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Measuring Social Performance in Social Enterprises: A Global Study of Microfinance Institutions

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Abstract

Social enterprises in the microfinance industry need to adhere to both financial and social demands. Critics argue that there is a mission drift away from the social mission, and this has motivated the introduction of social rating agencies to strengthen the business ethics of microfinance institutions (MFIs). Using a global dataset of 204 socially rated MFIs from 58 countries, we assess the factors that drive the social performance ratings of MFIs. Overall our results show that social ratings of MFIs are significantly related to financial performance, greater outreach especially in rural areas, well-defined social objectives, staff commitment, service quality and an enhanced customer service. We observe that various rating agencies attach different importance to each of the social indicators. The public policy implication is that social rating agencies need to become more transparent, to reduce the information asymmetries between heterogenous socially motivated investors and the focal MFI.

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Fig. 1

Source Clark and Sinha (2013, p. 1)

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Notes

  1. https://www.weforum.org/agenda/2019/02/social-entrepreneurs-in-the-spotlight-at-davos-2019/.

  2. In Table 6, we actually find a positive correlation between portfolio yield and social rating scores for MicroRate and Microfinanza.

  3. In addition we estimate the Variance Inflation Factors (unreported) for the major explanatory variables. The results demonstrates that our model is free of serious multicollinearity problems (Hair et al. 2010).

  4. In addition to the main test variables specified in Table 3, we substituted the indexed measures of the Universal Standards with six variables, one for each standard. Guided by the Smart campaign’s Client Protection Principles, we selected the following six variables arranged consecutively for standards 1 to 6: (1) Soc_obj is a dummy variable that = 1 if the MFI has clearly defined social objectives, (2) Staff_commit is a dummy variable that = 1 if the rating agency considers the MFI’s staff to be committed to social goals, (3) Client_retent_rate is the client retention rate of the MFI, (4) IR_transprncy is a dummy variable that = 1 if the rating agency considers the MFI to be transparent in charging interest rates, (5) Staff_tover is the rate of staff turnover in the MFI, and (6) OSS is the level of operational self-sufficiency. The unreported results of this test are similar to the main results reported in Panel B of Table 7.

  5. Results of Chow Statistics also demonstrates a statistically significant difference in the assessments made by the three rating agencies (Chow 1960).

  6. Regardless of possible reverse causality, it should in any case be interesting to assess whether the rating agencies “practice what they preach” and assign scores according to their own stated policies (Clark and Sinha 2013).

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  1. School of Business and Law, University of Agder, Servicebox 422, 4604, Kristiansand, Norway

    Leif Atle Beisland, Kwame Ohene Djan, Roy Mersland & Trond Randøy

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  1. Leif Atle Beisland
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Beisland, L.A., Djan, K.O., Mersland, R. et al. Measuring Social Performance in Social Enterprises: A Global Study of Microfinance Institutions. J Bus Ethics 171, 51–71 (2021). https://doi.org/10.1007/s10551-019-04417-z

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