developing a country wide approach to social performance measurement am ̈ fa proposal

Developing a Country Wide Approach to Social Performance Measurement

AM� FA Proposal

2Social Performance Proposal for AM� FA

Table of Contents

Executive Summary3

The Need For Market Information6

The Benefits of Consolidating Information 9

Example of SPA Market Analytics 11

The SPA for Individual MFI 16

SPA Development 20

The SPA Grading Scale 22

The SPA Delivery 28


About Moody’s Corporation

» Leading global provider of credit rating opinions, insight and tools for credit risk measurement and management» Founded in 1900» Approximately 6,100 employees worldwide» Presence in 28 countries» Revenue in 2011: $2.3 billion» Publicly listed (NYSE: MCO) » Largest shareholder: Berkshire Hathaway Inc.

» Independent provider of credit rating opinions and related information for over 100 years

» Ratings and analysis covering more than:

− 110 countries

− 11,000 corporate issuers

− 22,000 public finance issuers

− 94,000 structured finance obligations

» MIS’s published research and investor briefings draw thousands of attendees each year

Moody’s Investor Services (MIS)

» Research, data and software for financial risk analysis and related professional services

» Main areas of expertise: credit research and risk measurement, economic and consumer credit analytics, enterprise risk management, professional services, and structured analytics and valuation

» Client base includes leading asset managers, banks, corporates and insurers

» Outsourced research and analytical services arm – Copal Partners

Moody’s Analytics

» Largest third party provider of research and analytics for financial institutions

» Founded in 2002

» Approximately 1,700 highly educated and qualified employees worldwide

» Offices in 7 countries

» Support across major Asian and European countries

Copal Partners


Executive Summary

Issue: The microfinance industry is lacking both quality social performance data to be able to properly assess its performance and an effective means of communicating this information with regulators, investors, customers and other stakeholders.

Moody’s Analytics Social Performance Group’s Objective:To use the Social Performance Assessment (SPA) as a research tool to create a consolidated social performance database that can be used to help find solutions for issues regarding the effectiveness of microfinance in reducing poverty, identifying which social metrics imply better performance for specific social issues, and identifying which social indicators are relevant to financial risk.


Executive Summary

The Benefits to the Microfinance Market of Working with Moody’s on Social Assessments:

Communicate with InvestorsConduct Self EvaluationsCommunicate with Regulators

» Reduce MFIs’ Reporting Burden MA can provide custom social performance reports to investors to meet their reporting demands

» Track/Share SP Data Show incremental improvement in social performance over time as well as specific social performance factors and indicator metrics

» Attract Funding Transparent, user-friendly and easily shareable social performance metrics help attract social investment funding

» Roadmap for Improving Performance Identify MFA members’ areas of relative strengths and limitations to be used as a template for improving social performance management within the region

» Benchmarking SPA grades, granular scorecard-implied scores, and SPA sub-factor tables allow MFAs and members to easily compare their performance against peers

» Track Important Links for Research Track links between indicators, social outcomes, SPA grades, and financial performance

» Minimize Risks of Inappropriate Regulation Use of consolidated data from an MFA’s members reported by a globally recognized, independent third-party can demonstrate current social performance practices and trends to regulators

» Present the Social Performance of the Industry Moody’s Analytics (MA) can consolidate MFI data by region and country (where available) to highlight the social performance achievements of MFAs and members


Executive Summary

Why work With Moody’s Analytics to Develop the Analysis?

» Moody’s Corporation has an international reputation built over the past 100 years

» Moody’s Analytics has the internal resources to build consortia

» Moody’s Analytics has the internal resources to conduct in-depth research and provide a platform to move the microfinance industry toward more empirical methods of data analysis

» By working with Moody’s Analytics new players may be attracted to the market


The SPA for Individual MFIs


Key Features of the SPA for Individual MFIs



SPA Grade Snapshot: MFIs are graded on a scale of SP1 to SP5 and are also given a numerical grade from 0 to 100. By using both techniques the SPA allows an MFI to easily compare its current performance with that of its peers and its own past performance.

