MICROCAPITAL STORY: Grameen Foundation and Oikocredit Offer Progress out of Poverty Index as Cornerstone of Socially Motivated Microfinance Investment Guidelines

The Grameen Foundation, in collaboration with Oikocredit, has developed a set of guidelines to help ensure a social impact of investments in microfinance. In a press release, the foundation stated that in 2006 over USD 663 million had been invested into microfinance by US-based investors, much of it by socially motivated investors looking for a “social return” as well as a financial return. Measuring the size of the social return, however, has always proved more difficult than measuring its monetary counterpart.

The guidelines are accessible from the Grameen Foundation’s website via this link. The one page document contains a list of questions revolving around two basic issues: (1) Are microfinance institutions reaching poor clients; (2) Are microfinance institutions helping clients move out of poverty. The questions are listed below:

“An institutional investor can ask:

What percentage of the MFIs in the portfolio is using the Progress out of Poverty Index (PPI) or a comparable poverty measurement tool?
How effective are the MFIs at alleviating poverty?
Is social outreach and outcome information available by country?
Are investment dollars reaching the poor and very poor?
At the portfolio level, how many clients are moving out of poverty?
How long does it take for MFIs, on average, to attain for their clients sustained movement above the poverty line?

Individual investors can ask:

What measures are taken to ensure that investments really support the poor and poorest populations? Poverty assessment tools? Social audits? Other?
How often are the poverty profiles of microfinance institutions updated?
How does my investment manager define poor, very poor, and extremely poor? Are these categories comparable across microfinance institutions? Are they based on national or international definitions of poverty?”

Almost all of the questions that constitute the guidelines point towards the need to assess the poverty level of MFI clients. To address these questions, the document offers the Progress out of Poverty Index (PPI) as a poverty measurement tool.

The PPI is a MFI social performance tool developed by the Grameen Foundation, the Consultative Group to Assist the Poor (CGAP), and the Ford Foundation. It is designed to measure the poverty level of individuals and groups through ten poverty indicators. The indicators vary depending on the income level and characteristics of the country, but common indicators include whether the family owns a gas stove, what the house’s outer walls are made of, what kind of toilet facility the family has, or whether the family owns a television. A surveyor visits clients’ homes and assigns points for each indicator. The scores are then used to derive the clients’ PPI score. MFIs can use the PPI scores to estimate whether clients fall below the national poverty line, the USD 1 per day and/or USD 2 per day international benchmarks. By conducting regular surveys, changes in the poverty levels can be tracked over time. The Grameen Foundation claims, “With 90-percent confidence, estimates of groups’ overall poverty rates are accurate to within +/-2 percentage points.”

For more information on the PPI please refer to the Progress out of Poverty website and this MicroCapital Story. For more information on different tools developed to measure the social impact of MFIs, and the challenges involved in doing so, please refer to the MicroCapital Paper Wrap-Up of “Beyond Good Intentions: Measuring the Social Performance of Microfinance Institutions,” by Syed Hashemi.

Oikocredit is a Netherlands-based international non-profit financier of MFIs, with a loan portfolio of over USD 300 million. Oikocredit adopted the PPI in 2007, and has implemented it among investees in the Philippines and Peru.

The Grameen Foundation is a Washington DC-based non-profit organization that supports a global network of 55 MFIs with funding, technical assistance, training and new technology. As of March 31, 2008, The Grameen Foundation had USD 25 million in total assets. It is funded primarily by donors. Between April 2007 and April 2008 the foundation received USD 16 million in grants and USD 3.4 million in in-kind contributions. It also generated USD 2.1 million in program revenue. Of its USD 16.7 million in total expenses, USD 14.1 million went towards program services, and USD 2.6 million went towards management, fundraising, and other general expenses. Beyond these expenses, the Grameen Foundation provided USD 17.2 million in guarantees, leveraging USD 90.5 million in loans to microfinance institutions in Fiscal Year 2008.