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Microfinance Industry – Financial Reporting Standards Initiative

Survey Results Brief


EXE C U T I V E From September to October 2008, The organization. Support for the Microfinance
SEEP Network sponsored the survey, Information eXchange (the MIX), The
SU M M A R Y “Financial Reporting Standards for SEEP Network, or the Consultative Group
Microfinance.” This brief provides a to Assist the Poor (CGAP) was split almost
short summary of the results. More than evenly. One conclusion is that respondents
160 people—broadly distributed around strongly want to avoid “re-inventing the
the world—responded, representing a wheel” or “duplicating existing effort.”
wide spectrum of stakeholders, including
The SEEP Network is prepared to
microfinance institution (MFI) directors,
continue to facilitate this collaborative
industry practitioners, network leaders,
effort, with inclusive communication
raters, MIS software vendors, investors,
from other industry representatives.
donors, bankers, and researchers.
The respondents had a number of
Overall, they expressed a concurrence that thoughtful comments regarding how the
financial reporting standards are a priority initiative could operate, which will be
both for the industry and for individual helpful as it moves forward. Resolution
institutions to address. At least 87 percent on the entity’s form, membership, and
saw this initiative as “very important” or process were identified as next steps.
“important” for the industry. Common
Information on this initiative is online
concerns and priorities were articulated
at www.seepnetwork.org and the
across the spectrum of interest groups,
Enterprise Development Exchange
including a need for this initiative to:
http://communities.seepnetwork.org/
1) develop internal consensus within edexchange/node/1799. A short concept
the industry on a common platform paper on the Microfinance Reporting
for reporting that saves MFIs, Standards Committee was published earlier
investors, and donors time; and in 2008.1 A report on business model
options from work by other industries on
2) establish external connections to standards, a corollary to this brief, is also
existing international standards efforts, available for free download online.2 The
such as the International Accounting initiative actively seeks input, ideas, and
Standards Board (IASB) International time from stakeholders. The initiative
Financial Reporting Standards (IFRS). facilitator, Drew Tulchin, can be contacted
While there was a preponderance among at drew@socialenterprise.net. The
responses that the initiative would be aggregated survey data (with entries listed
well served by a formal entity, such as anonymously) is available upon request.
a standing committee, there was no Although the industry is made up of
unanimity on its management. The vast diverse stakeholders with widely varying
majority of respondents (83 percent) opinions, the results of this survey highlight
recommended instituting a centralized the extensive common ground as well
body to lead financial reporting standards as common interest in advancing the
for microfinance. Despite this overarching financial reporting standards initiative for
support, there was no consensus on where microfinance. The initiative is energized
to house such a body: 26 percent suggested by the continued contributions from
IASB, and 21 percent an independent its supporters of thoughtful ideas and
entity. The most common response (44 generous time commitments for the
percent) suggested that it be housed betterment of the industry as a whole.
within an existing microfinance support
1
Financial Services Working Group. “Microfinance Reporting Standards Committee Concept Note,” The SEEP Network, November,
2008. www.seepnetwork.org/files/6172_file_MF_Standards_Committee_concept_note_logo_up_11.09.08_ONLINE.pdf
2
Financial Services Working Group. “Business Models Report,” The SEEP Network, November, 2008. www.seepnetwork.org/files/6171_
file3_MFI_Reporting_Standards_Biz_Models_11_4_08.pdf
Microfinance Industry
Financial Reporting Standards Initiative

SECTION 1

Introduction & Background


The fast pace of change in the microfinance These include updating the 2005 standards,
industry calls for reporting standards responding to the increase in international
that ensure industry developments can investors, aligning national level regulatory
be quickly translated into comparable requirements with international standards,
information. New products, operational supporting MFI vendors (including raters,
models, and service delivery channels MIS software sellers, and consultants)
require that standards, particularly for to develop a “gold standard” for their
financial reporting, remain up to date and products, increasing dissemination of
applicable. In 2005, The SEEP Network performance and management tools (such
published the first update to microfinance as the SEEP FRAME), and ensuring that
reporting standards in 10 years, a process MFIs can readily adapt to international
of consensus that engaged practitioners, standards (such as the International
donors (including CGAP), investors, and Financial Reporting Standards, or IFRS).
other stakeholders. The “Framework,” as it is
commonly referred to, is now considered the In 2007 at the SEEP Network Annual
“industry standard.” While widely accepted General Meeting, SEEP Financial Service
in the industry, acceptable ratios and terms Working Group members identified
still have not been universally adopted. financial reporting standards as one of
the top priorities for SEEP’s attention. A
Microfinance as an industry does not have sub-committee of the Working Group was
a central body or mechanism to address founded to facilitate what is now called the
compliance or updates to financial reporting “Microfinance Industry Financial Reporting
standards. A number of issues are rising Standards Initiative.” The survey reported
in importance for which a central industry here was a major step in the process of
entity would be well placed to address. gathering input to chart a path forward.

