November 08, 2010
by Alex Counts, president and CEO, Grameen Foundation
Part of my job is to speak at various public fora on behalf of Grameen Foundation. I usually find it quite enjoyable and also a challenge, as every speaking engagement is different in terms of the audience, format, and environment. Sometimes, I speak alongside other experts in our field, which gives me an opportunity to learn from them as I wait my turn to present the Grameen Foundation story. I often find the questions I get from audiences to be stimulating and challenging; occasionally, they yield great new insights.
During my recent debate with Vikram Akula, the founder of Indian microfinance institution (MFI) SKS, a questioner framed the issue of the tension between profit-making and poverty reduction in microfinance in a fascinating way, using an analogy from the world of professional sports. He compared MFIs to baseball franchises, saying that though they measure their profit and loss in financial terms, the true measure of their success by most people — especially fans, players, and even owners most of the time — is how often they win games, and especially championships. I thought about this analogy — which could be extended to other sports — and I found it more and more apt.
For a baseball team, profit and loss in financial terms is important and often — but not always — related and correlated to winning percentage. But it is not the ultimate measure of success to most of the franchise’s stakeholders (and sometimes not to any of them). In some cases, teams with low profitability win lots of games and even championships, and everyone around that team is usually very happy. A case in point would be the Minnesota Twins during many years over the last few decades. (This can even be the case in loss-making franchises.) On the other hand, highly profitable teams sometimes lose many more games than they win — think of the New York Yankees from the mid-1980s to the mid-1990s. (I am in no position to opine in an objective way on the Philadelphia Phillies since I am a lifelong, rabid fan!)
How does this relate to microfinance? For MFIs with a poverty-reduction mandate, financial profitability is important. If an MFI cannot turn at least a small profit most years, it will be unlikely to continue to serve its clients, much less expand to reach more, unless it has an endowment or long-term philanthropic donors with deep pockets. But the ultimate measure of an MFI’s success is whether it is helping people to move out of poverty through providing quality products. To know whether it is being successful, it has to “keep score” by measuring its outcomes vis-à-vis poverty reduction. This is why social performance management tools like the Progress out of Poverty Index™ are so important. (Social ratings and impact studies using control groups are also quite useful, and complement approaches like the PPI.) If an MFI doesn’t use a social-performance tool, it would be like a sports team that didn’t keep score in the games it played, or one that didn’t track wins and losses in comparison to its peer group (i.e., teams in the same league).
Puzzlingly, this is what some people like Vikram Akula seem to be arguing: that if an MFI is profitable and growing, we can assume that it is high-achieving in realizing its social mission (assuming it has one). Well, maybe yes ... maybe no. Long-term, those two outcomes can be correlated — but not always. My strong sense, based on more than two decades in this field, is this — some MFIs that are marginally profitable are having a significant impact on poverty, while others that are highly profitable are not making much of a dent in this terrible societal problem. So let us define crisply what we are trying to do in microfinance and then let’s “keep score” on all the important measures of success, especially on the ultimate measure (at least for groups like Grameen Foundation) — how clients are able to improve their lives.
Thanks again to the attendee at the debate at the Asia Society who framed this age-old debate in a novel way — you really taught me something!
Photo credit: Pierre-Olivier, via Creative Commons.
Comments
You mentioned an interesting analogy, and it helps explain the behavior of the microfinance sector from a new perspective, which is great. However, has anyone noticed that the analogy works in reverse as well? We theorize that MFIs that aren't financial sustainable will simply have to close down their operations, which leads to negative social impact. However, the analogy's "reverse" implies that MFIs who focus simply on poverty alleviation will automatically attract more funds (as baseball teams who consistently perform well, will gather more fans and money!). How come nobody promotes this thought?