Incofin Social Performance Report 2011 by Cantilis

Incofin Social Performance Report

Incofin IM Social Performance Report

Table of contents ‘Committed Beyond Investment’ is more than a slogan............................................4 Social Performance at the heart of Incofin’s approach.............................................6 Social Performance Management in the investment process...................................8 1. Selection........................................................................................................................ 8 2. Evaluation (ECHOS©)................................................................................................... 9 3. Disbursement............................................................................................................... 11 Technical Assistance.................................................................................................16 Technical Assistance (TA) strategy................................................................................ 16 TA implementation......................................................................................................... 16 Towards an SPM-focused TA.......................................................................................... 18 SPM and governance................................................................................................22 Social Balanced Scorecard.......................................................................................... 22 Self-assessment tool for Board of Directors.................................................................. 23 Preventing over-indebtedness...................................................................................24 Incofin IM’s three step strategy to combat over-indebtedness in India.................. 24 A study on over-indebtedness in Cambodia.............................................................. 25 The Working Group ‘Over-indebtedness in Kyrgyzstan’............................................. 27 Promoting transparent and responsible pricing ......................................................28 Active involvement in SPM initiatives........................................................................30 Incofin IM within the Social Performance Task Force................................................. 30 The Working Group on Reasonable Covenants......................................................... 31 The Working Group for Tier II and Tier III MFIs............................................................... 32 Principles for Investors in Inclusive Finance (PIIF)......................................................... 33 Key goals for 2012.....................................................................................................36

Incofin IM Social Performance Report

‘Committed Beyond Investment’ is more than a slogan A

t Incofin Investment Management (Incofin IM), we do not believe that microfinance is by nature ethically good, simply because it is about ‘working with people at the bottom of the pyramid’. We believe that microfinance can only be ‘socially responsible’ if it explicitly includes a ‘double bottom line approach’ which truly combines financial and social targets. The ‘double bottom line approach’ is the only way for microfinance to provide a fair and sustainable financial and social return. In an ideal world, a positive outcome for the poor will only be achieved through this double bottom line. Our approach is based on the following convictions and observations: ·· Microfinance institutions (MFIs) serve clients who are fragile and easy to take advantage of; as a result, a great deal of responsibility lies with actors in the microfinance chain (investors in microfinance funds, fund managers, MFIs); ·· In order to make an impact on the lives of the poor, microfinance services should not only make finance more accessible but also aim at positive social effects that will benefit the final clients. This aim should be built into the design of the microfinance services offered.

Microfinance investors should be aware of the complex environment in which MFIs and their microfinance clients operate, and should refrain from making one-dimensional demands for financial return. At Incofin IM, we think microfinance is not about ‘profit first ‘or ‘social first’ but about finding a balance between the two. Unfortunately, in recent years we have observed that this balance has not always been respected. When excessive emphasis is placed on financial return, this can be very counter-productive and can be the cause of a great deal of damage to the poor, e.g. by creating regional pockets of overindebtedness among microfinance clients. The ‘double bottom line approach’ embodies the essence of Incofin IM’s mission and vision. It is part of our identity and of our corporate DNA. We promote it both internally, among our staff, and externally, among the microfinance chain actors, especially among our investors and investees. For us, promoting the double bottom line is not about spouting slogans. Instead we do it through research, discussion and challenging the relevant actors in the microfinance chain. Our goal is to develop systems and methodologies that will measure and improve social performance and that will also improve the double bottom line return for our investors. Incofin IM has always been a frontrunner in the area of ‘Social Performance Management’ (SPM), which is a dimension that we have been piloting and integrating into our approach for many years. We have also published articles on specific topics related to SPM. This is our first comprehensive SPM

Report, and it includes the results of years of internal reflection and experience in the field. It covers a wide range of topics and approaches. Since we believe that the future of the microfinance industry belongs to those who integrate SPM in their actions, we are convinced that our SPM Report will be the first in a long series of future reports. Loïc De Cannière Managing Director Incofin IM

Incofin IM Social Performance Report

The ‘double bottom line approach’ is part of our identity and of our corporate DNA.

Incofin IM Social Performance Report

Social Performance at the heart of Incofin’s approach I

ncofin IM’s approach to SPM in microfinance demonstrates its desire to help build up MFIs that develop a healthy balance between social and commercial goals. Our MFI partners are situated on a broad scale ranging from those focusing on highly social goals to those that are predominantly commercial in orientation. In each and every case, we strive to bring the right balance to the business. We consider this to be the most important commitment with regard to our investors. The year 2011 started off with a landmark event. On January 27th Incofin IM was a founding signatory to the Principles for Investing in Inclusive Finance (PIIF – http://www.unpri.org/piif/), a framework supported from the outset by Her Royal Highness Princess Máxima, the UN SecretaryGeneral’s Special Advocate for Inclusive Finance for Development. These constitute an overarching framework that covers a number of aspects of SPM, such as transparency, client data protection and the setting of standards. In doing so, the PIIF are broadly addressing the concerns of investors wanting to develop an inclusive financial services industry that keeps the interests of its low-income clients at the core of its own interests. True to its mission and DNA, and after discussion in the Incofin IM Board, our company quickly went on to create an implementation plan designed

to incorporate the PIIF into its operations. All other aspects of SPM discussed below have been integrated in this plan in one way or another. Not only that, Incofin IM also decided to sponsor the PIIF Secretariat. Incofin IM has recently finished redesigning its ECHOS tool, which is an SPM assessment and monitoring methodology which since its earliest versions has set standards for the industry. We now work with the third generation ECHOS tool. Several years after it was first introduced, Incofin IM can now count on a comprehensive database of SPM assessments which is without parallel and is increasingly attracting the attention of researchers. Perfecting our SPM tools and methodologies and training our staff to work with them will be high on our list. We believe that, in order to serve the best interest of our investors, we need to question everything we do along the way, step by step. To improve customer orientation, and to integrate SPM even further in our work, we have significantly modified the templates used for entering into financing agreements with MFIs. For example, loan agreements now contain a set of social covenants while shareholders agreements detail provisions to safeguard principles of good governance. Other relevant practices, such as the creation of an SPM committee at board level, have also been introduced. Incofin IM is increasingly including an SPM component in its technical assistance support packages. As a result, we are able to engage more proactively with our MFI investees on SPM matters. The steep increase in TA budgets for 2012 and

future years, in combination with this focus on SPM, provides significant leverage on practices at MFI level. Looking ahead at the prospects of 2012, it goes without saying that Incofin IM will continue to emphasize the importance of rural outreach. We expect that 2012 will lead to a number of new partnerships in view of stimulating financial possibilities for poorer people in rural areas. Incofin IM also intends to keep playing a proactive role in the industry, for example, by leading the Social Performace Task Forceâ&#x20AC;&#x2122;s discussions for setting a benchmark for reasonable covenants and looking for ways to avoid or overcome defaults. We aim to achieve full implementation of PIIF before the end of 2012 and to have the progress of this implementation evaluated externally. We are already looking forward to bringing you our next SPM report with an update on the accomplishment of our hopes and goals! Geert Peetermans Chief Investment Officer Incofin IM

Incofin IM Social Performance Report

For Incofin IM, SPM means helping MFIs develop a healthy balance between social and commercial goals.

Incofin IM Social Performance Report

SPM in the investment process 1. Selection Social indicators indicated in the application form

rom the first contact with potential microfinance institution (MFI) partners, Incofin IM intends to ensure that the MFI’s social profile clearly matches Incofin IM’s social investor mandate.

That is why Incofin IM’s application form requests MFIs to provide both financial and social indicators, classified in different categories: ·· Social transparency: We ask applicants whether they have already endorsed the Smart Campaign and whether they report frequently on their social indicators to the MIX Market. ·· Human Resources: As we believe that good staff treatment is key to good client services, we ask our applicants to share with us their level of staff turnover. ·· L ending profile: In order to check the percentage of loans going to productive investments, we ask for a breakdown of the MFI’s portfolio per sector of activities. If there is a high level of consumption loans, we ask for a more specific breakdown under headings such as health, education, housing, and so on. ·· Rural lending: Because we are convinced that financial exclusion (lack of access to financial services) is higher in rural areas, Incofin IM has developed a ‘rural scoring’ tool which investigates the location of an MFI’s branches according to the size of the population of the city where it is based. This provides us with a good indication on whether the MFI’s clients are indeed located in rural areas.

