PROGRESS NOTE • No. 12 • October 2005
Social Return on Investment and
Its Relevance to Microfinance
Didier Thys
Drew Tulchin, Social Enterprise Associates
Chandni Ohri, Grameen Foundation USA
Social return on investment includes other concepts, such as
(SROI) is an emerging concept monetized outcomes and cost-
in economic development. The benefit analysis.
term SROI generally refers to a
method of measuring social ben- The purpose of this Progress
efits. It is expressed as social per- Note is to introduce key concepts
formance as a ratio to an input, of SROI to the SEEP Network
typically capital. SROI is likely and broader microfinance com-
to become increasingly relevant munities. In the following sec-
in microfinance as the industry tions, this Progress Note discuss-
transitions from donor capital to es factors contributing to SROI
private investment. In this con- emerging on the microfinance
text, SROI is a tool by which agenda, explores SROI’s value to
MFIs can demonstrate their microfinance institutions,
social value, which is presumed describes some SROI tools with
to be important to attract socially examples, and suggests next steps
responsible investors to partici- for microfinance practitioners in
pate in microfinance as well as to developing/promoting SROI
A Joint Publication of allocate different levels of socially within the microfinance industry.
responsible investment to those
The Small Enterprise MFIs offering varying risk and
Education and social/financial return. SROI FRAMEWORK
Promotion Network
and
It is important to note up front The SROI framework is depicted
that SROI is not impact assess- in Figures 1 and 2. As seen in
The Microfinance ment. Although SROI and Figure 1, below, an organization
Information eXchange impact assessment utilize similar creates value over time (t on the z
(The Mix) information and similar meth- axis). Its foundation is capital
ods, the two are distinct. SROI (investment on the x axis). The
is a broader concept that includes organization is built up from
impact assessment within its capital by a mission led, but mar-
framework, but which also ket driven, plan (the y axis).
Figure 1: Understanding Value Creation
Source: Kim Alter, Virtue Ventures, SEEP Annual Meeting, October 2003
Implementing the plan creates above as a flow along a continu- outputs. Impacts are the results
social and economic value, meas- um. The input (investment) of outcomes. Impacts are in turn
urable in quantifiable and generates mission driven activi- measured in relation to original
unquantifiable ways. ties. These create outputs (a output.1
physical good, like a widget or a
In Figure 2, the SROI framework service, such as a loan).
expresses the Y axis from Figure 1 Outcomes are by-products of the
Figure 2: SROI Framework Logic Model
Source: Drew Tulchin, Social Enterprise Associates paper, Microfinance and the Double Bottom Line
1 The framework does not distinguish between direct or indirect results during the process of converting inputs to impacts. Proving the linkage between the input
and the outcomes/impacts is common ground with impact assessment.
2 • PROGRESS NOTE • No. 12 • October 2005
SROI AND trillion. Nearly one in nine In addition to the above factors,
MICROFINANCE professionally managed dol- the rise of SROI on the microfi-
lars in the US is invested nance agenda is attributed to the
A combination of several factors with at least a social screen. benefits it offers MFIs and other
has resulted in SROI being Efforts to define and measure stakeholders. To MFIs, SROI
placed on the microfinance agen- social benefits presumably offers:
da. The following factors are increase the attractiveness of
both broad in origin and specific investment alternatives for • Promotes customer-centered
to microfinance. socially responsible investors. service delivery.
Broad Factors Microfinance Specific Factors • Makes measurement of social
performance possible, pro-
• Increased accountability for • Insufficient donor funds to viding management a mecha-
non-profits: Institutional and address market demand: nism to manage toward a
individual donors are Demand for microfinance far double bottom-line.
increasingly demanding exceeds donor supply of
greater accountability and funds. Donors provide an • Provides information,
transparency from the non- estimated $500 million a enabling management to
profits they support. The year to microfinance. MFI make more informed
charity model of doing growth requires billions of decisions.