CHART 1 SECTION 2
Respondents
Respondent Profile Rate
Respondents’ Profile
MFI Practitioner 21%
The sample of respondents had both CHART 2
Network/Association 19% breadth and depth, as 162 people
responded to the survey. The respondents
Geographic Focus
MFI Service Provider 15%
represented a broad cross-section of
Investor or institutions (see chart 1), including Global
13%
Commercial Bank
the leading voices in microfinance. Asia
Researcher/Education 12% Respondents’ positions included manager/
program officer (29 percent), organizational Africa
Consultant 11%
head (22 percent), vice president/director North America
Donor 8% (16 percent), and analyst (9 percent).
South America
Respondents spanned the globe.
Europe
The most common areas of focus
were those identifying their work as 0% 5% 10% 15% 20% 25% 30%
global—28 percent covered more than
one continent; 23 percent, Asia; and
21 percent, Africa (see chart 2).
The SEEP Network • 1875 Connecticut Avenue, NW • Suite 414 • Washington, DC 20009 • USA
2 Phone: +1(202) 464-3771 • Fax: +1(202) 884-8479 • www.seepnetwork.org
Microfinance Industry
Financial Reporting Standards Initiative

SECTION 3

Opinions on Microfinance
Reporting Standards
BOX 1 The respondents were asked questions tools were notably higher than for
about the microfinance industry’s use of respondents as a whole. This reflects an
Rank Order: reporting standards and perceptions of its uneven value placed on standards efforts
Reasons importance. Overall, the data confirmed in the industry, a range of knowledge
for Using that, while the industry’s approach to on the subject, and varied levels of
Reporting Tools reporting standards remains fragmented, adoption. Although not unexpected,
there is a consensus that reporting standards these results confirm that while the
1. Internal Management are important for the industry. And, there microfinance industry is making headway
2. Operational Control was widespread support for more universal in understanding and valuing financial
3. Provide Information to
benchmarks and mechanisms to adopt reporting standards, progress toward
Investors standards. In order to establish effective industry-wide utilization remains uneven.
industry-wide reporting standards, the data The microfinance industry recognizes the
4. Regulatory Compliance suggested that the microfinance industry importance of reporting standards generally,
5. Audit Information must not only focus on a common “vision” and universal standards specifically. There
among major stakeholders regarding what is broad agreement among respondents
6. Industry Comparisons standards should consist of but also focus that reporting standards are either
7. Easier to Understand on building the institution-level capacity “very important” or “important” for the
MFIs necessary to ensure information is effectively industry as a whole (87 percent). They also
8. Normalize Differences disseminated and widely adopted. expressed support for the establishment
Between MFIs Most organizations have reporting of universal standards for the industry,
standards, but the industry’s approach with 81 percent supporting this issue
remains fragmented. The vast majority as “very important” or “important.”
of respondents (76 percent) reported Barriers to establishing standards must be
Survey Fact… that their organization had a specific understood. Respondents were helpful in
tool for financial reporting. However, identifying obstacles that must be overcome.
their motivations for reporting standards The most common reasons cited against
varied. A weighted scoring was made of universal standards were that different
respondents’ priority answers as to why they stakeholders want different information
valued reporting tools, listed in Box 1. (19 percent) and that the diversity of
Among those using reporting tools, the institutions within microfinance makes
87% leading reasons they used such tools were
internal management (40 percent cited
universal standards inappropriate (18
percent). Such observations correctly
this as the top priority; 62 percent as the identify real challenges to both the
first or second priority), and operational development of universal standards and
87% of the microfinance control (20 percent cited this as the top convergence around reporting. Strategies
industry respondents priority; 65 percent chose it as first or to surmount these barriers include dialogue
recognize the importance
of reporting standards second priority). These were followed by and engagement. Initial advancement is
using the tools to provide information possible in areas where there is common
to investors and to ensure regulatory ground, by focusing on best practices and
compliance. Next, respondents cited acknowledging that this is an on-going
the value of standards tools for audit process of continued improvement. It
information and industry comparisons is important to note that the difference
(such as the MIX’s Microbanking Bulletin between the application of specific ratios in
(MBB)). Lower priorities used reporting various reports, where different institutions
tools to make it easier for the financial have the flexibility to use the information
sector to understand microfinance and to they value, and an over-arching process
normalize the differences between MFIs. for industry standards that can interface
Among networks and service providers, with other international guidelines.
use and understanding of standards
The SEEP Network • 1875 Connecticut Avenue, NW • Suite 414 • Washington, DC 20009 • USA
3 Phone: +1(202) 464-3771 • Fax: +1(202) 884-8479 • www.seepnetwork.org
Microfinance Industry
Financial Reporting Standards Initiative