2. Evaluation ECHOS©: An in-depth social performance evaluation for a double bottom line investment

In line with its social investor’s mandate, Incofin IM never makes an investment decision without first conducting a detailed analysis of the social performance of its potential investee. This investigation is given the same level of importance as the analysis of the MFI’s financial performance. Incofin IM’s Investment Managers make sure that, during each of their due diligence1 investigations, they are 1 Due diligence is an on-site evaluation of a potential partner

spending as much time researching information on, for example, MFIs’ current client retention rates, use of poverty targeting tools, client satisfaction levels, human resources management, policies on prevention of over-indebtedness, as they are spending time investigating financial aspects such as liquidity ratio, cash flow analysis, return on assets and operational self-sufficiency. Social Performance is now a clearly defined concept. It is based on traceable quantitative and qualitative indicators which can be used to benchmark institutions against international best practices. It is not possible nowadays for any microfinance practitioner to call itself

MFI conducted by Incofin IM’s Investment Managers.

SPM grades scored by MFIs in the Incofin portfolio Grade

SPM level

91 - 100

Advanced level of social performance

81 - 90

Very good social performance

71 - 80

Good social performance

55 - 70

Fair social performance

50 - 55

Low social performance

Data from 100 MFI from the period 01-2009 till 06-2011

Number of MFIs 0 12

Incofin IM Social Performance Report

‘social’ if it is unable to demonstrate measures, quantitative achievements and implementation of clear socially responsible practices. Incofin IM was one of the first Microfinance Investment Vehicles (MIV) to develop a social scorecard

Incofin IM was one of the initial movers in the measurement of social performance, and developed its own proprietary social scorecard (ECHOS) as early as 2007. The ECHOS tool has since undergone three rounds of revision to ensure that it always remains in line with the latest guidelines and principles representing international best practices in social performance. One of the biggest challenges of social performance evaluation is the avoidance of subjectivity. Throughout 2011, Incofin IM has worked hard to identify indicators that can be verified objectively. This often means that the process of testing and then adjustment has to be done again and again to ensure true objectivity as well as consistency with new developments in the sector.

Incofin IM Social Performance Report

Gender Incofin Investment Management staff - worldwide

Some examples of revisions carried out in 2011

without prior permission from these clients.

Client Protection Principles

In the previous version of Incofin IM’s ECHOS, there was no specific question relating to the protection of client information privacy. Today, in line with the definition of the Client Protection Principles (CPPs) by the Smart Campaign 2, Incofin IM has inserted a specific question per CPP with detailed options of answers. Client information privacy is usually taken for granted, although ‘peer-topeer’ lending is still developing and there are instances of client stories being disseminated through websites, reports and marketing documents 2 The Smart Campaign is a global effort to unite microfinance leaders around a common goal: to keep clients at the driving

Human Resources Management

It cannot be denied that pushing field staff to achieve fast growth and a high collection rate while not necessarily offering fair remuneration schemes to ensure correct treatment of clients could be dangerous. This fact has made the industry realize how important it is to ensure a fair and socially responsible treatment of staff. With this in view, Incofin IM has revamped the human resources dimension of its social scorecard to include detailed questions on staff incentive schemes, remuneration and training opportunities.

Excerpt from ECHOS Does the MFI ensure sufficient respect of client privacy? ·· Yes, loan contracts include a clause on privacy of data, credit bureau checks require written agreements by clients, client files are stored in secured places away from public access, originals are kept in a safe (5 points) ·· Partially, loan contracts include a clause on privacy of data, client files are stored in secured places away from public access, originals are kept in a safe, but credit bureau checks are conducted without written agreements by clients, (2.5 points) ·· No (0 points)

Excerpt from ECHOS Does the MFI have an incentive scheme that takes into account social indicators and reward staff good social performance?

force of the industry. www.smartcampaign.org

SPM score on each ECHOS dimension according to the MFI's legal status Human resources (over 5 points) Quality of services (over 5 points) Outreach & Access (over 5 points) Social mission management (over 5 points) Environment, CSR, and Impact (over 5 points) 4.3

4.2

4.0

3.7

4.0 3.5

Human resources (over 5 points) Quality of services (over 5 points) Outreach & Access (over 5 points) Social mission management (over 5 points) Environment, CSR, and Impact (over 5 points) 4.1

3.9 3.5

4.1 3.6

3.4

3.1

SPM score on each ECHOS dimension per region

3.7 3.7

3.4

4.2

4.1 3.5

4.3

4.1

4 3.7

3.6

4.3 3.7

3.5

3.2

3 2.6

2.5 2.1

4.2

3.9

3.4 3.4 3.4

2.8 2.3

2.4

2.1

1.7

BANK

NBFI

NGO

TOTAL AVERAGE

East Asia and Pacific

Europe and Central America

LAC

South Asia

Sub Saharan Africa

··

Yes, in addition to the Porfolio At Risk (PAR)3 and outreach, the incentive scheme takes into account other social indicators (clients’ socio-economic profiles, client retention rate, client satisfaction) (5 points) Partially, the incentive scheme takes into account broad social indicators (mainly PAR and outreach) and it is directly linked to staff social performance (2.5 points) No (0 points)

··

3. Disbursement Since the end of 2011, all Incofin’s loan agreements now comprise two social representations aiming to promote transparency and client protection. The first representation asks MFIs partners to report their social performance indicators to the Mix Market on an annual basis, while the second one requests for each MFI borrower to endorse the SMART Campaign and implement the client protection principles in a reasonable timeframe. Incofin Investment Managers are in charge of monitoring the implementation of these two social covenants during their annual monitoring visit.

3 Measurement of the total outstanding balance of loans past due divided by the active portfolio.

Classification of MFIs according to their average disbursed loan size

(Average disbursed loan size / GNI per capita) depending on the MFI’s legal status

30 100%

15 47%

Number of MFIs

2 0 1 200 EUR

200 500 EUR

500 1000 EUR

1000 2000 EUR

2000 5000 EUR

5000 10000 EUR

10000 20000 EUR

43%

1 20000 50000 EUR

BANK

NBFI

NGO

NGOs and Non Banking Financial Insititutions (NBFI) tend to have a deeper poverty outreach with average loan sizes accounting for less than half of the national GNI per capita.

Gloria Bustos, CEO of Contactar, explains social performance management I am always asked why a psychologist heads a microfinance company that has to be responsible for the management of large sums of money from national and international institutions. I respond jokingly that I prefer to work with people’s productivity, rather than with their traumas and social dissatisfaction. The capacity to generate income makes humans useful to their families as well as to society, and allows them to improve their quality of life. Mr. Mario Hernández, a leather goods entrepreneur in Colombia, recently wrote: “The primary characteristic of those whose businesses go from good to excellent is that they began by looking after the people and then the strategy, combining genuine personal humility with intense professional determination.” This is the approach which Contactar takes. Our core social objective is to implement Social Management aligned with the financial results. The role of social investors The promotion of this type of program requires, of course, resources. Contactar dedicates a percentage of its surpluses to the program and establishes alliances with other development actors to execute it. Although our activities are social in nature, they are derived from financial profitability: more productive clients are responsible about their commitments, are able to manage their business themselves and can act jointly and ethically. It is crucial to understand that only a holistic approach to reducing poverty can have a positive impact on people’s living standards. A commitment to making human development sustainable is indispensable when doing microfinance.