“good works” is no longer dollars. MFIs need to access
sufficient justification for new sources of private capital • Improves financial and social
funding. Like their for-prof- to meet global demand for bottom lines.
it counterparts, non-profit microfinancial services.
institutions are expected to To external stakeholders, SROI
demonstrate their value • Need to define and differen- offers the following potential
added. tiate MFI performance: benefits:
Competition for capital
• United Nations’ Millennium between MFIs requires insti- • Establishes transparency in
Development Goals tutions to seek new ways to documenting social
(MDGs): The UN estab- attract investor attention. performance.
lished the MDGs to eradi- Measuring social return
cate extreme poverty and offers MFIs an opportunity • Permits comparisons between
halve the number of poor to differentiate themselves in organizations in social
people by 2015. This ambi- the marketplace, especially performance.
tious goal focuses on out- when financial performance
comes rather than inputs and is similar, and raise attrac- • Links MFI performance to
draws attention to the social tively priced funds. the UN MGDs.
performance of development
institutions and their ability • Legislative mandate to • Connects a social return to
to measure and demonstrate demonstrate poverty out- the investment inputs.
results. reach: Legislation requiring
USAID-funded MFIs to • Increases investment flows
• Growth in socially responsi- demonstrate poverty out- into microfinance and
ble investing (SRI): The SRI reach has propelled poverty improves efficiency of invest-
sector has sustained growth assessment, and more gener- ment allocations.
of 15% a year for more than ally social return measure-
a decade. SRI investments in ment, to the top echelon of
2003 totaled more than $2.2 industry priorities.
3 • PROGRESS NOTE • No. 12 • October 2005
SROI MEASUREMENT lates mission into concrete Organizational learning and
TOOLS behavior and enables outcome improvement is seen as central to
tracking. the approach, as is the link
SROI measurement tools can be between organizational accounta-
grouped into two categories. Global Reporting Initiative. bility and developing trust with
One group emphasizes process The Global Reporting Initiative stakeholders. As a process stan-
validation for performance-based (GRI) establishes and publishes dard, rather than performance
indicators while the other focuses voluntary performance guide- standard, AA1000 specifies the
on outcomes and monetization. lines. It uses an oversight board, processes that an organization
like the Financial Accounting should follow to account for its
Group 1: Process Validation Standards Board, to recommend performance, not the levels of
procedures and enact changes to performance the organization
A fundamental driver of social guidelines. Standardized report- should achieve.4
return is taking a specified mis- ing guidelines establish the vari-
sion, consider the activities gen- ables to measure, indicate how to Calvert Foundation’s SROI
erated to accomplish it, and measure them, and provide data Calculator. Calvert Foundation
measure the outputs of those presentation formats. Indicators has developed its own SROI cal-
activities. The tools in this group are divided into the following culator using self-reported data
emphasize how this is done by five areas: economic, environ- from organizations in its portfo-
measuring business processes. mental, social, human rights, lio. The web-based tool com-
Broadly, these tools tend to be and workplace. GRI’s inclusive putes social outcomes based on a
descriptive and qualitative. Their framework defines a role for all given investment amount in the
primary use is tracking change stakeholders. It emphasizes Calvert portfolio. It provides a
over time and progression transparency, trend analysis, and specific, readily understood,
towards a goal in relation to the incremental improvement.3 estimate of the social good pro-
underlying mission. Tools in this duced by a specific monetary
group include (1) the Balanced AccountAbility 1000. investment.5
Scorecard, (2) Global Reporting AccountAbility 1000 (AA1000)
Initiative, (3) AccountAbility is “a foundation standard,” which Group 2: Social Outcomes and
1000, and (4) Calvert comprises principles and a set of Monetization
Foundation’s SROI Calculator. process standards. A set of key
principles aim to stimulate inno- Tools falling in this group seek to
Balanced Scorecard. The vation above an agreed quality quantify social benefits. This is
Balanced Scorecard (BSC) floor, rather than encouraging accomplished by monetizing
expands beyond financial activity the development of a more rigid social returns in relation to
by establishing a link between compliance-oriented culture. investment. A number of formu-
and tracking of the mission, AA1000 focuses on engagement las have been developed to quan-
goals, and performance. BSC with stakeholders, seeking to link tify the blended value of social
tracks organizational behavior in the defining and embedding of and financial returns. The equa-
four areas: financial, customer, an organization’s values to the tions concentrate on net financial
internal business processes, and development of performance tar- return and net social value divid-
learning/growth. In each of the gets, in order to tie social and ed by the investment costs for a
four areas, management chooses ethical issues into the organiza- given period. The precise meas-
goals, develops key indicators to tion’s strategic management. urement depends on the indica-
represent core activities, and then
compares performance with stat-
ed objectives.2 The BSC is a 2 For more information and details, see www.balancedscorecard.org.
practitioner-centered device that 3 All materials are free to download, see www.globalreporting.org.