Sub-Factor Scores: Assessment tables provide a detailed analysis of an MFI’s factor and sub-factor scores. They focus on specific areas where an MFI performs well and where it needs improvement.

Global and Regional Benchmarking: Global and regional benchmarks allow an MFI to easily compare its social performance with that of its peers. Benchmarks are provided for the overall SPA grade and the six main factors.



Relative Contribution » Relative contribution charts show how each factor contributes both positively and negatively to an MFI’s final SPA score. It allows the MFI to focus on the areas that will have the most impact on its overall SPA grade.

» The relative contribution analysis is presented at both factor and sub-factor levels to make the tool more useful for management , reporting and self evaluation.


SPA Development


SPA Building Phases

• Phase 1 • Determining the key factors to include in a scorecard

• Development of a high-level scorecard

• Phase 2 • Determining the key indicators to be used for the different factors

• Development of a detailed scorecard

• Phase 3 • Converting the scorecard into an assessment grade

• Testing the results of the research

• Phase 4 • Delivery process for the SPA

• Global development and local delivery


Phase 1 Survey Development and Analysis

» Survey requires constituents of the microfinance industry to respond to a questionnaire on social performance

» Part 1 - Consortium :– Social Performance Task Force, Grameen Foundation, Women’s World Banking, Blue

Orchard, The Microfinance Information Exchange (MIX), Deutsche Bank, ImpAct

» Part 2 - Organizations – 74 Institutions

Type of Institution Total

Development Agency 6

For-Profit Investors (GP/LP) 36

MFIs 25

Not-For-Profit Funders 4

Other 3


SPA Factor and Sub-factor Weights

SCORECARD FACTORS WEIGHTS (%)

Social Mission 18Strategy and Leadership 23

Management quality 33Experience Professionalism Turnover Key worker risk Firm history/Product history Availability and quality of training Management transparency

Governance 27Board composition Meetings Association with other groups

Outreach and access 24Number of clients Depth of outreach Range of products offered Proximity to clients Community involvement

Administrative setup 16

Customer Relationship 20Customer protection 58

Pricing transparency 18Debt collection practices 15Policies 13Customer complaints / Litigation history 13Product suitability process 16Household debt burden 25

Customer service Products and services Speed of transaction Customer retention history Staff qualifications and credentials Timeliness and quality of reports

Measurement of Social Impact 15

Participation in social outcome or impact studies Explicit tool to measure social outcome or impact Frequency of data collected on social outcome or impact Transparency

Human Resources 15Organization and facilities Code of ethics Hiring policies (gender and anti-discrimination policies) Culture of delegation Fair compensation Staff skills and training Promotion and retention Staff incentives and audit

Environmental Performance 9

Example of indicator weights


Phase 2 SPA Survey

MFIs or MFI networks 7

For-profit investors 5

Not for profit funders 3

Development agencies 1

Total 16

Questionnaire consisted of 139 questions including: • 36 pair wise comparison questions

• 56 importance questions • 29 fill-in questions

• 9 relative importance questions • 9 relative weighting questions

Questionnaire Layout Expert Panel

In Phase 2 an extensive literature search was done to determine the key indicators to the factors that were established in Phase 1. These practices were then vetted

with MFIs, investors and microfinance networks. The results were collated in a questionnaire that was presented to a selected expert panel. The details of the

questionnaire and the panel are below:


Phase 3 - Development of Assessment Grades

1. Defining the meaning of each assessment grade

2. Mapping MFIs to an assessment category

» Working with raw MIX data

» Matching MIX data to Moody’s data points– 349 MFIs mapped to Moody’s scorecard factors

– Check robustness of MIX data by creating distributions

3. Creating assessment grade cut-offs

» Based on “blind” assessments of subset of 349 MFIs

» Cut-offs occurred where assessments switched to a different grade

» Tested cut-off robustness by analyzing the number of MFIs that fell out of each category