Incofin IM Social Performance Report

ECHOS© tool 1

1 Social mission management

2 Outreach and access 3 Quality of customer services and respect of Client Protection Principles 4 Human resources

100

5 Environment, corporate social responsibility and impact

Dimensions and their weight

social mission management

15%

Outreach and access

20%

Quality of customer services and respect of Client Protection Principles

Human resources

20%

• Clear social objectives • Measurable indicators • Different stakeholders

Social governance and SPM • Social goals included in the business plan • BoD Committee on SPM • Building of SPM awareness

Social transparency • Social reporting to MIX • Social rating/audit

Breadth of outreach • MFI clientele growth rate past 3y & forecast

Reached profiles • Compliance of client target with the one defined in the social mission • High rural outreach • High share of ‘exclusive’ clients* • High share of agricultural activities financing • Low minimum & average loan size

Enabling of financial access • Proximity • Feasible requirements on collateral, deposit of savings and following of training • Non-discrimination

Quality of customer service • Client satisfaction & attrition

Products and Services Offering • Variety of credit products • Presence of other financial products • Duration of loan application process

Client Protection Principles • Endorsement of CPP/SMART Campaign • Protection from overindebtedness • Transparent & responsible pricing • Ethical staff behaviour • Client privacy • Complaint handling

HR organization and corporate culture • Formalization of HR department • Delegation and communication • Non-discrimination of staff, code of ethics; social behaviour incentives

Staff development and compensation • Competitive compensation • Performance measurement & feedback mechanisms • Equal and numerous training opportunities given to staff • Internal promotions career development perspective

Labour climate • Staff rotation & satisfaction

Notes

(*) Clients only benefiting from one loan

Environment, corporate social responsibility and impact

15%

30% Social mission

Environmental & social practices • Financing exclusion list and E&S criteria in credit evaluation • Internal E&S policies • Financial products to support environment

Corporate Social Responsibility • Allocation of budget to financing of community development activities • Facilitate linkage of clients with non financial service providers

Responsable finance, social change, social impact • Financing of activities that generate income • MFI expansion without exclusion of clients • Conduction of impact studies

Incofin IM Social Performance Report

Promotion of client protection principles

deep outreach to finance productive activities

understanding clients’ financial needs to serve them better

88%

97%

84%

of Incofin’s MFI partners have fair and uncoercive collection policies and practices in place, among which 51% is currently enhancing its policy on ethical staff behavior and appropriate debt collection through additional trainings, while 37% of MFIs have already a formalized policy in place, including training of staff, detailed written code of ethics and compliance checks conducted by the internal audit.

of Incofin’s MFI partners have at least one loan product whose minimum average loan size is below 20% of the Gross National Income (GNI) per capita.

of Incofin’s MFI partners assess their clients’ satisfaction with different levels of formalization, including comprehensive anonymous satisfaction surveys, focus groups and exit surveys.

84% of Incofin’s MFI partners have put in place some precise policies to prevent over-indebtedness including credit bureau checks when such national bureau exists, and calculation of debt service ratios for all loan applications.

81% of Incofin’s MFI partners have a written code of ethics.

80% of Incofin’s MFI partners have more than 80% of their total outstanding loan portfolio invested in loans for income generating activities.

83% of Incofin’s MFI partners have enhanced their credit process so that they can disburse loans in less than one week.

Incofin IM Social Performance Report

Crystal makes financial language understandable for clients MFO Crystal’s head office is based in Kutaisi, a city in Central Georgia. Since its creation in 2004, this MFI has grown strongly to a portfolio of 11 million USD outstanding, currently making it the 5th largest MFI in Georgia. Crystal has a strong rural presence in western Georgia with 14 outlets and characterizes itself with flexible agricultural loans in local currency. These include flexible grace periods adjusted to client’s cash flow developments. Loan officers only take a maximum of 60% of the disposable income to be used for the repayment of the Crystal loan, which leaves enough room for unforeseen events. In 2010 Crystal received a Social Rating by Planet Rating. It has always been an active promoter of the Smart campaign. In October 2010 they received a Silver medal on transparency by MIX Market. At the start of 2011 the Smart Campaign for Client Protection in microfinance recognized Crystal for its outstanding efforts to ensure that clients fully understand the terms of their loan contract. As such MFO Crystal became Tool Winner in the Smart Campaign’s ‘Call for Tools: Plain Language Loan Contracts’. ‘The Smart Campaign asked MFIs to send in examples of their ‘plain language loan contracts’,’ said Smart Campaign Tool Development Specialist Leah Nedderman. ‘Crystal won our Call for Tools because their contract is a great example of how to make complex financial obligations understandable for clients, and it most clearly embodies our second Client Protection Principle.’ ‘Crystal’s contract for clients seeking small business credit is succinct, written in plain language, and uses very little jargon,’ said Nedderman. ‘It details loan terms, fees, and penalties, and importantly, spells out the rights and responsibilities of both parties.’ 12,317 clients 814 EUR - 1,057 USD average outstanding loan (31/12/11)

Incofin IM Social Performance Report

Technical Assistance Technical Assistance (TA) strategy As of January 2012, the total TA funds available for investees from Rural Impulse Funds I and II and Incofin cvso investees amount to 3.7 million EUR. In 2011, 1.2 million EUR was allocated to 20 investees to implement tailor-made TA interventions based on rigorous needs assessments conducted by Incofin IM’s Investment Managers during due diligence. In terms of regions, 60% of the investees benefiting from TA support are located in African countries, 21% in Latin America and Caribbean countries, 12% in Asia and 7% in Central Asia and Newly Independent States. 33% of the projects were designed with incorporation of an SPMfocus.

TA implementation Through its newly developed TA department, Incofin IM ensures its coordinating role in the provision of TA (i) in partnership with Investment Managers for project sourcing, design and evaluation, (ii) in close collaboration with MFIs for selection of adequate TA providers, securing of contracts, financial management, reporting and monitoring and (iii) in constant communication with external TA funders such as FMO (the Dutch Fund for enterprises) or the European Investment Bank. The following coordination services are provided by Incofin IM through all its TA implementations: ·· P roject sourcing: The flow of TA projects is mainly generated through Investment Managers who carry out regular missions in developing countries to monitor existing investments.

Incofin IM Social Performance Report

Fusion’s Small Ticket Vehicle Loan product

··

Project design: In close collaboration with the MFI and the responsible Investment Manager, the TA Coordinator draws up a TA proposal that needs to be approved by the TA funder. Selection of consultants: The TA Coordinator is involved in the selection and validation of TA service provider(s). His aim is to ensure proper quality and performance in the implementation of TA projects and to maximize project benefits and their impact on the MFI. Legal documents: For each TA project Incofin IM secures a TA project agreement with the MFI and TA service provider(s) covering all terms and conditions of the TA project. Detailed TA project agreements are prepared by Incofin IM’s Legal Officer in

Fusion is an equity partner of Incofin IM based in India. Through a grant funding from FMO, Incofin deployed a comprehensive Technical Assistance which included Development of specialised training modules on life-skill training, household and livelihood cash-flow analysis; development of Social Performance Management tool, development of a Risk Management matrix and new product development to reduce risk associated with singular product in order to reach the niche target segments that are left-out of financial inclusion In June 2011, Fusion launched a Small Ticket Vehicle Loan product (STVL) as its first step towards creating a sustainable, diversified and resilient product base for the underserved segment in India. This product was mainly offered to the underserved class of society who are predominantly linked to the Agri and rural logistics space. The average loan size stands at around USD 5,000 with 36 months tenure and a 27% (declining basis) product yield. 26,914 clients 137 EUR - 183 USD average outstanding loan (30/09/11)

··

close collaboration with the TA Coordinator. Financial management and disbursements: Incofin IM’s Financial Officer ensures the transfer of the TA grant to the MFI or to the TA service provider(s).

··

onitoring and reporting/ M Evaluation: The TA Coordinator monitors and evaluates the TA assignment. His evaluation is based on development and impact indicators, reports and on-site monitoring and evaluation inspections.

The TA cycle generally implemented by Incofin IM Internal TA Pipeline Committee

Investment Manager TA needs assessment

Internal allocation of TA funds

Investment Manager/ TA Coordinator/ MFI

Project design

Relevant entity depending on type of facility

Project approval

1. Selection of consultants 2. Legal documents 3. Financial management 4. Coordination of monitoring and reporting 5. Evaluation

Project cycle implementation

Incofin IM Social Performance Report

Incofin IM relief action for Horn of Africa

In 2011 the Horn of Africa was affected by the worst drought in the last 60 years, which caused more than 12 million people in Somalia, Kenya, and Ethiopia to suffer from famine. As a social investor and rural mi-

crofinance specialist, Incofin IM was deeply preoccupied with the crisis and launched a relief action with the French NGO ACTED. Through its microfinance network OXUS, ACTED has been working with Incofin IM for several years. ACTED has been operating in the region for 5 years now and focuses on

Towards an SPM-focused TA ··

··

I n Kyrgyzstan, Rural Impulse Fund I (RIF I) assisted the MFI Kompanion to implement client protection principles, preventing over-indebtedness through client training and supporting sector initiatives such as building capacities of the national network and credit bureau. In Guatemala, RIF I supported the MFI Fundea in its social performance assessment, monitoring and management. This included market focused, product development through the assessment, design and adaptation of products and services taking into account client target group financial needs, and also the development of non-financial services designed to enhance local

Location of the investees benefiting from TA support Africa

Latin America and Caribbean

Central Asia and Newly Independent States

7% 12%

21% 60%

Asia

··

development entrepreneurship by meeting the needs of target client groups. In Haiti, a TA project was implemented with the MFI ACME to focus on capacity building for staff and delivery of training modules to credit managers. Emphasis was also placed on providing financial education to clients. In Colombia, the MFI Crezcamos was supported by a TA project launched in the framework of the RIF I TA Facility in 2011. The project’s aim was to extend the MFI’s activities to rural areas and to improve its offer of microfinance products and services to rural people. After some market research the project identified potential rural markets for Crezcamos’ expansion between 2011 and 2014. An accompanying feasibility study

catastrophe prevention and providing access to drinking water, mainly in desolated areas. With the money raised, ACTED helped out people who live in regions that are not served by other NGOs in North Eastern Kenya and South Somalia.

was carried out to investigate its rural outreach, its credit methodology for these areas and its competitive positioning.

