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

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Measuring Market Rate InvestmentA first step in
Social Return for Microfinance

• Drew Tulchin
• Social Enterprise Associates
• Social Return on Investment (SROI) Panel
• SEEP Network Annual Conference
• Oct, 2003

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SROI Panel Measuring Market Rate Investment

• Introduction
• Definition, Value Goals of Social Return
• Frameworks
• Measuring Investment
• Market Investment Measurement
• Examples
• General
• Specific Prisma Microfinance
• QA

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Introduction

• Who are you? What brought you here today?

Who am I?

• Drew Tulchin,
• Social Enterprise Associates
• A network of professionals making communities
  better by applying business skills sustainable
  practices.

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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

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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?

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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)

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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 RD to create social science valid
  standard
• Use existing available data for best use

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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 RD to create social science valid
  standard
• Use existing available data for best use

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

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Measuring Investment

• 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

Are they Easy to use? Compelling for Investment?
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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 gt100 mean here?

Use Mod Invest Depends
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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
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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.
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Investment Measurement

• What it is.
• Hybrid Kortens transparency SDI
  sustainability
• Uses available information
• Percentage an MFIs 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
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Measurement General Example

• Assuming 100 in 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

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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
• _at_ NPV (No terminal value to be conservative)

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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?

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Your feedback participation is encouraged!
Thank you!

• Drew Tulchin
• Social Enterprise Associates
• www.SocialEnterprise.NET
• drew_at_SocialEnterprise.NET
• 617-872-0194