The Need For Market Information


Key concerns of Microfinance Associations (MFAs): Government Regulation/Interference and Social Performance

Source: SEEP report - Market Outlook 2012: Perspectives of Microfinance Association Leaders

» Social performance issues and the threat of government interference to deal with those issues is greater than ever before

» With the microfinance industry being heavily scrutinized by regulators, researchers and the media, microfinance associations must effectively communicate their association members’ social performance with external parties

Role of Microfinance Associations in Addressing Key Concerns


Role of Microfinance Associations in Addressing Key Concerns

Source: SEEP report - Market Outlook 2012: Perspectives of Microfinance Association Leaders

MFAs do not believe they are adequately prepared for the risks

» A consolidated effort by MFAs to provide quantitative metrics on the social performance of its members can mitigate some of the risks of inappropriate regulation and political interference

» Independent, third party social performance analysis from a globally recognized institution will better prepare MFAs to handle the growing risk trends


The Benefits of Consolidating Information


Using the Moody’s Analytics Social Performance Assessment

MFI

MFI

MFI

MFI ConsolidatedMoody’s Analytics

SPA Analysis

SPA

SPA

SPA

SPA

Reduce MFIs’ Reporting Burden

Attract Funding from Investors

Tool to Communicate with Public

Roadmap for Improving Social

Performance

Track/Share/Monitor MFA Members’

Social Performance

Help Prevent Inappropriate

Regulation

Benefits to Individual MFIs in Using the SPAThe SPA is a state-of-the-art analytical tool MFIs can use

to manage social risks and communicate with stakeholders

Benefits to Global Adoption of the SPAThe global adoption of the SPA would enable Moody’s

Analytics to create a research database that would provide the market with needed information

Communicate with Stakeholders

Tool to Answer Key Questions Facing the

Industry

Increase the Effectiveness of Research

Move Industry to more Empirical

Methods of Analysis


Example of Consolidating Individual SPA Information and Conducting Market

Analytics


Analysis of the AZ Market Compared to the World/Region

Source: 2009 MIX social data mapped to MA’s SPA scorecard

SPA Factors AZ World ECASocial Mission 71 79 78

Strategy and Leadership 30 38 33Customer Relationship 51 52 54

Measurement of Social Outcome or Impact 49 55 53Human Resources 57 64 63

Environmental Performance 23 42 33

Mean SPA Score 48 55 53

» The MA SPA can be used to gather data on a market and compare that market’s performance against different peer groups. The following analysis is based on 349 MFIs, including 17 from Azerbaijan, that were analyzed using the MA SPA scorecard

» This is one example of how the SPA can help an MFA consolidate its social performance data and communicate it to regulators, investors and the public

» Customized consolidated analysis can be done on any and all SPA factors or sub-factors to highlight MFAs’ social performance strengths

» Customized analysis can help MFAs focus on the social performance issues that its members need the most assistance with


The SPA Grading Scale


The SPA Grading Scale

GRADE EXPLANATION DEFINITIONS SPA SCORE RANGE

SP1 Excellent

An SP1 grade indicates that an MFI’s infrastructure and processes are consistent with a very high likelihood of operating in the best interests of its customers, that this is among its highest priorities and that the risk of causing adverse effect to its customers and other stakeholders is very low. An SP1 grade is consistent with an MFI that:

78–100» has a highly coordinated and strategic operation in

order to accomplish its social mission» adheres to best practice across all of the key SPA factors and most of the sub-factors

» demonstrates it has well-established and reliable information systems, internal controls and procedures relating to the information provided for the SPA

» maintains the highest standards in terms of customer over-indebtedness and debt collection practices.

SP2 Good

An SP2 grade indicates that an MFI’s infrastructure and processes are consistent with a high likelihood of operating in the best interests of its customers, that this is among its highest priorities and that the risk of causing adverse effect to its customers and other stakeholders is low. An SP2 grade is consistent with an MFI that:

65–77» coordinates strategic operations to accomplish its

social mission» adheres to best practice on almost all of the key SPA factors

» demonstrates that it has reliable information systems, internal controls and procedures relating to the information provided for the SPA

» maintains good standards in terms of customer over-indebtedness and debt collection practices.