Sinapi Aba Trust Sinapi Aba Trust (SAT) is an MFI founded in 1994. Since then, it has been based in Kumasi, in the Ashanti region of Ghana. SAT has always stayed true to its commitment to serve the most disadvantaged populations and is now the leading MFI in Ghana by number of borrowers (more than 124,000), mostly in rural areas, served through a network of 46 branches. SAT aims at a ‘transformational’ impact on clients’ lives and now scores 74% (Good level) on Incofin IM’s ECHOS. The institution is currently finalizing its first social scorecard. In a competitive Ghanaian market, it puts a strong focus on designing efficient products built on customer feedback and ensuring highquality service. One of SAT’s most exciting social outreach initiatives is their Youth Apprenticeship Program. This program consists in providing professional training (carpentry, hairdressing, etc.) to selected unemployed young Ghanaians, under the supervision of a Trade Master (often a SAT client). Once their training is completed, the trainees are provided with relevant tools and a small start-up loan. So far, 1,000 young Ghanaians have benefited from the program, and another 1,000 are in training. Some of the initial trainees have become Trade Masters themselves, thereby closing the loop. Incofin IM is currently supporting SAT’s growth and improvement through a

Technical Assistance mission performed by the Frankfurt School of Finance, under the European Investment Bank TA funding provided to Incofin IM’s Rural Impulse Fund II. 123,891 clients 175 EUR - 234 USD average outstanding loan (30/09/11)

TA-support for SEED In February 2012, Incofin IM provided a loan of 1,000,000 USD to the Philippine wholesale fund SEED through the Rural Impulse Fund I. Thanks to the financial support of FMO, SEED also received a technical assistance grant to strengthen its Social Performance Management. By means of a ‘Social Mission & Strategy Realignment Workshop’ the Board of Directors identified precise social goals – with corresponding measurable social indicators and social targets. In a next step,

SEED’s regional and provincial Investment Managers will be taught how to assess the social performance of SEED’s MFI partners and how to help them define an SPM action plan. Eventually SEED’s staff will also learn how to implement a PPI poverty tracking tool developed by Grameen Foundation, the Progress out of Poverty Index (PPI), into practice. This index allows them to track data about the poverty profile of microfinance clients in a more efficient way. Incofin IM supports Hope with TA-programme HOPE is an Indian non-banking finance company that has been carved out of the HOPE Foundation. HOPE has a base of 98,000 clients spread across 49 branches. In January and February 2011, an assessment exercise was carried out to establish the institution’s needs on

Crezcamos and the Progress out of Poverty Index

both the organizational and the client level. By the end of the assessment, it was clear that HOPE needed a number of capacity building activities which would help to enhance both its operational and financial performance. A Management Information System was introduced, and all staff members received a training on how to use it efficiently. HOPE’s approach in terms of risk management was improved and an adequate human resources policy was installed. An important part of the programme was also dedicated to the introduction of a Social Performance Management tool, which offers specific indicators and guidelines to the institution’s management. RIF II supported the funding of a social performance assessment as well as awareness trainings, on SPM principles at all levels of the organization and eventually the implementation of the PPI. Emphasis was also placed on client capacity building through organizing sessions of business planning and financial literacy training for clients. 98,087 clients 59 EUR - 77 USD average outstanding loan

(31/12/11)

The Progress out of Poverty Index (PPI) is a tool which allows to measure poverty levels of groups and individuals, taking into account a country’s most representative income and the sum which households on average spend. The end result is a ‘tailored’ questionnaire per country, with a list of questions that are correlated with the likelihood of being ‘poor’. Crezcamos is the first Colombian MFI to pilot and implement the PPI. It uses the information which is gathered through this survey to develop products and services tailored to the clients’ needs. For example, the PPI results on the education levels of Crezcamos’ clients open a potential product development opportunity for the company: they show that products which allow clients to increase their educational levels, such as school loans and educational microinsurance, might be meeting their clients’ needs. 34,745 clients 564 EUR - 757 USD average outstanding loan (30/09/11)

Incofin IM Social Performance Report

Credit Mongol introduces Green Loan to reduce air pollution from Yurt As the leading non-banking financial institution in Mongolia in terms of outstanding portfolio and financial performance, Credit Mongol is the successor to the Mongolian Small Business Fund, an NGO founded in 1999. Credit Mongol has a strong experience and expertise in lending and methodologies in line with international best practices. Micro and SME loans make up 65% of Credit Mongol’s portfolio. Its loan products are flexible and include seasonal repayment schedules and a sound analysis of the customer’s repayment capacity which aims at preventing over-indebtedness. This has resulted in an excellent portfolio quality with PAR30 below 1%. Credit Mongol continues to improve its clients’, employees’ and stakeholders’ satisfaction by updating its loan products, increasing outreach (especially in rural areas), providing donations to vulnerable classes of society, and providing free trainings and free medical check-ups for the staff through its Social Development Fund. The institution recently launched a ‘Green Loan’ to contribute to reducing air pollution in Mongolia. As Credit Mongol grows, social performance is attracting increasing attention from its management and shareholders. Measuring and reporting on social performance is a key way for Credit Mongol to achieve social value creation. Therefore the MFI wants to develop and implement a comprehensive framework for measuring and managing social performance in the course of 2012 through a dedicated technical assistance project supported by Incofin IM. In 2011 Credit Mongol endorsed the Smart Campaign and updated its loan policies and manuals by adding a special section in compliance with the Client Protection Principles. Credit Mongol considers defining, assessing and implementing specific tools for social performance its main challenge for 2012. 2,598 clients 2,643 EUR - 3,546 USD average outstanding loan (30/09/11)

Incofin IM Social Performance Report

SPM and governance W

hen it comes to governance, the role of social investors in the social management performance of MFIs is crucial. This is mainly the case when investors are also active in equity investments and participate actively in the shareholder structure of the MFIs concerned. The relationship between investors and MFIs is different when investors are part of the capital as against when they are lenders. Since Incofin IM is active in the field of equity investment, its involvement in different initiatives at governance level is a central element of its SPM. Two of these initiatives have direct links with SPM and are explained in more detail below.

Banco FIE supports the ‘microjustice’ project

Social Balanced Scorecard

As a part of its Corporate Social Responsibilitypolicy, the Bolivian MFI Banco FIE supports the ‘microjustice’ project. According to this program, the poorest in many societies do not have access to lawyers, courts or government services. This means that they cannot enjoy even the most basic rights such as obtaining correct identity papers, legal proof of land ownership or basic legal assistance. In order to have a real impact, the microjustice project created alliances with important parties that are in contact with people at the base of the pyramid.

Social performance assessments generally rely on a predefined set of indicators which evaluate a wide range of process indicators, practices and results that are related to the MFI’s social mission. However, when social performance is integrated into governance, it is necessary to monitor a smaller number of indicators, which are relevant to the MFI’s social mission. These are prioritized according to the MFI’s specific goals and strategy, context and its Management Information System (MIS).

With its network of more than 100 branches all over the country and its close contact with more than 400,000 people, Banco FIE is considered as an important ally to the project. By making its branches available as a space to consult the legal advisors’ team, paying salaries for the legal advisors and publicizing brochures explaining basic legal rights, Banco FIE has already helped many poor people to exercise their rights as citizens.

