Evaluating social returns on microfinance

Whether you are an individual investor, an institutional fund, or a microfinance organization, the issue of returns on social investment is always a concern.  The difference is usually in the approach that each stakeholder may take in measuring these returns.  The Grameen Foundation made a major stride in the effort to create an evaluation framework by releasing guidelines to evaluate social returns to investments.

As of 2006, socially-focused investors in the U.S. had channeled more than $663 million into microfinance. Most of these investors choose microfinance because they expect financial as well as social returns related to reducing poverty. Until recently, however, there were few tools to help them track how well their investments were achieving their goal of improving the lives of microfinance clients and how those “returns” compared to industry-wide performance benchmarks.

When I read about a new set of guidelines, I imagined some complex framework, or a laundry list of things to look for.  Instead, the guidelines are quite short and simple.  Maybe even the measurement of social returns follows Occam’s razor!

The guidelines are just a first step – some of the questions may need a little more teasing out.  For example,  a question listed for institutional investors to ask: How effective are the MFIs at alleviating poverty?  Investors may want a more elaborated approach in terms of what “effective” means.  At the same time, the strength of these guidelines is that they are flexible and realize that social investments, even in a field like microfinance, can vary.  Along with GF’s previous initiative, the Progress out of Poverty Index, which tracks microfinance institutions’ track records with poverty alleviation, the evaluation guidelines are a welcome development in the world of performance indices.

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