A Guide to Assessing and Implementing the Universal Standards for Social and Environmental Performance Management

Dimension 6 - Responsible Growth and Returns

Dimension 6’s standards and guidance start from the premise that, as a social enterprise, an institution’s financial decisions and results should reflect their social goals. As with other social enterprises, striking the right balance is key. As financial institutions grow and take on new funders who may have a different priorities or strike a different balance, it is very important for the financial service provider to have institutionalized policies and practices that support its own balance. The 3 primary areas of focus in this dimension are responsibly managing growth, setting prices and using profits to achieve long-term sustainability while achieving social goals.

Dimension 6 includes three standards:

6.A.1 The provider's strategic and/or business plan establishes responsible growth targets.

Most providers target positive growth rates of their customer base and/or portfolio. Average annual growth rates are usually in the range of 5-30%, but they can reach 50% or more in markets where the market potential is still very large. Such high growth rates can be appropriate in some contexts—such as when a young provider is expanding its operations—yet they can be very dangerous in others where they can spur client over-indebtedness or weaken the internal control systems of fast-growing providers.

Regardless of why your institution pursues growth (e.g., to achieve economies of scale and reach sustainability, to meet your social goal of financial inclusion), ensure that your target growth rates are sustainable. Sustainability means growing only as quickly as you can adapt and expand your quality-control systems, such as employee training and MIS capacity, as well as your risk monitoring. A sustainable growth rate will allow you to expand while maintaining adequate portfolio quality, providing good customer service, respecting clients’ rights, and giving employees manageable workloads.  

Set target growth rates by branch and/or region over a three- to five-year time horizon. During this process, analyze the following factors, keeping in mind the quality of customer service, client protection, and employee satisfaction:

  • External factors: client demand, competition, market penetration and saturation, and market infrastructure; and
  • Internal factors: internal controls, human resource capability, MIS, and client satisfaction.
Analyze external factors

For each branch and for each product, your institution should analyze external factors, including client demand, current and future market penetration of competitors, market saturation, and market infrastructure. Careful analysis of these elements is necessary to set sustainable target growth rates. Segment your market information by different types of clients and different products because pockets of saturation can exist within an otherwise fairly unsaturated market. The institution should also assess whether an “intensive” or “extensive” growth strategy is most appropriate: an “intensive growth” strategy means adding new borrowers within existing branches or a limited geographic market, while “extensive growth” strategy focuses on opening new branches and/or entering new markets. In general, more caution is required for intensive growth, which depletes the pool of “good” borrowers faster than extensive growth. Historical data from the MIX Market shows that intensive growth levels over 168% (growth rate of number of borrowers per branch) are associated with lower portfolio quality; while only extensive growth levels over 631% per year (growth rate of the number of branches per FSP) are associated with worsening portfolio quality. These data do not suggest that your institution should never pursue “intensive growth,” but rather that you should consider whether the geographic diversification of your intended growth will promote positive outcomes for clients (e.g., financial inclusion) or negative outcomes (e.g., client over-indebtedness).

The table titled Analyze Internal Factors to Inform Your Growth Policy sets out the external factors you should analyze, the data you’ll need to do that analysis (“resources needed”), and what insight you gain from each analysis (“analysis”). Using Global Data to Calculate Market Potential demonstrates how your institution can use Global Findex data to help determine your institution’s potential market.  

Analyze internal factors

Your growth policy should also take into account your institution’s internal capacity for balancing growth with service quality. Table 33 lists the internal factors you should examine, and it summarizes the insights you can gain from each analysis.

Field Examples and Resources for 6.A.1

6.A.1.1 The provider adjusts growth targets to market saturation.

Market saturation occurs when the provision of a product or service reaches the limits of a targeted client segment’s effective demand. Market saturation in credit presents a high risk of over-indebtedness. It is difficult to measure, but there are some warning signals, such as loan officers finding it hard to reach their disbursement targets, or multiple borrowings being common practice.

MIMOSA is a tool created to measure the level of saturation in credit markets and can offer insight into the level of risk a certain country is experiencing.

Scoring guidance

The analyst will need to 1) determine if the institution adjusts its growth targets for field staff, and 2) on what frequency are these targets reviewed and 3) what prompts these adjustments.

  • Does the provider monitor market saturation? What are the sources of information?
  • Is the budget/financial planning a bottom-up process? Is there input from the field?
  • Have there been adjustments made to the growth targets due to market saturation/over-indebtedness in the past?
Sources of information
  • Interview with Board  
  • Interview with the head of credit
  • Interview with CEO
  • Interview with CFO
  • Management reports to the Board, past Board meeting minutes
  • Market studies
  • Business plan and the assumptions used for projecting growth
  • Past growth trends
  • Credit bureau reports, if they exist
Evidence to provide

Demonstrate that the Board or the top management request, have, and use information about market saturation to determine and adjust targets. If there is an example of adjusting growth targets for this or other reasons, within the last year, describe it.

Field examples / Guidance for implementation
Resources for indicator 6.A.1.1
  • The MIMOSA Index, which is based on market penetration and capacity
    • Serbian MFI Monitors Aggregate Household Credit to Identify Risks (938)

6.A.1.2 The provider aligns growth targets to demand, by client segment, as identified in market research.

Different client segments will have unique levels of demand and saturation with regards to credit and other products. In order to understand these unique characteristics of their target client segments, the FSP needs to conduct market research in various forms. To tailor its growth targets to the needs and level of saturation of each target segment, the FSP needs to use the results of its market and sector level research to adjust its growth targets to a responsible level based on the circumstances of its clients and its context. For more information about client-centric market research and analysis of client needs by segment and sector, please see section 3.A.1 and 3.A.2 of this implementation guide.

Scoring guidance
  • To fully meet this indicator the FSP must do several things:
  • Carry out market research
  • Differentiate that market research by its most relevant client segments
  • Adjust each product’s growth targets based on an understanding of that segment’s demand, level of indebtedness, and level of market saturation
Sources of information
  • Results of market research studies, mystery shopping, country level research, credit bureau research
  • Client interviews
  • Annual or operational plans that show the target growth rates by segment/product
Evidence to provide

Summary of the practices that the FSP implemented that meet the indicator

6.A.1.3 The provider allocates funds and human resources to reinforce the following internal capacities to ensure responsible growth:

6.A.1.3.1 Internal control mechanisms/internal audit
6.A.1.3.2 Hiring and training employees, and third-party agents as applicable
6.A.1.3.3 Management information system quality and capacity

Growth can cause “growing pains” and these details aim to address the main ways in which rapid growth can lead to shortcomings in internal capacity that can affect client protection and customer satisfaction. The FSP needs sufficient staff, orientation and refresher trainings, data management infrastructure, and monitoring capacity to be able to effectively manage growth while maintaining high standards for client protection. The FSP must ensure that sufficient staff and monetary resources are in place to build and maintain its internal capacity during times of significant growth.