In this context, Incofin IM has actively participated in the process of designing, testing and implementing social performance dashboards for its partners. These dashboards aim to provide timely and relevant information to board members in terms of managing social performance. Thanks to the use of this Social Balanced Scorecard, the board is able to monitor effectively whether or not the MFI’s mission is indeed being fulfilled.

167,089 clients 2,078 EUR - 2,788 USD average outstanding loan (30/09/11)

Incofin IM Social Performance Report

Self-assessment tool for MFIsâ&#x20AC;&#x2122; Board of Directors One of the key roles of social equity investors is to be active at governance level in the institution. That is why Incofin IM aims primarily to strengthen the governance of these institutions. Two of the key responsibilities of the Board of Directors are to define and uphold the mission and purpose of the MFI and to evaluate its own performance and commit to improving that performance. In order to help the Board of Directors meet these objectives, Incofin IM has developed a selfassessment tool for boards. Its most important objective is to oblige members to examine their own decision-making mechanisms, and to foster discussion and analysis amongst board members rather than grade staff members. The tool covers four dimensions of good corporate governance: 1. Fulfilment of board responsibilities, 2. Board composition, 3. Organization of board meetings, 4. Observance of ethical principles and the management of conflicts of interest.

This tool is designed to be employed once a year during a Board meeting which specifically focuses on selfassessment. The tool has been used for four years by the Bolivian MFI Banco FIE and is gradually being rolled out to other Latin American Incofin IM partners in which the fund has equity stakes. The goal is to introduce it to Incofin IM partners worldwide.

Self-assessment tool 1

0 50 100

Governance score 1 Board responsibilities 2 Board composition 3 Board meetings organization 4 Ethical principles and conflicts of interest Grade ranges 91 - 100 Excellent performance 81 - 90 Very good performance 71 - 80 Good performance 55 - 70 Fair performance < 55 Insufficient

Incofin IM Social Performance Report

Preventing over-indebtedness I

ncofin IM is highly concerned with the risks that are involved in over-indebtedness (OID), and actively participates in industry wide discussions on the risks involved. Incofin IM is currently participating in a study of OID in Cambodia and is an active member of the working group which focuses on OID in Kyrgyzstan. In addition to the promotion of transparent and responsible pricing in all investment decisions in order to avoid OID, Incofin IM has already proactively implemented a number of internal new practices. In the cases of MFIs operating in highly penetrated markets characterized by rising risks of over-indebtedness, it has added specific covenants in its loan agreements. These agreements concern:

1. ceiling on the number of parallel loans, 2. the compulsory and systematic consultation of a credit bureau before loan disbursements to end clients.

Incofin IMâ&#x20AC;&#x2122;s three step strategy to combat over-indebtedness in India In January 2010, when Incofin IM was contemplating an accelerated expansion plan in India, the point was explicitly raised that the market in this country was growing too rapidly. This meant that there would be many money-chasing MFIs and clients in the states with highly matured markets such as Tamil Nadu, Karnatka, Andhra Pradesh, West Bengal and Orissa. The Incofin IM team decided that a more prudent approach was necessary and so it formulated a three step strategy: 1. to focus on states where penetration is less and where the microfinance infrastructure is not yet fully developed;

2. to invest in companies which focus on rural areas, rather than in most of the others that were focusing on urban models; 3. to back promoters who focus on governance and who intend to build up a strong second-line professional team. Following the above strategy, the Investment team made investments in three MFIs: Fusion Microfinance (May 2010), Hope Microcredit (December 2010) and Arman Financial Services (December 2011). In all three companies, Incofin IM entered as a Series A investor. The investment team worked alongside the promoter group and management team to build a solid governance structure as well as a professional team. Together with these MFIs, Incofin IM has been able to establish a positive relationship with the local state governments – which has enabled the smooth running of operations on the ground. The technical assistance support provided by Incofin IM and its donor partners has significantly helped the MFIs to achieve their mission. The investee MFIs have diligently made use of the technical assistance resources to build internal capacities, to conduct financial literacy programmes, social welfare activities, healthcare camps and many more activities.

Incofin IM Social Performance Report

Today, these MFIs carry considerable positive weight within the lender community and the microfinance stakeholders. They are also pegged to become the regional leaders in the states or regions in which they operate.

A study on overindebtedness in Cambodia The Cambodian microfinance sector has grown tremendously over the past decade. From just 3 million USD of outstanding loans and 50,000 borrowers in 1995, it has surged to a remarkable 300 million USD in 2010. More than 800,000 Cambodian people now have the opportunity to access financial services, develop their businesses and improve their living standards. While this has been an incredible achievement, there are concerns about too rapid growth, instances of multiple lending, and the underlying risk of overindebtedness in the industry. It is clear that the socially responsible Cambodian MFIs are aware of this issue, as most of them have decided to revise their growth projection targets downwards. It is also encouraging to see that the national Cambodian Microfinance Association (CMA) has begun to address this issue as well, through collecting data

Incofin IM employees: committed beyond investment Elien Egaña, Legal Counsel “After obtaining my master degree in Law and following an additional master in international relations and diplomacy, there were plenty of paths to choose from for my first venture into professional life. During my law studies I chose economic law as my major and combined this with a thesis in human rights. In my search for a first job, I knew I wanted an occupation which would impact the lives of people in a positive way by creating opportunities for them.” “When I found out that Incofin creates both social and economic perspectives by providing financial services to people in developing countries all over the world, I immediately knew that I wanted to be part of this international and socially committed team. A choice I haven’t regretted ever since.”

Incofin IM Social Performance Report

Incofin IM supports Haitian MFI ACME after earthquake

After the devastating earthquake of January 12, 2010 in Haiti, Incofin IM made a special effort to help microfinance institution ACME. Thanks to donations paid into its special ac-

count, Incofin IM was able to donate EUR 171,000 to ACME’s customers. Most of ACME’s customers lived in the poor neighborhoods of the capital Port-auPrince, which are precisely those areas that were very badly hit by the quake. Many of them lost all they had and

tried to regain control of their lives and restart their business with the help of ACME. ACME’s management decided to help these customers in a number of ways, including with money raised through the Incofin IM donations account.

and organizing informal data sharing on villages’ credit history to prevent any overlapping in operations.

Kompanion promotes client empowerment through community development activities Kompanion is a community development financial institution established by Mercy Corps Kyrgyzstan in 2004. This MFI is represented in all oblasts and regions of Kyrgyzstan with 105 outlets, providing services to more than 130,000 customers and is the second largest financial institution in Kyrgyzstan as measured by the number of customers. Kompanion offers a range of group loan products, mainly supporting rural promoters: farmers and agricultural producers. Clients very much appreciate Kompanion’s client oriented services, which is proven by the high retention rate of 85%. Kompanion maintains close relationships with them, thanks to its community development activities: ·· Eco-Garden initiative: improving food security and enhance household incomes from home gardens. ·· Greenhouse initiative: low-cost technologies for growing crops that are traditionally not planted in the region. ·· Cellar initiative: promoting effective and safe methods of agricultural product storage. ·· Livestock Management: stimulating citizens’ responsibility for maintaining the environment. ·· Eco-Homestead: helping rural communities to decrease soil and water contamination. ·· Energy Saving Stoves Initiative: establishing contact with specialists in energy efficient stove construction. ·· Apple project: regular festivals help villagers to find potential buyers for their apple harvest. In November 2011 the MFI registered the subsidiary ‘Kompanion Invest’ to launch its new Islamic Banking product. The main rationale for this new loan product is that Muslim population prefers loans with Sharia standards rather than traditional financial products and services. 34,745 clients 564 EUR - 757 USD average outstanding loan (30/09/11)

The repayment rate for the industry remains high (around 95%), and the upcoming credit bureau will certainly provide greater transparency and information to the sector. Incofin IM, BlueOrchard Finance SA and Oikocredit have decided to allocate time, effort and resources to conduct a research study on understanding the drivers of over-indebtedness of microfinance clients in Cambodia. The three parties have finalized the design of the study. Benefiting from the great support and insightful input of eight leading Cambodian MFIs, the sampling method and final terms of reference have now been drafted and the study is to be published by the end of 2012.

