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Measuring Market Rate Investment: A first step in Social Return for Microfinance

Measuring Market Rate Investment: A first step in Social Return for Microfinance. Drew Tulchin Social Enterprise Associates Social Return on Investment (SROI) Panel SEEP Network Annual Conference Oct, 2003. SROI Panel: Measuring Market Rate Investment. Introduction

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Measuring Market Rate Investment: A first step in Social Return for Microfinance

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  1. Measuring Market Rate Investment:A first step in Social Return for Microfinance Drew Tulchin Social Enterprise Associates Social Return on Investment (SROI) Panel SEEP Network Annual Conference Oct, 2003

  2. SROI Panel:Measuring Market Rate Investment • Introduction • Definition, Value & Goals of Social Return • Frameworks • Measuring Investment • Market Investment Measurement • Examples • General • Specific: Prisma Microfinance • Q&A

  3. Drew Tulchin, Social Enterprise Associates A network of professionals making communities better by applying business skills & sustainable practices. Who are you? What brought you here today? Introduction Who am I?

  4. Definitions of Social Return • More than one definition? • Different emphasis directs our thinking • Varied audiences suggests variety of solutions • Internal Economic Value generated • (s)ROI • Documented social value created • SroI • External Economic Value created • i.e. return provided to society

  5. Challenges of Social Return • Not well understood • Hard to measure important elements • Few tools exist • No industry standard • Takes lots of time • Need to create proxies • No critical mass, low cost/benefit • Why bother?

  6. Value of Social Return • Broadly (more obvious) What is its function? • Marketing / PR • Enhance impact measurements • Tie to Socially Responsible Investment (SRI) • Mobilize new investment/sources of cash into microfinance • Specifically (less obvious) Who is the social return for? • Use by managers in decision-making • Segment SRI interested investors. Craft tailored messages to each, using social return for some • Consider social benefits from financial inputs (investment)

  7. Goals for Social Return • Develop an industry metric & apply it uniformly • Establish comparables (apples to apples) • Aggregate Data (industry totals, vs. other sectors) • INTERNAL audience: • Easy to use, add value to operations • EXTERNAL audience: • Easy to understand, add meaning to investment decision &/or evaluation • SROI operating on two fronts: • Undertake R&D to create social science valid standard • Use existing available data for best use

  8. Goals for Social Return • Develop an industry metric & apply it uniformly • Establish comparables (apples to apples) • Aggregate Data (industry totals, vs. other sectors) • INTERNAL audience: • Easy to use, add value to operations • EXTERNAL audience: • Easy to understand, add meaning to investment decision &/or evaluation • SROI operating on two fronts: • Undertake R&D to create social science valid standard • Use existing available data for best use

  9. Impact Framework United Way’s Logic Model Org.’s Activities Outputs Outcomes Community Mission Goal Effect, impact & measurement related back to MISSION Source: United Way & Kellogg Foundation

  10. Social Return Framework Adapted Logic Model Input Activities Outputs Outcomes Impact (Investment) Effect, impact & measurement related back to INPUT as a return ratio Source: Soc. Ent. Assoc Microfinance and the Double Bottom Line, Ford Foundation

  11. Premise • Given the model, assuming the organization engages in same activities (& outcomes, outputs), market rate investment is the best input. • Investment for social return: • Larger pool of money • ($1 trillion a day vs. donors’ est. $1 billion a year) • ‘More’ social benefit • ALL grant $ is social benefit based, investment $ is not • ‘Frees’ up grants for other uses • donors encouraged to take on higher risk activity

  12. Sources for Analysis Balance Sheet Weighted Average Cost of Capital (WACC) Rating Reports Mix Market Measurement Tools Operational & Financial Self Sufficiency (OSS/FSS) Subsidy Dependency Index (SDI) Market Efficiency Audit Investment Measurement Measuring Investment Are they Easy to use? Compelling for Investment?

  13. Operational & Financial Self Sufficiency (OSS/FSS) • What they are. • SEEP Definition • How they apply to Social Return. • OSS / FSS demonstrate financial success • Two examine question from different angles • Challenges & Problems. • Used for other purposes • Not complete application • What do numbers >100% mean here? Use = Mod Invest = Depends

  14. Subsidy Dependency Index (SDI) • What it is. • Amount an MFI must increase interest rates so operations are at breakeven / sustainable levels • How it applies to Social Return. • SDI shows how far rates charged are from sustainable operating levels • Challenges & Problems. • ‘Negative’ measure, little change is good • Difficult to understand • Its measurement is not central to social return Use = Low Invest = Low

  15. Market Efficiency Audit • What it is. • Developed by David Korten, “When Corporations Rule the World” to provide transparency on corporate subsidies by measuring and displaying the subsidies corporations received in production of their products • How it applies to Social Return. • Designed with corporate social responsibility in mind Not judgmental, geared towards transparency • Challenges & Problems. • ‘Negative’ measure, 0 is good • Not known & used • Transferable to MFIs? Use = Low Invest =Maybe Mod Source: Korten, David. “A Market Based Approach to Corporate Responsibility.”

  16. Investment Measurement • What it is. • Hybrid: Korten’s transparency & SDI sustainability • Uses available information • Percentage an MFI’s capital is market rate investment • How it applies to Social Return. • Demonstrative metric displays MFIs capital in concise fashion. Easy to count & compare • Challenges & Problems. • New concept • MFIs threatened by having a ‘low score’ • Already too much ‘noise’ in this area Use = New Invest = High

  17. Measurement – General Example • Assuming $100in Total Capital • Case 1 – All grants. 0 /100 = 0% • Case 2 – All investment. 100 / 100 = 100% • Case 3 – All soft loans at 1/2 market rates. (100 x .5) / 100 = 50% • Case 4 - $30 grants. $30 investment. $40 at 2/3 market rates. • ((30 x 0) + (30 x 1) + (40 x .67)) / 100 = 57%

  18. Measurement – Specific Example • Prisma Microfinance: for-profit US international financial services company • Received SROI Award – Global Social Investment Forum (www.socialvc.net) • Completely funded by private investment • Investment Measurement is 100% • SROI Measurement • One year:Current portfolio x Investment Measurement • Five years:Current portfolio value • + incremental portfolio value each year • x Investment Measurement • @ NPV (No terminal value to be conservative)

  19. Conclusion • Consider how SR to be used in the industry • Value of a framework in the approach • 4 Models considered here • Investment Measurement emphasized • Not a solution, but a first step • Key Questions for feedback: • It is logical? Does it have value? • How to improve it or what would be better? • This tool is one option; more work needed here • Recommended next steps?

  20. Your feedback & participation is encouraged! Thank you! Drew Tulchin Social Enterprise Associates www.SocialEnterprise.NET drew@SocialEnterprise.NET 617-872-0194

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