Scoring guidance
  • All Details must be met in order to pass the indicator, otherwise the answer is partially. In order to pass this indicator, the FSP must:
  • Have sufficient funds to hire sufficient staff to keep up with growth  
  • Have sufficient staff to do the job well i.e. not leave the front line stretched thin, overworked or burned out due to staff shortages. See Guidelines for Case Load Limits for recommended levels for loan officers.
  • Have annual refresher trainings for all existing staff and have orientation trainings for all new staff within three months of their start date.
  • Have sufficient audit or monitoring staff to visit each branch at least once a year and conduct interview of file reviews of at least 3-5% of total clients.
  • MIS capacity that allows the FSP to keep all social and financial information about all its clients in one database or two databases that are linked by unique client ID
Sources of information
  • Interview with the internal audit staff and/or manager
  • Interview with the IT manager or head of Data
  • Interview with the Head of HR and/or Training
Evidence to provide
  • How often is each branch visited by the Internal Audit department and what % of clients and/or loan officers receive monitoring visits/calls.  
  • How often and for how much time per session do staff receive training, what is the rate of turnover in the institution for field staff and overall.
  • Whether the MIS is integrated across financial and social performance data
Resources for indicator 6.A.1.3

6.A.2 During times of high growth, the provider monitors more frequently data related to responsible growth

Growth has a direct impact on your institution’s ability to maintain high service quality and institutional sustainability. To maintain close control of institutional growth, your institution should monitor a list of key indicators each quarter including:  

  • Internal indicators of growth, per field officer, branch, and region, and for each product and/or client segment, including the following:  
    • Number of loans outstanding  
    • Outstanding portfolio  
    • Average loan size  
    • Number of savings accounts and average balances  
    • New client recruitment  
    • Incidence of multiple borrowing (from the same FSP and from other sources)  
    • Change in PAR 30  
    • Productivity (Borrowers/Employee or Borrowers/Field staff)  
  • Vintage analysis1 per branch for each product, per loan officer or period. Such analysis can highlight credit risk issues that are minimized by a global analysis. Vintage analysis is useful especially during changes in the credit methodology, incentive scheme, or operational organization.  
  • The evolution of the local market conditions

Monitor these indicators quarterly, as an annual assessment does not capture periods of fluctuation, such as high growth followed by contraction. It is also important to monitor growth by branch, because sometimes problem behavior at a specific branch, such as excessive growth, is not evident in the aggregate data for the institution. Compare these indicators to your targets, analyzing any differences.

In addition to closely monitoring your own growth, watch the evolution of market conditions by analyzing market growth by client segment and/or product type on a quarterly basis. If unexpected changes in the external conditions are detected, management should act to prevent negative consequences for the institution and its clients. For example, if a new competitor enters a geographic area that already has high penetration by other providers, consider whether preventive or corrective action is necessary, such as implementing more conservative debt limits for client loans or revising growth targets.

Monitor internal capacity to handle growth  

In addition to carefully tracking institutional growth, also monitor whether your institution’s internal capacity is keeping pace with growth. The table Analyze Internal Factors to Inform Your Growth Policy presents some of the most important indicators that management should monitor, as well as how to analyze these indicators, in order to address risks related to your institution’s capacity to handle growth. Monitor these indicators for each branch or regional office, for each field agent, and for each product.

Enhance internal capacity as needed

Periods of high growth often require operational adjustments to avoid problems such as client over-indebtedness, poor service quality, staff dissatisfaction, and deteriorating portfolio quality. For example, an uptick in staff hiring and training tends to expose any weaknesses in a provider’s human resources management, such as poor screening of job candidates or insufficient onboarding for new staff. In this case, more robust hiring protocols and additional staff training are needed. When a provider’s MIS is asked to hold, process, and analyze a more substantial data load, it is not uncommon for a provider to find that upgrades are necessary. Additionally, high-growth providers often need to adjust staff incentives to emphasize portfolio quality and client satisfaction to mitigate the risk of staff pursuing risky clients, such as clients of other providers or those who fall outside the provider’s target poverty range, for example. Expect additional risks associated with growth and stay ahead of potential problems by enhancing your institution’s operations as needed.

Field Examples and Resources

6.A.2.1 The provider analyzes growth rates by branch/region. Minimum frequency: annually

When FSPs only analyze growth rates at the aggregate level or at the institutional level there, they might miss the nuance that may be affecting certain areas of the portfolio. This indicator requires analysis of the data on growth rates by branch and/or region in order to ensure that the FSPs see the growth rates at a more granular level so that if growth rates are too high in one branch or one region, action can be taken to address that before it becomes so bad that one branch’s problems affect the overall quality of the portfolio.

Scoring guidance

The FPS must analyze the growth rates of its portfolio by branch and/or region in order to pass this indicator.

Sources of information
  • Reports
  • MIS
Evidence to provide

Pictures of the reports that show data on growth rates by branch or region OR the title and page number of the document where the evidence can be found.

6.A.2.2 The provider monitors the following data during times of growth, Minimum frequency: monthly

6.A.2.2.1 Outreach indicators, including average loan size of new clients and share of new clients who are from the provider's target client group
6.A.2.2.2 Quality of service indicators segmented by branch, including portfolio at risk and number of complaints
6.A.2.2.3 Human resource capacity indicators, including clients per field officer, ratio of internal audit staff to total number of staff, hours of training for new employees (by position), and employee turnover (by position)

FSP are almost constantly seeking to grow, so the safest thing is for the FSP to have a protocol that requires this data collection at all times. The first detail is designed to help the FSP ensure that it is not experiencing mission drift by making sure that the size of new loans stays appropriate for target clients and monitoring recruitment to ensure that new clients are in the targeted client segments. The second detail is designed to help identify problems at the branch level so action can be taken before those problem spread to the institutional level. The productivity and turnover data help ensure that the FSP’s internal capacity is keeping pass with its growth so that staff are properly trained and don’t have too many clients to be able to provide thorough and careful analysis for each one.

Scoring guidance

The FSP must pass every detail in order to be able to pass the indicator. In order to pass the details, the FSP needs to collect, aggregate, and report data on:

  • average loan size of new clients,
  • Percent of new clients who are from the provider's target client group,  
  • PAR by branch  
  • number of complaints by branch
  • clients per field officer,  
  • ratio of internal audit staff to total number of staff,  
  • hours of training for new employees (by position), and  
  • employee turnover by position, especially for field officers
Sources of information
  • Monthly operational reports for the credit staff
  • Business intelligence reports
  • HR reports
  • Training reports/summaries
  • Internal Audit reports
  • SPM or CP reports, if available
Evidence to provide

List the names of each of the documents where this information can be found – include the title and page number of the document and which of the above data points can be found in that report.

6.A.2.3 When the provider identifies growth that is harmful to clients, it takes mitigating action such as reducing growth targets, applying more conservative loan approval criteria, or limiting the total number of loans an individual can have at one time.

In general, the critical harm that clients may experience is over-indebtedness. It is critical that this market risk be discussed at the highest level of the institution, including with other market players. The goal of this indicator is to close the loop on the issue of responsible growth – the Essential Practices in this standard (6A) recommend that the FSP set responsible growth targets, monitor the data related to this growth, and then if they detect any issues through this data analysis, they take action to mitigate the risks to clients.

Scoring guidance

Before estimating that this indicator is not applicable, conduct a thorough analysis of all the possible sources of information to identify whether there is such risk, and whether the Board and management are concerned with potential over-heating of the market.  

The way this indicator is written, the first thing the analyst needs to look for is whether the FSP has actually identified incidences of “harmful growth” in the recent past – say the last year or two. If the FSP has identified harmful growth – or if they could reasonably be expected to – for example if the country is experiencing an over-indebtedness crisis, then they are obligated to fulfill the second half of this indicator. To meet this indicator, the FSP must take mitigating action in order to bring the harmful growth down to a level that does not represent a risk to the wellbeing of clients. Actions of this nature can include reducing growth targets, limiting the amount of credit available to its clients, setting limits on multiple lending for shared clients etc.  

Sources of information
  • Articles and publications on market context
  • Interview with Board  
  • Interview with CEO
  • Interview with operations
  • Management reports to the Board, past Board meeting minutes
  • Loan officers’ productivity ratios compared to targets  
  • PAR reports
  • Interview with the head of credit
Evidence to provide
  • If you have scored NA, demonstrate that growth is controlled, and that the region of operation clearly presents no risk nor history of over-indebtedness
  • If there is an example of such mitigation action that has been taken, describe it.
  • If there should have been mitigating action and there was not, describe the context.
Field examples / Guidance for implementation
Resources for indicator 6.A.2.3

Standard 6B. The provider sets prices responsibly.