AMK: a perfect example of the double bottom line-MFI For AMK, the largest MFI in Cambodia, growth and excellent financial performance have never caused a deviation from its social mission. Its ongoing social commitment was confirmed in 2011, when the microfinance rating agency MicroFinanza rewarded AMK with an outstanding social performance grading of ‘AA-‘. Just like Incofin IM, AMK operates on the basis of a double bottom line approach, which includes both social and financial performance. For example, the MFI has developed a social performance management framework which serves as a key decision making tool for AMK’s

2010 CGAP MIV ESG AWARD for Rural Impulse Fund I Rural Impulse Fund I received in 2010 the CGAP MIV ESG Award. RIF I was recognized as being ‘best in class’ for commitment to environmental, social and governance (ESG) issues in its investment decisions. The Consultative Group to Assist the Poor (CGAP) received applications from more than one-third of the 90 MIVs. Together, they manage more than 7 billion USD and form a vital pool of financing

management and Board of Directors. It has also taken steps in the prevention of over-indebtedness, for instance by introducing a ‘no multiple loan’ policy, and has developed several new individual loan products for business expansion and seasonal/agricultural investment. 273,879 clients 124 EUR - 166 USD average outstanding loan (30/09/11)

The Working Group ‘Over-indebtedness in Kyrgyzstan’ In Kyrgyzstan, a working group of several investors was set up to discuss over-indebtedness and its impact on the Kyrgyz microfinance market. The group has been working on drawing up new measures to help MFIs prevent over-indebtedness. Working through conference calls every quarter since May 2011, the group held its first meeting at the Microfinance Center Conference in Prague. A dozen MIVs regularly participate in these calls. Their main concerns centre on multiple borrowings and the aggressive growth of loan portfolios in the Kyrgyz market, while the credit bureau remain relatively weak. In general, there is a lack of product diversification in the market, with the largest MFIs offering very similar products, which are predominantly very small (and therefore expensive) group loans. As a result, borrowers may be taking out multiple loans to meet their

Incofin IM Social Performance Report

that supports microfinance institutions around the world. A review board comprising representatives from CGAP, UN PRI, and LuxFLAG considered the applications and judged them against four criteria: transparency of ESG reporting; integration and enforcement of ESG principles; comprehensiveness of the ESG framework; and engagement and innovation. RIF I was explicitly mentioned as leader in reporting and transparency.

needs, while they could also achieve the same objective through a single, more flexible loan product. There is a general lack of information about the point where multiple borrowing crosses over into over-indebtedness and whether this is happening in the Kyrgyz microfinance sector. The working group aims to gain deeper understanding of this process and to investigate how the problem of over-indebtedness can be prevented. In this respect, the working group members are trying to include covenants and guidelines in their loan agreements regarding the prevention of over-indebtedness.

Incofin IM employees: committed beyond investment Alexander Vuylsteke, Business Development Associate “I joined Incofin in August 2011, as the result of a decision to work in an industry that targets the double bottom line. This decision was based on a strong belief that there are many cases where social and financial performance reinforce each other. Why work to address only one of these objectives and compromise on the other if both can be combined? That would not make sense to me. Moreover, I simply find it very interesting to address economic, social and environmental issues in developing countries. Compared with mainstream industries, the impact investing industry is very dynamic in nature and has a lot more potential to create considerable change in the lives of people who need it most.” “At Incofin I have found a dynamic team of colleagues that are intrinsically motivated and truly committed to social performance. This culture creates a very stimulating environment. In my role of fund structuring and fund raising at Incofin, I find it great to set up new ventures in the impact investing industry and promote them among the investor community!”

Incofin IM Social Performance Report

Promoting transparent and responsible pricing I

ncofin IM wants to promote responsible pricing in all its investment decisions. We are very much aware that at the present time it is not easy for institutions to operate with low interest rates due to the high operating expenses, the low average loan size they offer, and the costs of funding and credit risk that have to be taken into account. Nevertheless, we also believe that once an institution has reached a stable level of financial maturity, its goal must be to look at its pricing structure in order to reach a clear decision on how to serve its clients in a more affordable manner. In fact, there are a number of mature microfinance markets where MFIs have devoted major efforts to streamlining operations in order to reduce costs, control their portfolio quality and train their staff in time management. These MFIs have now proved that lowering the levels of effective interest rate (EIR) is possible.

As a result, Incofin IM has decided to enhance its responsible pricing analysis in its ECHOS tool by asking Investment Managers when conducting due diligences to answer questions like: Does the MFI offer responsible pricing? ·· Yes, the EIR is less than 20% (5 points) ·· The EIR is between 20 and 30% (4 points) ·· The EIR is between 30 and 40% (3 points) ·· The EIR is between 40 and 50% (2 points) ·· The EIR is between 50 and 60% (1 point) ·· The EIR is over 60% (no points) Of course, in order to answer these questions, the pricing offered by the MFI’s market competitors needs to be taken into account. This is why Incofin IM also asks its Investment Managers to conduct a comparative assessment of the MFI’s pricing, by collecting and comparing EIRs where available. Another option is to compare the portfolio yield (used as a proxy of EIR) of the prospect MFI with at least four other MFIs operating in the same market.

Preliminary research on the Trade-off Theory

The relationship between outreach and financial sustainability of microfinance institutions: An investigation of the trade-off theory (Nik Stoop) In 2011, Incofin IM decided to partner with Nik Stoop a student of the Master in Advanced Studies in Economics from the University of Leuven (Belgium). He made use of Incofin IM’s database to investigate a well-known topic in the microfinance industry, the trade-off theory. Methodology4 A key issue in the investigation of this subject is the lack of commonly agreed indicators for MFI performance. We dealt with this problem by using a Confirmatory Factor Analysis (CFA) to create artificial indices for MFI outreach and financial sustainability5. Based on previous research we chose the following six variables to construct our indices: ∙ % of female borrowers ∙ average loan size as a % of GNI/ capita ∙ availability of policy targeting the poor (dummy) ∙ return on equity (ROE) ∙ return on assets (ROA) ∙ operational self-sufficiency (OSS)

Results First of all, our results provide correlational evidence against the trade-off theory. Using Incofin’s social and financial performance measurement tools we find a positive and significant correlation of 0.40 between financial and social performance. Hence, a strong focus on social performance does not necessarily need to come at a cost of financial performance. In fact, synergies may exist. Next, based on our SUR-estimates, we found that a higher score on the outreach dimension seems to be linked to lower profitability and lower cost efficiency. Hence, there appears to be a trade-off between outreach and certain dimension of financial performance (profitability and cost efficiency). In contrast, we found a positive relationship between outreach and portfolio quality. This result is in line with the finding of Morduch6 that most MFIs remain substantially subsidized, especially those with explicit social objectives. It could be argued that these findings consolidate the importance of “social investors” such as Incofin.

Investigating the relationship between outreach and financial sustainability of MFIs remains a challenge for at least two important reasons: First, there is a lack of high-quality and representative databases. Secondly, there are no commonly agreed upon ways to measure social performance and social impact of MFIs. To address these issues, and to further deepen the knowledge of the relationship between financial and social performance of MFIs, Incofin has planned a collective research effort with other relevant stake-holders. Participants include CERISE/Oikocredit, Microfinanza Rating, Blue Orchard, Triple Jump and MIX.

Financial and social performances per region Social score (over 100 points) Financial score (over 100 points)

Finally, consistent with Cull & Morduch , our OLS estimates seem to indicate that individual based lending institutions are more susceptible to mission drift than solidarity-group lenders and village banks. Specifically, individual based MFIs appear to decrease their focus on outreach as they mature. Nevertheless further research is required to distinguish between the effects of mission drift and MFIs who increase their loan size in order to meet the growing financial needs of their mature clients. Future Research 7

Next, for each MFI, we estimated socalled factor scores on our artificially constructed measures for outreach and financial sustainability. These were subsequently used as the dependent variables in a Seemingly Unrelated Regression (SUR) model to analyse the determinants of MFI performance. Finally, we used an Ordinary Least Squares (OLS) model to assess the occurrence of mission drift among the MFIs in our sample.

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East Asia Europe and Pacific and Central America

5 In doing so, we follow recent contributions to the literature including: Luzzi, F.G., and S. Weber (2007): ”Measuring the per-formance of MFIs:

An application of factor analysis,” Microfinance and Public Policy: Outreach, Performance and Efficiency. Ed. Bernd Balkenhol. London:

Palgrave MacMillan, 153-169.