4 Definitions are elaborated, see www.accountability.org.uk/aa1000/default.asp
empowers management. It trans- 5 The tool can be used online, see www.calvertfoundation.org/individual/investment/index.html?source=
4 • PROGRESS NOTE • No. 12 • October 2005
tors used, with a typical calcula- 3. Financial income to the MFI the field and has begun to be
tion estimating value creation [income – (administrative incorporated in other areas
through direct (e.g., increased costs + loan loss reserve + of SEEP, including Social
incomes) and indirect (e.g., pub- cost of funds)]. Performance.
lic expenditures saved) outcomes.
4. Investment costs (grants + • Involve social investors and
Freedom from Hunger’s subsidies). donors: Encourage the Mix
approach to measuring the SROI Market to work with the SRI
of its Credit with Education serv- Much work remains to refine community to identify their
ice delivery model is a good existing tools and develop new priorities and interests in
example of this type of tool. The ones to measure SROI. The field social return and social
mission statement (or value is young, but growing rapidly. return measurement.
proposition) of Freedom from There exists ample opportunity
Hunger is to reduce malnutrition for microfinance researchers and • MicroBanking Bulletin issue:
in children less than five years practitioners to contribute to the Once there is a critical mass
old. Consequently, its SROI tool discussion, test existing of interest in SROI in the
estimates social return in four approaches or develop new ones, industry, devote a
areas: and disseminate lessons learned MicroBanking Bulletin issue
and other information. to this topic.
1. Lives saved due to informa-
tion from health education. The end goals of these proposed
NEXT STEPS actions are to:
2. Money saved by members
due to the lower cost of This Progress Note hopes to • Increase attention on MFI
financial services. encourage practitioner activity in social performance.
developing and adapting SROI
3. Net income earned by the for microfinance. The following • Develop standards for social
organization offering Credit actions are proposed. return in microfinance.
with Education services.
• Add the topic of SROI to • Incorporate new tools to
4. Subsidy invested to create more microfinance confer- inform management and
and/or expand Credit with ences. Social return can read- investor decision-making.
Education services. ily be promoted in industry
conferences, publications, • Increase socially responsible
The computation they use for and trainings. Given the investment in microfinance.
their specific SROI is as follows: mainstream growth of the
concept, it is a good connec- It is hoped that practitioners will
1. Value of lives saved (number tor for microfinance to the take the opportunity to partici-
of lives saved * GNP per greater SRI and investing pate in the process of building
capita * life expectancy). public. collective knowledge in this
important topic and demonstrate
2. Net gain to the user (cost of • SEEP working groups: This the unique value-added of
borrowing from moneylend- effort will utilize SEEP’s microfinance.
er – cost of borrowing from established channels for sup-
organization offering Credit porting practitioner interest
with Education). on the emerging subjects in
5 • PROGRESS NOTE • No. 12 • October 2005
Authors
Didier Thys,
Drew Tulchin, Social Enterprise Associates
Chandni Ohri, Grameen Foundation USA
Editor
Jennifer E. Hansel, The SEEP Network
Contact
For additional information or to order additional copies, contact The SEEP Network.
1825 Connecticut Avenue, NW
Washington, DC 20009–5721 USA
Tel: 202.884.8392
Fax: 202.884.8479
E-mail: seep@seepnetwork.org
www.seepnetwork.org
Progress Notes
Previously published in this series:
• Progress Note No. 1, Integrating Poverty Assessment into Client Assessment.
• Progress Note No. 2, Analysis of Client Assessment Data.
• Progress Note No. 3, Institutionalizing Client Assessment: The Activists for
Social Alternatives—India.
• Progress Note No. 4, The Emerging Role of Microfinance Programs in Mitigating the
Impact of Natural Disasters: Summary Findings of an Impact Assessment of World Vision’s
Ethiopian Affiliate.
• Progress Note No. 5, Conflict and Post-Conflict Environments: Ten Short Lessons To
Make Microfinance Work.
• Progress Note No. 6, Client Assessment Lessons Learned.
• Progress Note No. 7, Benefits of Client Assessment
• Progress Note No. 8, Using Microfinance Networks to Promote Client Assessment:
Case Study of ASOMIF
• Progress Note No. 9, Toward a Complete Progress Tracking System
• Progress Note No. 10, Measuring Poverty Directly: Insights from ACCION’s Poverty
Assessment Project
• Progress Note No. 11, Microfinance and Social Performance: How FINCA Used a Client
Assessment Tool to Identify Mission Drift
• Conceptual Note on Social Performance Management
To read other titles from the Progress Note series, visit www.seepnetwork.org.
6 • PROGRESS NOTE • No. 12 • October 2005