As an institution with social goals, you have a responsibility to price your products and services responsibly. Though the financial services industry does not have a single definition for “responsible,” there are objective and quantitative ways to determine whether your prices are responsible. A responsible price is one that is sustainable for the provider and is affordable for the client. This standard discusses how you can determine whether your prices fit that description.

This standard has 3 essential practices:

6.B.1 The provider charges fair prices.

Use a formal pricing policy

Your institution should have a formal (internal) pricing policy that balances the interests of your institution with those of the client. The pricing policy should take into account:

  1. Cost of providing the product—the cost of funding, operations, and loan losses;
  2. Affordability for the client (discussed below);
  3. Desired profit, including returns to capital; and
  4. Social goals for the product, such as reaching remote locations or providing access to very poor people.

Your institution is likely taking on costs that a more conventional company would avoid—for example, design and pilot costs for innovative “pro-poor” products and costs involved in targeting clients that are harder to reach. While in many cases these efforts will eventually yield a reasonable financial return from better product design, stronger competitive position, or enhanced client loyalty and lower client acquisition costs, there may be a period before they do so. In this regard, your institution must decide which of the “investments” in future profitability should be funded by the client through higher prices and which should be absorbed by your institution (or investors) through lower retained earnings or dividends.

Set Responsible Prices on Insurance and Payments Products

If you have mandatory insurance fees, or offer optional insurance policies, the price should cover at least the premiums passed to insurance companies and the actual cost of providing the product. Sustainability is vital for insurance. Many clients are unfamiliar with or untrusting of insurance, and a client may lose trust in insurance products if they are discontinued or undergo drastic changes repeatedly or unexpectedly. If your insurance product is not sustainable, and you have made a decision to subsidize the product in order to offer this benefit to clients, be clear on a long-term plan for sustainable continuity of coverage.

It is also important to adjust insurance pricing based on actual claims experience. When insurance is first offered in a market, or to a new client segment, pricing is based on predicted claims/payouts. However, with time (e.g., after 2-3 years), the price should be adjusted to reflect the reality of client claims. If claims are fewer/less expensive than anticipated, these savings should be passed to clients in the form of a lower price, expansion of benefits, or other advantages. Alternatively, if payouts are higher than expected, the price should increase in order to ensure the long-term sustainability of the product.

As you track insurance claims for pricing purposes, also check your claims ratio (defined as claims paid out to clients as a percentage of total amount of premiums collected). A claims ratio below 60% is a significant red flag, signaling that the insurance product does not create value for clients. If your claims ratio is at or below 60%, you should understand why. A low claims ratio may be justified if the product is very new, if the costs of distribution and/or servicing claims is unusually and unavoidably high, or other exceptional circumstances. It is your responsibility to make sure clients receive value from the products and services they buy from you.

Finally, with regards to payments services, check that transaction costs should be comparable to those charged by peers.

Calculate Interest Earned on a Daily Basis

Calculate interest earned on savings deposits on a daily basis. This daily balance method should replace other methods such as paying interest on, for example, the lowest available balance between the tenth and last day of the month. Paying clients based on their day-end balance yields better returns on savings for clients, and it is important for motivating low-income savers to continue to put away money, as even a small daily increase is rewarded.

Set Responsible Prices on Credit Products  

Analysis for responsible pricing is based on the assumption that a provider whose costs are well-managed (operations are efficient and credit losses are limited) and has fair profits (that benefit clients) will have fair pricing, as reflected by its income.

The graphic Components of Responsible Pricing depicts this assumption (for providers who derive their main revenue from loans), and it sets out the components of pricing that you can use to assess whether you have priced your products responsibly. The pricing analysis for this standard focuses on the three components over which providers have the most control: operational efficiency, loan losses expenses, and profits.

Start by considering your institution’s operational self-sufficiency (OSS). Your institution should either be currently covering costs (OSS greater than or equal to 100%) or rapidly approaching break-even, and your financial results should allow you to maintain your capital base. Sustainability is essential for the longevity of your institution. Clients must be able to depend on service continuity, so sustainability is as important to client protection as it is to your financial performance.

When assessing your sustainability trends, it is best to consider the last three years, including the most recent data you have available. If your OSS is not already at or above 100%, the trend should be upward, showing that you will reach sustainability in the next one to two years. The Sustainability Trends graphs show a trend approaching sustainability (a) and a trend that signals a worrisome sustainability trend (b).

Use declining balance calculations

The way you calculate interest on loans also affects the APR charged to your clients. Calculate interest rates using a declining balance, rather than a flat calculation. Using the flat method, the borrower pays interest on the full loan amount, even though the amount they have over the loan term decreases as they repay the loan. Stating nominal interest rates using the flat calculation appears much cheaper than declining balance rates, but they are in fact nearly twice as expensive as stated.

Many providers are afraid to use a declining interest rate because their prices may look higher than competitors who quote a flat rate. That is because any nominal interest rates do not take into account additional fees (processing fees, compulsory savings, etc.), and so they appear lower than rates presented as Effective Interest Rate (EIR) or Annualized Percentage Rate (APR)—formulxz+9as that are all-inclusive. If you find yourself in this position, do not be afraid to be a first mover and set the standard for your market. Advertise your fair pricing calculation and position your institution as the leader in treating clients fairly. Make sure that staff understand the interest rate calculation and can describe it clearly to clients, as well as discuss the advantages of a declining balance rate. Additionally, you might consider lobbying your regulator to establish policies on interest rate calculations and disclosures. For clients to truly make meaningful comparisons between products, the sector as a whole needs to shift to these transparent, all-inclusive pricing formulas.

Compare financial ratios with peers

First and foremost, you should know whether the price of each of your products is higher, lower, or similar to other known prices. Keep in mind that most loan products have a range of prices affected by factors such as the loan term and repayment frequency. When you compare prices with competitors, it is important to compare similar products (type, size, term, etc.) and to compare prices that have been calculated in the same way. In other words, when assessing the price of a loan product, first try to clarify what components were included in the calculation (e.g., fees, cash collateral), what interest rate method was used (flat or declining), and what annualization process (nominal or compounding) was used in the conversion. Doing so will enable you to compare like products and make a more accurate comparison of your prices to those of your competitors.

When analyzing your prices, keep in mind that portfolio yield (PY) is an average of all products. Calculating the APR for each product is preferable, as it is more precise and can isolate problematic prices better than PY. Consider an individual client’s perspective: it does not matter to him/her that your institution’s average price for all credit products is on par with competitors if the one product s/he uses is priced too high. Therefore, the analysis discussed below should be done at the product level first and foremost, and at the portfolio level secondarily.[1]

The pricing diagnostic described above is not designed to give a definite answer to the question: Are my institution’s prices responsible or irresponsible? Instead, it is intended to identify any areas that need further exploration. For example, if your OER is higher than the expected maximum, you should examine why that is the case. Do you have explanatory factors not captured by the model? Some of these might include operating in a low-security environment that requires significant spending on non-standard security costs; serving particularly difficult-to-reach clients; serving an exceptionally underprivileged population that requires add-on services (youth, disabled, etc.); or offering non-financial programs that are useful to clients. However, if these— or similar—factors are not present, then it is likely that you need to improve your efficiency so that it is not passed on to clients through your prices. As you consider how to improve the efficiency of your processes, remember that any new measures should take client and employee well-being into account. Aim for an appropriate balance between efficiency and your social goals such as customer service and strong client protection.