6 Morduch, J. (2000): “The Microfinance Schism,” World Development, vol.28 (4), pp.617-629. 7 Cull, R., A. Demirgüç-Kunt and J. Morduch (2007): “Financial Performance and outreach: a global analysis of leading micro-banks,” Economic Journal, Royal Economic Society, vol.117 (517), p F107-F133.

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4 Due to the short nature of this article, the technicalities related to the econometric approach are left out.

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LAC

South Asia

Sub Saharan Africa

Incofin IM Social Performance Report

Active involvement in SPM initiatives Incofin IM within the Social Performance Task Force

he Social Performance Task Force (‘SPTF’) was established in March 2005 by the Consultative Group to Assist the Poor (CGAP), the Argidius Foundation, and the Ford Foundation. They brought together different microfinance stakeholders (MFIs, networks, investors) to agree on a common social performance framework and to develop an action plan to move social performance forward. Since that time, the SPTF has emerged as the key dialogue platform for the promotion of social performance in microfinance. Incofin IM joined the SPTF in 2007. Since then, it has been an active supporter of SPTF’s activities. Incofin IM has been very active at the Governance level of the SPTF: a representative of Incofin (David Dewez) has been elected by peer members from the Investors Group to represent investors at the SPTF Steering Committee, along with Oikocredit. The committee acts as the governing and advisory body of the platform and its members include representatives of different stakeholders from the microfinance sector. As co-leaders of the Social Investors Group, Incofin has been playing a very active role in coordinating the “Investors Group”. This group, representing both private and public investors, discuss important issues related to SPM and Investments. The agenda of the Investors Group includes

yearly meetings at the occasion of the annual SPTF meeting and the creation of several working groups to coordinate efforts among investors in areas that are considered relevant to SPM. The working groups created by the Investors Group are: ·· the Working Group for reasonable covenants, led by Dina Pons from Incofin IM, ·· the working Group on the implementation of the Principles for Investment in Inclusive Finance (PIIFs), ·· the Working Group on overindebtedness, ·· the Working Group on harmonization of due diligence tools.

For more information on the SPTF, visit www.sptf.com.

The Working Group for Reasonable Covenants

s a socially responsible microfinance investor, Incofin IM is committed to promoting Responsible Finance and to implementing it in its daily operations and practices. This is the reason why, in June 2011, Incofin IM as member of the Social Investors Group (under the umbrella of the Social Performance Task Force)

Arnur Credit promotes financial inclusion in rural areas Arnur Credit is the leading microcredit organization in South Kazakhstan, covering all regions in the southern part of the country through 39 offices. It occupies a very strong position in rural areas and focuses on providing credit to the largely underserved agricultural sector, accounting for 42% of its loan book. The institution does not belong to any network but in the last years has managed to extend its international exposure and attract several foreign investors. The gross outstanding portfolio has recovered from the 2008-2009 financial crisis and it is currently steadily growing in the number of active borrowers: 74% in 2010 and 64% in 2011. In April 2011 Arnur Credit received its first social rating and got a ‘BB’ Stable rating from Microfinanza Social Rating. The overall social responsibility towards its staff is adequate. Personnel enjoys a good working climate, adequate training opportunity and a transparent career path. Recently a bonus system and approved code of ethics were introduced. The MFI offers a range of loan products with flexible repayment conditions fit to meet different clients’ needs, including loan products with credit lines over three years. This helps the borrower to cut down administration expenses in obtaining a loan. The cost of service is transparent since neither commissions nor hidden costs are charged. The depth of outreach is good with operations concentrated in one of the poorest regions of the country. 5,199 clients 1,336 EUR - 1,735 USD average outstanding loan (30/09/11)

Incofin IM Social Performance Report

took the initiative of creating and moderating a working group ‘Defining Reasonable Covenants in Debt and Equity investments in microfinance’. Incofin IM decided to lead this project because we believe that it is our responsibility to define covenants that protect our investees and prevent them from adopting aggressive behaviour which could be harmful to themselves and to their clients. For 2012, the 13 like-minded international microfinance investment funds (MIVs) of the working group will be working to align the financial and social covenants in loan agreements of MIVs. To achieve this, they plan to come up with a list of core financial and social indicators, with agreed calculation methods, preferred levels (maximum and minimum), and justifications for adjustments when needed. This list should simplify the legal and monitoring formalities that our MFI partners have to complete when dealing with different investors. Through this working group Incofin IM has also initiated a discussion on how to define common language and proceedings regarding ‘Lenders’ attitude’ in cases of breach of covenants (including waivers, information sharing, communication, coordination, etc). The goal is to use this common language as a guideline for MIVs when drafting their respective loan agreements. Ultimately it should be incorporated in their loan agreement templates.

Incofin IM Social Performance Report

Excellent M-CRIL rating for Incofin IM funds

In 2010 M-Cril, a leading rating agency in the microfinance sector, has given Incofin cvso and Rural Impulse Fund I the highest possible rating (‘highly recommended’) for both financial and social performance.

The Working Group members keep in touch through monthly calls and will submit a proposal to the rest of the investment community at the Social Performance Annual meeting in June 2012. In a second phase, this Working Group will focus on equity investments by looking at the alignment of shareholder agreements, financial covenants and social representations of MIVs. They will use the same method as that used for debt investments.

The Working Group for Tier II and Tier III MFIs

n June 2011, Incofin IM as a European Microfinance Platform member and along with other international MIVs such as GCAMF, LMDF, Alterfin, Etimos, PlaNISresponsAbility, SIDI, Cordaid, Triple Jump, Oikocredit, and NMI formed a working group to identify common challenges and to collaborate in supporting Tier II and Tier III MFIs. In particular, they wanted to come up with a standardized definition for Tier II and III institutions,

FINCA DRC: SPM in a challenging environment FINCA DRC has been present in Congo DRC since 2003, starting right after the end of the civil war. In spite of the difficult post-conflict environment in which it operates, FINCA DRC has managed to grow to over 77,000 borrowers and more than 18 million USD in portfolio, while still maintaining its focus on the very base of the borrower pyramid as evidenced by the average loan size of 238 USD. In DRC, FINCA is one of the only MFIs that cater to both groups and individuals thanks to a strong and reliable lending methodology implemented by skilled and dedicated staff. The institution has set up transparent and fair HR procedures to ensure a good staff satisfaction – thus showing that social performance is an internal, as well as an external focus. FINCA DRC reports its indicators to the MIX Market and has endorsed the Smart campaign. It implements the Client Protection Principles, delivering well-designed products with a sense of customer service. FINCA plans to take new innovative steps to show its commitment so Social Performance: deepening their outreach by launching mobile points of sale to get closer to their clients and save them precious time. A board-level SPM committee will be looking at new SPM indicators now integrated in their reporting. The example of FINCA DRC shows that even in an extremely challenging environment, a committed, professional institution can make genuine efforts in Social Performance Management – scoring a social performance indicator of 67% on Incofin IM’s ECHOS tool. 77,419 clients 138 EUR - 238 USD average outstanding loan (31/12/11)

build a directory of Tier II and III investors, reflect on foreign exchange hedging and small transaction sizes, and figure out how to coordinate technical assistance more efficiently. A second meeting took place during the European Microfinance Week in November 2011. In this regard, Incofin IM has already started building partnerships with several Tier II MFIs in East Asia, including one cooperative and one venture capital institution in Indonesia. The challenge of this type of partnership is first to avoid overflowing the MFI with money when it is not needed. This requires a reassessment of the MFI’s financial projections and a careful planning of the disbursement. Secondly, regarding technical assistance, it is very important to ensure full ownership of the MFI. For this reason, the production of the TA need assessment must happen in conjunction with the MFI’s management team and the managers should be involved in the selection of consultants. Thirdly, the format of technical assistance is a challenge as well. Traditional class trainings usually do not bear long term fruits; one to one coaching is usually more time consuming but is likely to have a greater impact on the institution. In 2012, Incofin will further develop guidelines in order to formalize a proper policy regarding partnerships with Tier II and Tier III MFIs.

