Microfinancing has been a significant development in the field of social entrepreneurship not only because it has demonstrated proof of concept that social ventures can be big business, but also because it has highlighted what a challenge merging the worlds of profitability and social progress can be. Just ask Hugh Sinclair, author of Confessions of a Microfinance Heretic.
Hugh argues that the challenge is one of transparency. Like the subprime lending crisis, Hugh believes that predatory practices are unavoidable where the motivations of the lenders aren’t aligned with the motivations of the lendees. While I agree that transparency is certainly important, what I wanted to explore was the misalignment, rather than the issue of transparency and regulation. After all, why is there a misalignment in the first place? Weren’t these organizations founded on the premise of providing un/underserved constituents with the financial means to better themselves and their communities (Check out Grameen’s website which is chock-full of social impact lingo and yet we’ve read the controversy surrounding them. Yes, the accusations leveled at Grameen are considered by many to be frivolous, but the criticisms of microfinance as a viable industry are still relevant). I wanted to consider the question of how do organizations go astray and whether microfiance institutions (MFI’s) can effectively protect their mission internally.
The so-called “lean startup revolution” is the work of silicone-valley veteran and organizational evangelist Eric Reis. While the concept is innovative in its application, the premise of the Lean Startup is essentially a repurposing of the scientific method. If you don’t tie what you are doing to something measurable, there is no way to systematically progress. In this regard, social ventures are no different from other companies. As we discussed in class last week, determining the ultimate social impact of a project or scheme can be a challenging undertaking for companies, but it is essential for social ventures, especially those that are inherently vulnerable to corruption.
The relative importance for MFI’s to implement a metric-based approach is something that I came across in a publication by Kiva. There, Kiva professes that increasing success and subsequently, the increasing competition, threaten to pull microfinancing firms further from their social missions. To their credit, MFI’s have been aware of this weakness and established the Social Performance Task Force (SPTF) in 2005 and the Microfinance Information Exchange (MIX) in 2009 (for those interested, the MIX site is a treasure-trove of MFI data). One graph from their publication, Defining responsible financial performance: how to think about social performance, struck me. The graph, Development goals and outcomes tracking, shows the discrepancy between MFI’s who recognize that tracking social impact is a critical part staying aligned with their social mission and those that actually track outcomes. The drop-off is troubling. While it is certainly important to recognize as an institution that social impact tracking is important, the proclamation strikes me as hollow if it isn’t backed up with any tangible effort to measure social impact. As long as MFI’s continue to operate in this fashion, I would expect that we will continue to see evidence of questionable business practices in the microfinance industry and criticism from analysts.