Consider whether prices are affordable for clients  

When determining appropriate prices for your products, use the quantitative price comparison discussed above in conjunction with your other pricing considerations, including affordability for clients. The following qualitative data will help you assess the affordability of your prices:  

  1. Indicators of client stress. Understand whether clients are under undue financial stress as they make their loan payments. Do clients forgo necessities (meals, healthcare, etc.) to afford loan payments? Or make undesired changes to their lifestyle (take children out of school, sell off household items, reduce participation in community activities, etc.)? Are repayments actually degrading their economic activities (selling off productive assets, depleting savings, etc.)? While these unacceptable sacrifices can indicate other problems unrelated to the cost of credit (e.g., too many debts, family crisis, poor business skills), they should be a red flag. Combine your analysis of client stress/financial health with the data below to understand whether the cost of your products is contributing to the problem.  
  2. Client feedback on prices and satisfaction with products. Gather client feedback on current prices. Ask whether clients are able to build assets and cope with cash flow uncertainties. Check your prices against how satisfied clients are with the products/services that you offer. Seek client feedback on loan sizes, interest paid on savings, prices, and fees, and whether they are satisfied with the products and customer service that they receive, given the cost of the product. Higher prices may be justified by high client satisfaction with your unique product/service features (e.g., convenience, timeliness), as many clients are willing to pay more for better products and client service. Likewise, low satisfaction is a signal that clients do not find products/services valuable and may only be willing to pay for them due to lack of options or confusion on the real cost.

[1] Product-level pricing from peers is not always readily available. In such cases, PY comparisons are appropriate. It is important to continue working as a sector to make pricing on individual products publicly available.

Field Examples and Resources

6.B.1.1 The interest rate takes into account the following costs required to deliver credit: funding costs, operating costs, loan losses, and returns to capital.

Interest rates should be set to be affordable to clients and sustainable for the institution. It should cover all direct costs involved in providing credit, potentially including a mark-up to serve as profit. Funding and operating costs are usually assumed from trends for past averages. Loan losses that should be covered by the interest rate are based on your assumptions of risk. Returns to capital, or profit margins, are defined by the top management and/or board by their expected or desired level of profit.

Scoring guidance
  • Analyze the process of setting interest rates: if there has been no cost analysis conducted in the past year or two, if the provider has not defined its expected level of profit, then this cannot be scored “yes”.
  • Having a formal pricing policy is not mandatory to score “yes” as long as the provider has a documented basis that was used in setting and reviewing its interest rates.
  • In order to pass this indicator, the FSP must have included these 4 components in its calculation of its interest rates: funding costs, operating costs, loan losses, and returns to capital.
Sources of information
  • Interview with CFO
  • Interview with product development department
  • Interview with CEO, and potentially with Board member
  • Pricing policy, if it exists
  • Reports from finance that support interest rate setting
Evidence to provide
  • Pricing policy, if applicable  
  • How interest are rate defined e.g. based on a cost analysis, based on what competitors charge, etc.  
  • how much it costs the FSP to lend $100
  • The expected level of profit defined by the Board or the top management, if applicable
  • Any trend data if these factors are monitored over time  
  • Describe in detail how the interest rates are set and what information is used to set them
  • Whether or not the FSP takes into account affordability to clients when setting its rates

6.B.1.2 Annual Percentage Rate (APR) for all of the provider's major credit products (> 20% portfolio) is within 15% of its peers. If it is outside the range, the provider can provide a valid justification.

The industry uses an internationally recognized formula for APR that can be calculated in the APR Estimation and Benchmarking tool. This formula for APR generates the only comparable data between loan products that have different terms and conditions. APR indicates how much it costs to borrow $100 and keep this amount during one full year.

In addition to the cost of interest rate and fees, this APR formula also takes into account all the various criteria that differ from one loan to the other and that constitute a cost to the client, such as the loan term, the repayment schedule, and all side costs like a guarantee deposit, commission, fees, grace period etc.

Scoring guidance
  • You absolutely need to go and dig for information on peers to score this indicator; if you don’t have precise peer information, this indicator cannot be scored “yes”.
  • Use as many samples as possible (loan term, loan size) for both the provider’s products and peers’ products. Oftentimes the national network, a country study, or data from the FSP on its competitors can help obtain this type of peer pricing data.
  • If the average APR of one of the products is higher than the 15% deviation from peer, then this indicator is scored “partially.” 15% deviation means that if the peer APR is 20%, then the provider’s APR should range between 17% and 23%.  
  • For Certification, this indicator can only be scored “yes” if the sample of comparable peer information is large and relevant enough ~ 5-6 other comparable FSPs from the same market.
  • Once the analyst has compiled the peer data, she will need to enter it into the Excel spreadsheet associated with the SPI tool so that the tool will calculate whether the FSP’s data is within the acceptable range AND whether it is within 15% of the peer price data.
  • If the FSP’s APR is in the green range than it can be marked as “yes”
  • If the FSP’s APR is in the yellow range, then the analyst must have a conversation with the senior management e.g., CEO, CFO etc. to understand why the price has been elevated and determine whether their justification is acceptable. Explanations that can result in the elevated price being justified include operating in insecure markets near war zones where income and expenses are unpredictable, large foreseen expenses in the short term, such as becoming a regulated institution, spending the proceeds from the FSP’s earnings on things to improve the client’s lives, such as schooling for their children, financial education, etc.  
  • If the price is in the red zone than the indicator is marked “no”
Sources of information
  • APR Estimation and Benchmarking tool  
  • Provider’s detailed product specifications and their average loan term and size
  • Relevant peer information to calculate APR on their major credit products (sometimes providers have collected it through market studies or mystery shopping)
  • NOTE: Do not use self-reported APR, which may not be calculated using the formula that is required for this analysis, rather insert raw data in the APR Estimation and Benchmarking tool
Evidence to provide
  • Ensure that you have enough comparable data from peers to score this indicator. Comparing to one or 2 other products on the market is not sufficient.
  • Make sure that you compare a large variety of loan sizes and loan terms

6.B.1.3 The provider discloses loan interest on a declining balance and according to the exact date of payment.

There are two different ways of disclosing the nominal interest rate: (i) on a flat basis, meaning that the interest disclosed is calculated on the initial amount of the loan, or (ii) on a declining balance basis, meaning that the interest is calculated on the outstanding principal amount.Disclosing the interest rate on a flat basis is considered unfair to clients, because it lowers considerably the nominal interest rate figure. Disclosing your interest rates on a declining basis is international best practice and is considered the only transparent and responsible practice.  

Scoring guidance
  • If the FSP discloses its interest rate payments on a declining balance basis than the score for this indicator is “yes”
  • If the FSP’s peers disclose their interest rates on a declining balance and the FSP uses a flat basis the score is “no”
  • If all peers in the country compute and disclose the interest rate to clients on a flat basis (i.e., based on initial loan amount), and the FSP also discloses this information on a flat basis, then it may be scored “Partially” as long as a transparent communication is in place and total cost of credit is disclosed.
  • For Certification, it may be scored “Yes” as an exception, validated by the Certification Committee, in the event that the FSP undertakes enhanced transparency of pricing disclosure to the clients.  
  • In a repayment schedule that is not regular, or in case of anticipated payment, the client should pay the exact amount of interest due for the period; in sum, the MIS should be able to calculate an exact daily interest rate. If not, then it is scored “partially”.
Sources of information
  • Product brochures and marketing material for clients
  • Sample loan repayment schedules / amortization schedules
Evidence to provide
  • Explain what you have observed in reviewing the marketing material and several repayment schedules from different products and client files
  • If you have scored “yes” or “partially” despite the disclosure of a flat interest rate, please provide a justification and demonstrate that the client receives a thorough and transparent communication on this topic.
Resources for indicator 6.B.1.3

6.B.1.4 Loan interest (including arrears interest) does not accrue past 180 days in arrears, at maximum.