It assessed the two funds by looking at its management and the underlying details of the investments. Incofin cvso and RIF I scored high on financial indicators due to strong management, the diversity of its portfolio and their optimal use of risk management instruments. They received a

‘Principles for Investors in Inclusive Finance’ (PIIF)

n January 2011, Incofin IM was a signatory of the ‘Principles for Investors in Inclusive Finance’ (PIIF), and made a financial contribution of 2,500 EUR. The PIIF constitute a sub-set of principles incorporated in the broader ‘Principles for Responsible Investment’ (PRI) which are in turn backed by the United Nations. The PRI reflect the view that environmental, social and corporate governance (ESG) issues affect the performance of investment portfolios and therefore must be taken into consideration by investors calling themselves socially responsible. Given Incofin IM’s social commitment and its use of its social performance evaluation tool (ECHOS) for each investment decision, the endorsement of such principles seems logical and in line with Incofin IM’s core double bottom line mandate. The Principles provide a framework of practices and indicators which all investors can use to incorporate ESG items into their decision-making and ownership practices. This way, they are able to ensure a true double bottom line investment strategy. Because of its long term expertise in ESG inclusion in investment decisions, Incofin IM has been

Incofin IM Social Performance Report

high score for social performance thanks to, amongst others, the systematic screening of MFIs according to an in-house social performance evalution tool (ECHOS), the constant monitoring of investments and a high degree of transparency.

asked to join an advisory group to provide feedback on the content of the Reporting Framework that the PIIF secretariat is currently designing. Incofin IM used its own expertise gained through developing the ECHOS tool to provide guidance on types of indicators and information to be included in the PIIF. By sharing its current activities in the field of ‘transparency’, Incofin IM has also contributed to a publication that compiles best practices for implementation of PIIF. Incofin has also been drawing up an action plan on PIIF implementation which has been published on the PIIF intranet. Only three microfinance MIVs have published an action plan so far: SNS, Triodos and Incofin IM.

PIIF Investors

Direct investors

(direct and indirect)

Microfinance institutions

Client Protection Principles MFI Transparency PRI

PIIF CGAP MIV Disclosure Guidelines and SMTP IRIS

Incofin IM Social Performance Report

VisionFund Cambodia prioritizes social performance As of December 2011, VisionFund Cambodia (VFC) has around 700 staff with a gross loan portfolio of 37.5 million USD serving more than 130,000 clients, including HIV/AIDS affected families, child laborers and widowed households. The institution has received outstanding awards for its achievements such as: Financial Transparency Award from CGAP, Social performance award from MIX Market, and Gold Award for its social reporting in 2010. VFC got 4- in a social rating conducted by Planet Rating in 2011. The vision and social mission of VFC are shared among the BOD, management, and staff during specific SPM trainings conducted during orientation sessions, annual retreats, and weekly devotions. Furthermore, VFC takes into account its social mission in all major decisions such as branch opening, based on poverty level and saturation of the area. The field staff incentive system is tied with social performance indicators (average loan size, % of CB loans, % of women clients, % of client retention) and is emphasized in the semi and annual evaluations. VFC targets the poor regardless of their religious beliefs, gender, or ethnic background. Generally, VFC clients are excluded from traditional financial services. Its target clientele is mainly composed of women and people living in rural areas. All clients benefit from credit life insurance and financial education. Client satisfaction surveys are conducted annually in selected branches, collecting feedback from clients about interest rate, ease in accessing products and services, and staff professionalism, among others. Client exit surveys are also conducted annually. Eventually there are also evaluation and supervision of SPM implementation. The branch offices are regularly evaluated by the Internal Audit and Evaluation Department on their social performance management. A Social Performance Management Committee is in place and meets regularly to discuss about the social performance management issues. 132,036 clients 231 EUR - 286 USD average outstanding loan (31/12/11)

Incofin IM Social Performance Report

Moving forward to 2012 I

ncofin IM has always firmly believed that the alignment of financial sustainability and social impact is not only possible but essential. Incofin IM’s view has always been that investing in microfinance alone does not provide sufficient proof of social motivation. Because we are aware that belief needs to be brought face to face with reality, Incofin IM has since its creation been one of the most proactive developers of social performance standards among microfinance investors.

Since the emergence of the concept of ‘social performance management’, Incofin IM’s concern has been to develop social standards and to integrate the corresponding measurable social indicators into its investment policies and procedures. As a result, Incofin IM’s due diligence evaluation takes both financial and social performances into account in each and every investment decision its makes. As early as 2007, when many microfinance practitioners were still questioning the added value of the newly emerged concept of ‘social performance’, Incofin IM developed its own social performance scorecard (ECHOS). Since that time, social performance has remained at the heart of our practices and at the core of our strategy. From revising our original social scorecard to evaluating our MFI partners and supporting them in deploying SPM in their operations through offering free technical assistance, Incofin IM has shown itself to be a social investor. We train our

staff in SPM principles and we report on SPM achievements to our Board. We do not only include clauses on social representation in our legal documents, but also advocate social performance in the sector. Incofin IM wants to be both a socially responsible and a social pioneer. This means going beyond compliance with minimum social benchmarks to relentlessly pushing out the boundaries of best practice in social performance. We are striving to constantly and consistently promote social standards in all our investment work, and are trying to provide constant support to all our MFI partners in their efforts to implement SPM practices. While the years behind us have been intense and rich in debates, initiatives and concrete actions in the field of social performance, we are dedicated to making 2012 and the years to come a time of even greater vibrancy. In 2012, we will adapt our MIS system so as to track our social performance more systematically. This will allow everyone, from field staff to board members, from our back-office team to our front-line Investment Managers, to see if we are on track for achieving our social mission. In 2012, we will further enhance our current promotion of the Client Protection Principles (CPPs). As well as requesting all our partner MFIs to endorse the industry’s Smart Campaign, we will also develop a tool to track progress in implementation of the CPPs by our partner MFIs. But simply

tracking is not enough. We will continue to train our Investment Managers in CPPs to ensure that, in each of their interactions with MFIs in the field, they are fully equipped and capable of providing guidance, support and capacity building on the implementation of CPPs.

the use of the self-assessment tool for board members, and promote the integration of indicators for board members to monitor social performance (Social Balanced Scorecard). With these scorecards, every MFI will be able to track the achievement of its social mission.

In 2012, we will also continue to provide debt in local currencies in order to protect our most fragile partners from foreign exchange risks. We will also include SPM-related targets in the overall annual targets of the individual staff members, promoting mini-training modules on SPM to Tier II MFIs.

In addition, Incofin IM plans to continue its strong commitment to supporting the social performance task force and its various activities.

In 2012, we feel it is our duty not only to report to the PIIF principles body, but also to contribute to its design of an external evaluation tool which could be used to evaluate true compliance of all investors calling themselves ‘social’. In 2012, we will expand our technical assistance facility in order to support our MFI partners and help them strengthen their institutional and social performance. In 2012, we will continue to champion SPM practices in all institutions where we actively participate at governance level with a Board seat. We will implement

We look forward to sharing our future progress with you, and to contributing – all of us together – to the development of a sound and socially responsible microfinance sector!

Dina Pons Investment Manager

David Dewez Regional Director Latin America & the Caribbean

Incofin IM Social Performance Report

Incofin IM employees: committed beyond investment Thomas Adank, Investment Manager “After years in the financial sector in Switzerland, I was ready for a change. I wanted to do something different, contribute to the world in a meaningful way. This is why I volunteered at an MFI in Colombia’s rural area for several months. Along with all the new experiences, I got to know Incofin’s work and their definition of the Double Bottom Line Approach. I was bitten by the microfinance bug and wanted to combine finance, which I know, with social impact, which I care about.” “Incofin offered me this opportunity and now I am a member of its Bogota team. It is exciting to work with an international team of highly motivated people that explore new markets, that care about long term sustainability and that spread prosperity to remote corners of the world.”

Incofin IM wants to be a social pioneer. This means going beyond compliance with minimum social benchmarks, to relentlessly push the boundaries of best practice in social performance.

IMPRINT Responsible editor Kaat Van Bosstraeten, Communications Manager, Incofin Investment Management Design, layout, copywriting and coordination Cantilis (www.cantilis.be)

incofin Investment Management BelgiUM Sneeuwbeslaan 20 2610 Antwerp T: +32 3 829 25 36 F: +32 3 740 78 28 info@incofin.com

Colombia Incofin Americas SaS Carrera 9 No. 74 - 08 Edificio Profinanzas Oficina 1004 Bogotá T: +57 742 59 33 F: +57 1742 5949 info@incofin.com

India TVH Lumbini Square Flat # 5063, 5th Block, 6th Floor, 127-A, Bricklin Road Purasawalkam Chennai – 600007 Tamil Nadu T +91 44 26 91 66 24 info@incofin.com