A recent publication by the MIX Market revealed a number of trade-offs and synergies microfinance institutions face when pursuing the double bottom line (i.e. focus on both social and financial performance). Adrian Gonzalez, the author, tested the relationship between social performance and employee productivity, portfolio quality and efficiency by looking at a sample of 208 microfinance institutions. The following results came up in the study:

1.  Social performance and employee productivity

Measured as the number of clients per worker, labor productivity was higher in the following contexts:

• Trainings about social performance (including customer protection and client retention)
• Assessments against portfolio quality, client outreach and retention rates
• Comprehensive Human Resource (HR) Policy that covers pay scales, insurance, pension funds, safety and health of workers, participatory decision-making, etc. (Read about 4 ways to create a good HR environment in microfinance institutions)
• Following the village banking or group lending method, rather than individual lending
• Market presence in rural areas.

2.  Social performance and portfolio quality

Measured as Portfolio at Risk over 30 Days (PAR30) and Write-Off Ratio (WOR), portfolio quality was higher when the staff was trained on social performance and a client data protection policy existed (the results were a little complicated in the latter case).

3.  Social performance and efficiency

Measured as operational efficiency and cost per borrower as percentage of GNIPC, efficiency was higher in the following contexts:

• Targeting of non-poor clients and targeting a number of market segment
• Absence of staff incentives related to social performance (because they are costly to administer)
• Low dropout rates (i.e. higher retention ratio).

This website’s view: Microfinance, being a social business, is expected to pursue social objectives; however, the recent trend of commercialization has posed a few doubts over the sustainability of microfinance institutions that pay more attention to social welfare than financial viability. Even though the above paper does not differentiate between microfinance institutions that are commercial and non-commercial, it does address those doubts by showing social performance can benefit the microfinance institution along three financial paths. Moreover, it ties in to the idea that microfinance institutions who adopt customer protection principles can gain various strategic benefits.

Read full research paper at the following reference:

Gonzalez, A. (2010). Microfinance Synergies and Trade-offs: Social vs. Financial Performance Outcomes in 2008. Available: http://www.themix.org/publications/data-brief-no-7-microfinance-synergies-and-trade-offs-social-vs-financial-performance-o. Last