When a client falls into delinquency, regular interests usually continue to accrue, meaning it increases the client’s amount due. Some providers also apply an additional penalty interest that starts accruing when the loan falls into arrears. Both these accruals should stop at the latest by the time the client enters more than 180 days in arrears, whether the loan is written-off or not.

Note: If the accounting regulation requires to keep accruing interest on the books, then the interests accrued after 180 days are 100% provisioned and not charged to the client.

Scoring guidance
  • If the FSP has a policy or the national regulation specifies that both regular and penalty interest should not be charged to the client after 180 days of arrears than the score is yes.
  • If the FSP charges the client penalty and regular interest past 180 days of arears the score is “no”
  • If the FSP stops charging regular interest but keeps charging penalty interest after 180 days of arears – or vice versa – than the score is “partially”, and “No” in Certification.
Sources of information
  • Interview with Finance/Accounting
  • Interview with MIS managers
  • Management Information System (MIS) parameters
  • Sample transactions computed on a delinquent loan
  • Interview with the head of credit
  • Credit manual
Evidence to provide

Explain the accrual process used by the FSP to calculate both regular and penalty interest on late client loans, including the number of days, if any, when these interests cease to accrue.

6.B.2 The provider charges reasonable fees.

Charge reasonable fees on all products

Pre-payment penalties, account closure fees, transaction fees, or other penalties should not be excessive. Pre-payment fees should be based on an evaluation of the actual costs incurred by the early repayment, and prepayment penalties should not include interest that would be accrued between time of pre-payment and the end of the loan term. Similarly, arrears interest and penalties should not compound debt; they are calculated based on the principal amount only.

Look carefully at the fees associated with savings accounts. Clients should be encouraged to save as much and as frequently as possible, even in small amounts. Withdrawal, account opening, and minimum balance fees can quickly erode small savings, so aim to keep savings account fees low.

With regards to insurance, you should not charge clients nor receive from the insurance provider an entrance fee, exclusivity fee, or initiation fee. These fees mimic a bribe or kickback for access to the financial provider client base, which can have a negative impact on the market (and ultimately clients) by driving prices up and/or locking a provider into long-term arrangements with an insurer.  

Finally, monitor the fees that agents or other third-party providers may be charging to your clients—for example, a transaction fee charged by an agent at the point of sale. Make sure that third-party fees are reasonable when compared to other similar actors in your market.

6.B.2.1 The provider does not charge clients for confirmation of transactions and balance inquiries.

Clients should have free access to their account information and loan balance any time. Clients should also receive transaction receipts (in paper or digitally) for free for every transaction. This applies to loans, deposits, and payment services.

Scoring guidance

The FSP must provide its clients with free 1) confirmation receipts for all transactions and 2) balance inquires in order to pass this indicator.  If the FSP only offers one of these items for free than the score would be “partially” e.g., all transactions receive free confirmation receipts, but balance inquires incur a charge after 3x per month. If neither of these things is provided or they are provided for a fee than the answer is “no”.

Sources of information
  • Interview with operations
  • Interview with front-line staff
  • Branch observation
  • Description of fees in product manuals or brochures
Evidence to provide

Explain the way clients receive confirmation of transactions and of account balances and any fees that may be incurred to receive this information.

6.B.2.2 Prepayment penalties do not include the interest that would have accrued between time of prepayment and the end of the loan term.

When a client wants to accelerate the repayment of his loan, some providers may apply a penalty to discourage the practice, and/or compensate for the loss of future profits on that loan. In such a case, a client should not pay any future interest on a principal amount that he has already repaid.  

Acknowledging that early repayment of a loan may represent a loss to the provider, penalties may be applied in the form of a fixed fee, or a percentage fee of the outstanding due, transparently disclosed at or before contract signature. These fees should be reasonable.

Scoring guidance
  • This indicator can be scored “NA” only if the provider doesn’t apply any fee or penalty on early or accelerated payment of loans.
  • This only applies for early repayment of the loan principal and not in the case that the client prepays a loan installment, which is assessed in indicator 6.B.1.3
  • If the FSP does not charge all the interest that would have accrued between the time of prepayment and the end of the loan term than the answer to this can be “yes”
  • If the fixed fee is greater than or equal all the interest that would have accrued between the time of prepayment and the end of the loan term then the score should be “no”
  • Use your professional judgement to determine if the fee equal to the FSP’s chosen percentage of the outstanding due is reasonable.
Sources of information
  • Sample loan contract with the mention of prepayment penalties
  • Interview with management and staff of the credit operations
  • Interview with Branch manager and branch staff
  • Sample transaction report for a loan with anticipated repayment – compared with the future interests that would have been paid
  • Credit manual – section on prepayment of loans
Evidence to provide
  • Describe the policy that the FSP has in place for when a client requests to pay off a loan early including the fees/costs associated with that choice.  
  • Describe if there are any exceptions to this policy e.g., for top up loans.
  • Provide your opinion on whether the penalty/fees are reasonable.

6.B.2.3 Arrears interest and penalties do not compound debt; they are calculated based on the principal amount only.

When a client falls in arrears, a provider may apply penalties and arrears interest. When stated as a percentage, the basis for calculation of these penalties and arrears interest should only be the current outstanding loan amount. It should not be based on the installment amount for instance, which includes regular interest.

Scoring guidance
  • If penalties are stated as a lump sum, then this is scored “yes”.
  • If the provider doesn’t apply any penalty for arrears, score “yes”.
  • If the penalty interest is calculated based on principal and interest, then the answer is “no”
Sources of information
  • Sample loan contract, look for where it mentions arrears interest and penalties
  • Interview with credit manager
  • Interview with Branch manager and branch staff
  • Check with the MIS department and the MIS accounting parameters
  • Sample transaction report for a delinquent loan
Evidence to provide
  • Describe the policy and practice the FSP uses to calculate arrears penalties and penalty interest
  • Describe if this practice is reasonable in your professional judgement.

6.B.2.4 If the provider offers savings, it charges reasonable fees on savings accounts.

6.B.2.4.1 Fees on deposit accounts are not disproportionately high relative to small deposit balances.
6.B.2.4.2 The fee structure for deposit accounts does not allow zeroing out accounts through repeated application of fees.

Fees on savings or deposit accounts can include: account management fees, withdrawal fees, fees for not fulfilling certain conditions, such as a minimum balance, or a specific term before withdrawal etc. The point of a savings account is to help the client accumulate a useful lump sum they can use to improve their life or manage emergencies. The fees on the savings accounts, especially those that are serving low-income clients, should have reasonable fees that don’t represent a burden to the client.

Scoring guidance
  • If the FSP does not offer savings, the indicator is NA.
  • If the provider offers savings, but applies no fees at all, both details can be scored “yes”
  • For detail 6.B.2.4.2, if there is a recurrent fee that may eventually zero out a dormant account, the provider should have a mechanism in place to remind the client how to avoid this fee (if it is a penalty), or to top-up his account.
  • If the provider offers savings and charges fees, then in order to pass the indicator the FSP 1) must charge reasonable fees for low-income clients who tend to have low balance accounts, AND 2) must not charge such high and/or repetitive fees that those fees can use up the client’s savings in the space of a year or two.
Sources of information
  • Savings product brochure / Fees description
  • A few sample account statements
  • The terms and conditions that the client signs when they open a savings account
  • Interview with product manager for savings
Evidence to provide
  • Describe the types and sizes of all the fees that can be charged to those who have savings accounts with the FSP.  
  • Provide your opinion as to whether each of these fees are reasonable or not.

6.B.3 The provider does not transfer unnecessary costs to clients.