GRADE EXPLANATION DEFINITIONS SPA SCORE RANGE

SP3 Adequate

An SP3 grade indicates that an MFI’s infrastructure and processes are consistent with a good likelihood of operating in the best interests of its customers, that this is among its high priorities and that it attempts to manage the risk of causing adverse effect to its customers and other stakeholders. An SP3 grade is consistent with an MFI that: 50–64» adheres to good practice on most of the key SPA factors» demonstrates that it has adequate information systems,

internal controls and procedures relating to the information provided for the SPA

» maintains reasonable standards in terms of customer protection.

SP4 Weak

An SP4 grade indicates that an MFI’s infrastructure and processes show some adherence to operating in the best interests of its customers, and that this is among its priorities. An SP4 grade is consistent with an MFI that:

30–49» adheres to good practice on some of the key SPA Factors» has weak information systems, internal controls and

procedures relating to the information provided for the SPA

» maintains some standards in terms of customer protection.

SP5 Poor

An SP5 grade indicates that an MFI’s infrastructure and processes do not show evidence of being in the best interests of its customers, and that this may not be among its priorities. An SP5 grade is consistent with an MFI that: 0–29» has no or inadequate information systems, internal

controls and procedures relating to the information provided for the SPA

» maintains no standards in terms of customer protection.


The SPA Delivery


Delivery of the SPA

Document request Moody’s sends data and document

request to MFI

Desk research Data/documents review, identify

information gaps

Telephone interviews Telephone /Skype interviews with

senior, middle and branch managers

Scheduling and logistics Schedule on-site visit and logistics

Interviews with senior, middle and branch management Review of operational processes, management information systems,

and implementation

Interviews with branch employees and loan officers

Customer surveys Awareness and transparency

verification, validation of customer feedback and MFI procedures

On-site visit Off-site data collection

and scheduling

Analysis, report writing Analysis of primary and secondary

information, verification of information with MFI, drafting of

final report

Completion of SPA scorecard

Draft report sent to assessment committee

Analysis and report writing

Review and report finalisation

SPA grade review Report and assessment rationale

reviewed by assessment committee

Draft sent to MFI for comments

Incorporating comments MFI’s comments, if relevant, are

incorporated

Report finalization Report is finalized by assessment

committee and sent to MFI

Assessment committee Teams from MA, Copal Partners and local affiliate take part in an assessment committee to decide SPA grades

Term of the SPA Once completed the SPA grade is monitored over the course of the year. After one year the SPA must be renewed or the

SPA grade is withdrawn and is no longer valid

Initiation Completion6 – 8 weeks


Global Reach

The SPA will be delivered by a global team of analysts that combines the oversight of MA, the local delivery by Moody’s affiliate relationships, and the analytical abilities of MA’s subsidiary, Copal Partners

Together these three entities deliver vertically-integrated, state-of-the-art analytics combined with local country knowledge to ensure the highest quality analysis of social performance

Moody’s Analytics Methodology and Oversight

Copal Partners

Administration and Analytics Eastern

EuropeCentral

Asia

Sub Saharan

Africa

Local Deliveryby affiliates

Latin America

Middle EastNorth Africa

Global Developmentby Moody’s Analytics and Copal Partners


Contact Information

Alan BonillaAssistant Vice President7 World Trade Center, New York, NY 10007W: (212) 553-1314E: [email protected]

Jody RaschSenior Vice President7 World Trade Center, New York, NY 10007W: (212) 553-3797E: [email protected]

Michael RauenhorstVice President7 World Trade Center, New York, NY 10007W: (212) 553-2866E: [email protected]

www.moodysanalytics.com/microfinance


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developing a country wide approach to social performance measurement am ̈ fa proposal

Documents

social performance proposal

social performance management

social metrics

social assessments

social indicators

better performance

specific social issues

credit research