client protection is achieved to ensure the clients’ and investors‘ trust (U shape). The findings imply that social performance matters for the financial results; understanding the synergies and the trade-offs between the two is key to balance the sustainability and the progress towards the social mission.
A key promise of microfinance is poverty alleviation combined with a notion of economic development and social responsibility. The underlying expectation is that good business can do well, as microfinance institutions can be profitable businesses and jointly play a meaningful part in the quest for poverty alleviation. This hypothesis is charming but also challenging. Is it really possible that an organization engages to hundred percent in two aims: profit and poverty alleviation? Or will any organization eventually have to prioritize profit or poverty alleviation?
A lot of debate has been heard on this topic but the empirical basis is still small due to a lack of data or resources. Academics lack data on the social performance of microfinance institutions to conduct practically meaningful analyses of the relationship between the financial performance and poverty alleviation of microfinance institutions. They usually employ the average size of a microfinance institutions loan as measure of poverty. This measure, however, relates about as much to institutional policies and strategies as to the financial requests of clients, whereby even the financial demands of clients might be more related to a type of business opportunity than to poverty. In fact, it is possible that a client requests a smaller loan just because she has small existing funds to support her business.
Professionals, in contrast to academics, have access to social ratings of microfinance institutions, which employ a wealth of rich indicators. However, their main expertise lies naturally in commercial microfinance operations. Conducting advanced statistical analyses to ensure that a research finding describing the relationship between the social responsibility/poverty alleviation and the financial performance of microfinance institutions can be accredited best possible to a specific narrative by eliminating all other thinkable narratives is beyond the resources of most professional microfinance organizations. Nevertheless, organizations working in the microfinance sector within the Social Performance Task Force such as Cerise, Microfinanza Rating, MIX and microfinance investors (e.g. Blue Orchard, Incofin, Oikocredit and Triple Jump) are committed to understanding the relationship between the social and the financial of microfinance institutions. They have conducted initial analyses of the relationship which indicate that social aspects might matter for financial performance. Sensibly, their analyses focus on general measures of the social performance of microfinance institutions instead of a cryptic single indicator such as the academics’ average loan size. This social performance measure of professionals is largely concerned with poverty alleviation but also includes other aspects such as client protection or social responsibility towards staff.