As financial service providers with a social mission, you have a responsibility to operate efficiently and spend money prudently in ways that create value directly or indirectly for your clients. Forcing clients to pay excessively high prices to cover unnecessary costs or inefficiencies can undermine your social goals. For example, if the CEO is earning millions of dollars and this salary has to be paid for out of the provider’s earnings, then the profits to pay the CEO an inflated salary are generated off the fees paid by the poor clients. This would not be in keeping with the institutions mission if its social mission included goals such as improving the lives of its clients and their families, reducing poverty in their country etc. The goal of this practice and accompanying indicators is to prompt FSPs to analyze their expenses and make sure that those costs are in line with its social mission.

Field Examples and Resources

6.B.3.1 Loan Loss Expense Ratio (LLER Ratio) is within the accepted performance range. If it is outside the range, the provider can provide a valid justification.

For the purposes of this indicator, the LLER ratio is defined as the Net Loan Loss Provision Expense (annual) as a % of the average total assets over the year. The net loan loss provision expense represents the net value of loan portfolio impairment loss considering any reversal on impairment loss and any recovery on loans written off recognized as income during the accounting period.


In local currency, where n is the year for which you are analyzing the financial statements:

     Loan Loss Reserven – Loan Loss Reserven-1 - Recoveries of loans written offover period n         

LLERn = ----------------------------------------------------------------------------------------------------------        

                                     (Total Assetsn + Total Assetsn-1) / 2    


                             Net Loan Loss Provision Expensen - Recoveries

Or LLERn =      ----------------------------------------------------------------------

                                                    Average Assetsn

The accepted performance range is below 5%.

Scoring guidance
  • If the LLER is less than 5% than the score is “yes”
  • If the LLER is greater than or equal to 5% than the score is “no” unless some solid justification is present
  • The net loan loss expense can be negative if your PAR has considerably decreased or if you have changed your provisioning policy to a less conservative method. This will also receive a “yes” score.  
  • If the LLER is outside the range, look at recent trends that could maybe justify  a score of “partially”.
  • For Certification, this ratio needs to be analyzed as of end of latest quarter, as of year n (most recent year-end numbers available) and if very volatile, as of n-1.
  • The 5% threshold constitutes a high threshold, and performance should be below that threshold to pass this indicator, except in exceptional circumstances, which will need to be significantly substantiated to earn the FSP a “yes” score despite being in the elevated range.
Sources of information
  • Financial statements
  • Provisioning policy
  • Interview with CFO

NOTE: Do not use self-reported ratios, as they may not be calculated in the same way as required by this tool, rather recalculate using raw financial data.

Evidence to provide
  • Provide the ratio and the year of the data used to calculate that result.  
  • If you scored “yes” despite showing a ratio outside the accepted performance range, justify your score by describing the exceptional circumstances that explain the excess ratio, and how the provider is taking specific measures to avoid transferring this cost to the clients.

6.B.3.2 Operating expense Ratio (OER Ratio) is within the accepted performance range. If outside of the range, the provider can provide a valid justification.

For the purposes of this indicator, OER ratio is calculated as a % of average assets. Operating expenses consist of personnel expenses, administrative expenses (such as rent, utilities, supplies, advertising, transportation, communications, consulting fees etc..), and depreciation expenses. It excludes loan loss provision expense, financial expense, expenses linked to non-financial services and business income tax.

The accepted performance range is found by following a multi-factor model that estimates the expected OER given key factors of the provider and its operating context. The model considers the following variables: GNI per capita, rural population density, rural ratio (rural clients/total number of clients), average outstanding loan size, and assets. In the assessment of this indicator, there is a tolerance level of 6.5 percentage points above the expected ratio.

Scoring guidance
  • Use the CP4 Companion tool
  • Fill the table for key financial data in local currency, applying strictly no adjustments to financial statements.
  • The tool automatically conducts the Validity Test; this test verifies that the 2 sides of the accounting equivalence are within 5% margin of each other:
  • (Expenses + Return on Assets) ≈ Portfolio Yield  
  • If the test is invalid, it’s important to evaluate the source of the discrepancy and make necessary adjustments. For example if a provider has significant non-loan income, then this income should be excluded from financial statements for the OER calculation (asset base and ROA)
    • Loan portfolios held off-balance sheet should be recalculated using a “managed portfolio” basis, counting loans that are on- and off-balance sheet together. Income from portfolio and security sales linked to the off-balance sheet portfolio should be included as part of the portfolio yield.  
    • Adjustments for provisions – when these are insufficient – may be made and assets and related ratios recalculated accordingly.  
    • There should be no adjustments for subsidized debt.  
  • The tool automatically provides a uniform calculation of the provider’s OER; compare it to the maximum expected OER (automatically calculated in the tool).
  • In the assessment of this indicator, there is a tolerance level of 6.5% calculated in the tool and called maximum expected OER; this means that if the provider exceeds the expected OER by no more than 6.5%, the score is “Partially” (and “Yes” in the case of Certification)
  • If the provider’s OER exceeds the maximum expected percentage, then the indicator is scored “No”, unless there is a valid justification (see below for acceptable circumstances)
  • For Certification, a score “Yes” despite being outside the range has to be validated by the Certification Committee.
Sources of information
  • Financial statements
  • Interview with CFO
  • CP4 Companion tool
  • NOTE: Do not use self-reported ratios, which may not be calculated the same way, rather insert raw financial data in the CP4 Companion.
Evidence to provide
  • If the score is “yes”, provide both OER and expected OER.
  • If the provider’s OER is above the maximum expected OER, the following are the special circumstances that may serve as a valid justification for a “Yes” or “Partially”:
    • FSP operating in a low-security environment, requiring significant spending on non-standard security costs  
    • FSP serving an exceptionally under-privileged population, requiring add-on services (youth, disabled, etc.)  
    • FSP serving exceptionally remote clients, requiring large numbers of staff to regularly travel large distances. Serving rural clients does not qualify as a valid justification.  
    • FSP is operating non-financial programs that are useful to clients. In this case, it is proposed that the cost of the non-financial program be removed from the overall operation, and then the remaining OER compared to the expected value. If the new value is below the 6.5% tolerance level, then non-financial program cost may be allowed.  
    • When excess OER is observed only during a limited time-period linked to a specific event outside the FSP’s control (e.g. natural disaster, monetary crisis, etc.) it may considered justified only if OERs outside this period comply (in the past and in the projections).

6.B.3.3 Return on Assets (ROA) is within the accepted performance range. If outside of the range, the provider can provide a valid justification.

Return on assets is defined as the net income (after taxes and before donations) as a % of average assets. For the purposes of this indicator, the asset base is adjusted for compulsory deposits* (meaning that compulsory deposits are subtracted from assets). No other adjustments should be included in this analysis. The analysis looks at the average ROA (adj.) over the past 3 years.

The performance ranges of the Average adjusted* ROA over the past 3 years are:

  • < 1% = Low range
  • 1%-6% = Normal range
  • > 6% = High range

*Adjustment for compulsory deposits only. Compulsory deposits can substantially distort pricing and other financial metrics. For further analysis, financial metrics should be adjusted, retrieving compulsory deposits from the GLP and Asset base.

While we acknowledge that the question of “what level of profit is deemed acceptable” is more driven by moral concerns rather than financial and economic concerns, you need to draw a line somewhere. The cap of 6% has been chosen to leave room for the FSPs to demonstrate a profitable and sustainable business model while being consistent with international best practice for responsible pricing.

ROA in the low range brings into question the long-term sustainability of the provider. ROA in the high range ultimately means the clients are paying excessive prices; the provider should thus consider reducing its interest rates and fees.

Scoring guidance
  • Use the CP4 Companion tool for uniform and automatic calculation
  • If the ROA falls into the normal range then the score is “yes”
  • If the result for average ROA falls in the high range, the score is “No” unless there is a valid justification (see below).
  • If ROA falls into the low range, the score may be “partially” because it is questionable whether the pricing levels will allow for the long-term sustainability of the provider.
  • For Certification, a score “Yes” despite being outside the range has to be validated by the Certification Committee.
Sources of information
  • Financial statements – historical and forecast
  • Dividends policy / Shareholder agreement
  • Interview with Board
  • Interview with CEO
  • Interview with CFO

NOTE: Do not use self-reported ratios, which may not be calculated the same way, rather insert raw financial data in the CP4 Companion tool.

Evidence to provide
  • Provide the average ROA over the past three years, and whether the result falls into the low, normal, or high range.  
  • If the result falls in the low range, assess the sustainability of the provider and its ability to serve clients in the long run. How is ROA projected to evolve in the next 2-3 years? In case the low ROA is consequent to a crisis, what were the ROA levels before the crisis?
  • If high profits mainly benefit shareholders above the levels justified by the operating context (e.g. inflation), then the FSP’s profitability should be seen as inconsistent with responsible pricing.
  • If the result is in high range, the following exceptions can be considered:  
    • Inflation: average ROA can be in the high range but cannot exceed the period’s average inflation (average inflation over the past 3 years).  
    • Diverting profits to non-profits that serve their clients with non-financial services. This may only be used as justification for excess ROA up to the amount that is actually passed on to the relevant non-profit entities. This allowance is capped at 1% making the maximum justifiable average ROA 7%.  
    • Borrower retention rate above 75%: this can be an appropriate justification, only up to 7% average ROA.  
    • Time-bound Exceptional Event: If excess ROA is observed only during a limited time-period, linked to recovering after a specific event outside the FSP’s control (e.g. natural disaster, monetary crisis, Covid crisis, etc.) it may be justified, only if the average ROA outside this period complies (in the past, and in the projections). This is particularly relevant for NGOs, that cannot raise outside equity. Care should be taken to not apply this exception for institutions that rely on high retained earnings to make up for frequent periods of high losses, especially where there is no reasonable external explanation.
  • NOTE: The following arguments DO NOT justify a high average ROA:  
    • Shareholders expectations of returns
    • Country or political risk
    • Early stage FIs / startups
    • Building up equity and strengthening the institution (except after a crisis or in preparation for a big change, like becoming a regulated institution)
    • Growing outreach under limited access to equity
    • Profits shared with clients

6.C.1 The provider engages with equity investors whose investment strategy is aligned with the provider's social goals.

When your institution is seeking equity investment, seek funders whose expectations for financial returns, social returns, time horizons, and exit strategies are aligned with your own. It is important that in the structuring stage of an investment agreement, the terms of the transaction explicitly recognize and seek to preserve your institution’s social goals, which include your growth and profitability targets, discussed above. If terms such as expected social outcomes and use of profits are left unarticulated in pre- investment negotiations, management will be forced to reconcile these inconsistencies once funding is already in place, which often leads to tension between the institution and funders.

As a starting point, each new equity investor should study the mission and social goals of the institution and its strategy for achieving them (see standard 1a). Doing so ensures that the investor understands that the mission of your institution is not to maximize financial performance but to balance financial and social performance. A funding agreement should include an explicit articulation of your institution’s approach and goals with respect to financial and social performance, which will be included in the formal documentation of the transaction. Likewise, you should perform comparable due diligence on potential investors, so that your board and management are confident that investors share your social and financial goals.

The table Aligning Social and Financial Expectations lists the terms that should be mutually decided on by your institution and potential investors, alongside discussion questions that will help both parties determine whether the terms are aligned with your institution’s social goals.

Field Examples and Resources

6.C.1.1 The provider discusses its social goals with potential equity investors and asks about their planned timeframe for investment and exit strategies to assess alignment on social strategy.

Sometimes the financial institution’s options for outside funds are limited, but in as much as it is possible for the financial institution to insist upon and cultivate relationships with investors who share the institution’s social goals, it will benefit the institution in the long term. Equity investors that insist on higher returns, quick exit in the event of a crisis, or other similar actions, may not truly supporting the financial institution’s social mission. These differences in priorities can lead to tension between the FSP and its investor or mission drift. The indicators below seek to avoid these difficult situations.

Scoring guidance
  • If the institution has no equity investors than the score is NA  
  • If the senior management of the organization routinely brings up 1) its mission / social goals and 2) exit strategies with its potential investors, then the score is a “yes”
  • If the institution discusses only one of the items above the score would be “partially”
  • If the institution does not have these discussions with its investors the score is “no”  
Sources of information
  • Interviews with the CEO, CFO
  • Interviews with a Board member and/or investor (especially if they have a seat on the board)
Evidence to provide

Describe the process of taking on new equity investors from the interviews with the leadership of the FSP. Describe whether and why you think this meets the criteria in the indicator.

6.C.1.2 The board of directors prioritizes accepting investment offers from investors whose investment strategy is aligned with the provider's social strategy.

In many countries the choices for outside investment are limited but in as much as it is possible the financial institution should prioritize accepting investment offers from investors who share their mission and values.  

Scoring guidance
  • If the board takes the investors’ alignment with the institution’s social strategy into account when agreeing to the investment, then the score is “yes”.
  • If the institution doesn’t have any/many options for outside investment then the score is “no”
  • If the institution does not have any outside investors the indicator is NA.
Sources of information
  • Interview with a board member
  • Interview with the CEO, CFO
  • Interview with invesor on the board
Evidence to provide
  • Describe the types of investors that the institution has taken on in the last year or two and whether they are aligned with the institution’s social strategy. Offer some information on the country context and institutional context to show which, if any, options the institution has regarding sources of investment funds. Describe why you think their actions meet the criteria in the indicator.

6.C.1.3 The shareholder agreement specifies the following:

6.C.1.3.1 Commitment to social goals
6.C.1.3.2 Expected level and use of profits
6.C.1.3.3 Expected investment timeline / exit strategy

Your institutional policy (bylaws, statutes, shareholder agreements, etc.) should be very clear on the use and allocation of profits. It should detail how much of the current year’s profit is expected to be distributed in dividends and bonuses for staff and/or management, how much should be allocated to general reserves to maintain a good capital adequacy in the context of growth, and how much will be allocated to create benefits to clients. Your institution should also clearly state whether it has a goal to lower interest rates for clients as long as profits remain above a certain threshold.

Scoring guidance
  • If the institution has no shareholder agreements, then the score is NA.
  • To get a “yes” the institution has to include all three of the details in all its shareholder agreements: 1) social goals, 2) expected profits, and 3) exit strategy.  
  • If any of these three criteria are missing from the shareholder agreements then the score is “partially.”
Sources of information
  • Shareholder agreements (the institution’s often won’t share these)
  • Interviews with the board
  • Interview with the CEO, CFO
Evidence to provide
  • Quote the passages from the shareholder agreement that fulfill the criteria in the Details. Or reference the investor with whom the shareholder agreement was made and the page number where the answers to these Details can be found.  
  • Describe whether there is a process for including these criteria in the shareholder agreements or whether it seems ad hoc.

6.C.2 The provider uses its profits for expenditures that benefit clients.

Higher yield targets might be acceptable if excess income is used to benefit clients. Some examples include investments in: market research/product design/product testing so that products fit better with clients’ needs; client monitoring; improved client protection practices (e.g., creation of a client complaints mechanism or revision of loan contracts to improve their transparency); improved staff training on customer service; or extension of services into unbanked geographic locations. If high profits mainly benefit shareholders above the levels justified by the operating context (e.g., after accounting for inflation, country risk, etc.), then your profit/profit targets are most likely inconsistent with your social goals.

6.C.2.1 The provider's use of profits in the previous year included at least one of the following investments: strengthening its social or environmental performance management practices, provision of non-financial services, lowering of prices, or local community investment.

The use of the profits helps determine if the level of profits is appropriate, especially if the yield on the portfolio or ROA is in the elevated range. If some of the profits are used to benefit clients, such as lowering interest rates, offering educational services for clients and/or their children, or designing new products to meet client needs then that use of profits is pro-client can be acceptable. If the level of profits is in the elevated range and the institution is not using those funds to benefit clients then it is simply over-charging its clients in order to generate profits for executives and shareholders, which is not in keeping with the goals of responsible finance.

Scoring guidance
  • In order to score “yes” on this indicator the financial institution must have implemented ONE or more of the 4 pro-client actions mentioned in the indicator within the 12 months prior to the evaluation. These 4 pro-client actions include:  
  • “Strengthening social or environmental performance” includes spending on anything that allowed the institution to implement more of the practices described in any of the seven dimensions of the Universal Standards  
  • “Non-financial services” include any activities offered to clients outside of straight financial services (loans, savings, insurance) such as business development training, health education or preventative health screening, educational opportunities for the clients and their children, etc.
  • Lowering prices usually means lowering interest rates on credit but it could also be delivered through higher interest paid on deposits or eliminating a fee or commission that was formerly charged to all clients. These reductions should be for all clients not just the clients with a strong repayment history.
  • “Community investment” includes activities that benefit the communities where the clients live, such as planting trees, installing clean water sources, electrification, sanitation, and cultural or entertainment activities that can bring the community together.  
  • If  the institution earned no profits in the past year than the indicator is NA.
Sources of information
  • Interviews with the manager in charge of non-financial services
  • Interview with the head of credit – to check for changes in interest rates and why
  • Interviews with the SPM officer to see what projects to implement the Universal Standards may be underway
  • Interview with a representative of the financial institution’s Foundation which often is established to provide financial literacy or other pro-client interventions and is funded by the FSP.
  • Interview with staff who work on sustainability initiatives
  • Annual report
  • Financial statements that show level of profit
Evidence to provide

Description of the types of pro-client activities that have been implemented in the year prior to the evaluation and the extent of these activities e.g, by how much were interest rates loweres, how many clients were reached with BDS training etc

Resources for indicator 6.C.2.1

A mini case describing how the MFI used its profits in pro-client ways e.g., Banco Sol offewred school supplies to their clients, lowered interest rates etc.

6.C.2.2 The provider has a policy that specifies when dividends may be paid and in what amount, in alignment with its social goals.

The profit generated by the FSP is often generated through the payments made by low-income clients and therefore the financial institution must consider when and at what level dividends may be paid to ensure that the payment of dividends to members or shareholders in done in line with the social goals/values/ mission of the FSP.

Scoring guidance
  • To obtain a “yes” for this indicator, the FSP must comply with the following three items:
  • This indicator requires a policy, which means a formal document approved by the institution’s board, so it must be an actual policy (not a documented process and not recorded in the board minutes) in order to pass this indicator.  
  • The policy must specify WHEN dividends may be paid e.g., how many times per year and under what conditions e.g., ROA is in the elevated range and HOW MUCH can be paid out in dividends.  
  • The details of how dividends are paid out should be in alignment with the FSP’s social goals.  
  • If any of these items are missing from the policy then the score is “partially”
Sources of information
  • The policy on dividends, which may be contained in the credit manual or member charter or other type of document.
  • Interviews with the CEO and CFO
Evidence to provide

Description of which document contains this information (title and page number) and a breif summary of the content of the policy with regards to when dividends may be paid. The analyst should include whether, in her professional judgement, the FSP’s policy is in fact in line with its social goals.

6.C.3 The provider has a transparent financial and social structure.

Transparency regarding social objectives and return expectations is critical to a full alignment between investors and the provider. Your institution should also be transparent on all the risks it bears, notably financial risks. Serving vulnerable clients and operating in unstable environments with unreliable or non-existent deposit insurance means that your institution has a responsibility to be transparent and closely manage risk. In keeping with the International Financial Reporting Standards (IFRS), your institution should disclose in its financial statements all risks related to assets or liabilities (foreign exchange risk, interest rate risk, maturity risk, etc.), delineate contingent liabilities2, disclose off balance sheet items3, count them in leverage ratios, and provide all details of your shareholding structure and participations in other companies. Make public your annual audited accounts.

6.C.3.1 The provider publicly discloses its annual audited financial statements.

This is a minimum requirement for the financial institution to be transparent with its stakeholders. Regulators, investors, and social auditors all need access to the audited financial statements to be able to make informed decisions regarding the financial service provider. Accounting standards sometimes differ by country however, every financial service provider should publish its annual audited financial statements in accordance with their national audit requirements or the IFRS standards.  

Scoring guidance
  • If the FSP publishes its audited financial statements than the score is “yes”  
  • If the financial statements are not audited and are not publicly disclosed than the score is “no,” while if only one of these factors is missing then the score is “partially”
Sources of information

The financial statements should be available on the FSP’s website. Sometimes the latest year’s results are not up yet and must be emailed to the auditors by the FSP’s staff. Ideally the analyst will review the last three years' worth of audited financial statements to understand the trends and results contained therein.  

Evidence to provide

Link to the audited financial statements posted online

6.C.3.2 The provider discloses the results of its social audits and outcomes measurement to all stakeholders, upon request.

Transparency in financial performance is important (6.C.3.1) and the goal of this indicator is to extend that level of transparency to the institution’s social performance as well. Social audits, social ratings, outcomes studies, client satisfaction surveys, impact evaluations etc. can all help the FSP’s stakeholders understand the FSP’s practices and priorities.

Scoring guidance

The social auditor is one of the stakeholders that the provider should disclose its social evaluations to upon request, so the level of forthcomingness of the financial institution with the social auditors will be indicative of their openness to share these types of results with other stakeholders such as raters, investors, and public entities. If the FSP discloses these types of documents to the social auditors without issue then the score is “yes”.

Sources of information
  • The provider’s website
  • Documents requested from the point person within the FSP who is facilitating documents for the social audit.
  • Sometimes national or international networks or national regulators will post this type of information about their member institutions as well.
Evidence to provide

List the types of evaluations that the institution has commissioned in the past 2-3 years and whether the analysts were able to review a copy of the reports. This will include things like social rating reports, financial inclusion index reports, ISO or client protection certifications, customer satisfaction survey results, impact evaluation reports etc.  Sometimes links can be included to these reports if they are posted on the company’s website.

6.C.3.3 The provider discloses the compensation of senior management to donors, raters, investors and other stakeholders, upon request.

The goal of this indicator is to ensure that the FSP’s stakeholders can obtain the information necessary for them to determine if the compensation paid to the FSP’s executives, senior management, and board members is appropriate for the responsible inclusive finance sector and consistent with the FSP’s social goals. Disclosing this information publicly may represent a security risk in some countries and therefore this indicator does not require public disclosure, rather only disclosure to relative parties upon request.  On a one-off basis the FSP should be able to disclose this information to its regulators, investors, and auditors upon request.  

Scoring guidance

The social auditor is one of the stakeholders that the provider should disclose its leadershp’s compensation to upon request, so the level of forthcomingness of the financial institution with the social auditors will be indicative of their openness to share this type of information with other stakeholders such as raters, investors, and public entities. If the FSP discloses this information to the social auditors without issue then the score is “yes”.

Sources of information

The head of HR or the CEO should be able to answer questions about the compensation – both variable and fixed – for the institution’s executives, senior managers, and board directors.  

Evidence to provide

Summarize the information from the interviews with credit and HR and CEO/CFO addressing both the transparency of the FSP regarding compensation and the actual compensation. When documenting this indicator it is important to understand both fixed compensation (salary, base pay, etc.) and variable compensation (may include incentives, bonuses, commissions, non-monetary perks etc.). As a rule of thumb, we hope that the compensation of the CEO is not more than 25 times the compensation of the field officers.