What Survey SECTION 3, CONTINUED

Respondents Our colleagues elaborated upon factors practices, such as different treatments for
Had To Say limiting reporting in the microfinance
industry. The most common responses are
loan loss provision, delinquency, write-
offs, etc. Twelve percent mentioned the
COMMENTS A
identified here, listed in chart 4. Forty- tension between meeting global standards
“There must be a four percent of the respondents cited and domestic regulatory requirements.
thorough discussion lack of universal standards as the primary Meanwhile, 8 percent emphasized
among MFIs, regulator, barrier limiting reporting. Twenty-one the balance needed between financial
investors, donors, and
percent commented on divergent business and social objectives for standards.
auditors on the need of
standard reporting. It CHART 3
may not be possible to
have one set of reporting Key Issues in Reporting for Microfinance to Resolve
globally because
there may be some Universal Standards 44%
local issues, such as
methodology of services, Business Practices 21%
maturity of industry, and
auditing and taxation Tension Between National/Global Standards 12%

acts. Thus, the standard Balancing Financial and Social Objectives 8%


should have some
flexibility to adopt as per
local requirements.” 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
“Reporting standards
need to respect (45 percent), the high cost associated with
COMMENTS A SEE SIDEBAR
accounting principles completing multiple reports (14 percent),
and reports need to be Survey respondents were also asked about lack of transparency (14 percent), and
TRUE AND FAIR and be industry challenges at the institutional level. the need to balance financial and social
complete…” Firm-level challenges include lack of capacity reporting (9 percent). See Chart 4 below.
COMMENTS B
CHART 4
“Each report adds to the
burden of an MFI. With Key Standards Issues at the Institutional Level
a less-than-adequate
management information
system (MIS), an MFI Lack of Capacity 45%

has to create many of High Cost of Compliance/Multiple Reporting 14%


them manually. This
takes a lot of time away Transparency 14%

from addressing real


issues faced by the Balancing Financial and Social Objectives 9%

MFI. I wish this reporting


was made easier. There 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
is a huge need for a
universal MIS capable Institutional-level problems are congruent affordable, internal industry dialogue is
of generating universal with the industry-wide problems. Taken on-going, communication is maintained
reports in compliance together, they highlight the fact that with external players, information is widely
with the industry’s correct balance is needed when advancing disseminated, education and training
best practices.”
this initiative. It is important to establish is available to ensure adoption, and
“Accountability is a and maintain rigorous, industry-wide, incentives are provided to fuel adoption.
key issue because an universal, global standards as a “gold ring”
MFI may not always COMMENTS B SEE SIDEBAR
to reach for. Progress for this initiative
validate results reliably must ensure that reporting tools are
and may not be held
responsible either.”

The SEEP Network • 1875 Connecticut Avenue, NW • Suite 414 • Washington, DC 20009 • USA
4 Phone: +1(202) 464-3771 • Fax: +1(202) 884-8479 • www.seepnetwork.org
Microfinance Industry
Financial Reporting Standards Initiative

SECTION 4

What Survey Establishing an Entity


Respondents
Had To Say to Lead Standards Efforts
COMMENTS C Industry-wide agreement on the importance Furthermore, 76 percent agreed that
of reporting standards provides common this would be either “very important”
“If all MFIs are equipped ground from which diverse stakeholders or “important” for the industry.
with an effective can work together. The survey also enquired
reporting tool, that how such work should be done. Responses Among those agreeing that a committee
will free up much would be worth while, the lead reason
capacity at the MFI
largely supported the idea of establishing a
formal industry entity, such as a committee, for its utility was to set industry common
level and allow the guidelines and benchmarks (41 percent).
network organizations to focus on setting common guidelines,
standards, and benchmarks for the Other value for a committee included
(if applicable) to more bringing together diverse stakeholders (14
easily analyze and microfinance industry. Questions of where
consolidate data for to house the initiative and how to effectively percent), to serve as a watchdog/regulatory
better reporting to operate it day-to-day remain to be answered. body (8 percent), and act as a global face for
stakeholders.” microfinance to external parties (7 percent).
CHART 5
“If we are to maintain the COMMENTS C SEE SIDEBAR
integrity of the industry Is a Microfinance Entity or Although in the minority, respondents who
then this is vital. When
I talk to individuals Committee Worthwhile? did not think establishing a committee
about investing in would be useful provided important
microfinance, they Yes, 83% information to explain their position. The
invariably ask similar reasons for this stance included belief that
questions, all of which it would be a duplication of existing efforts
may be answered within the microfinance industry (CGAP
with simple, basic, and SEEP’s other activities were cited),
honest reporting. If this skepticism that it would not be possible to
is the case, people
will tend to be much
forge a consensus because of the diversity
more forthcoming in among MFIs, and concern that it could not
supporting institutions be an effective body without sanctioning
and the industry. Where powers. This initiative will develop written
there are unanswered responses to these reasonable critiques
questions and things and document the value a new initiative
obviously being avoided, No,17% would bring as a means to foster better
then people get rightly discussion. Furthermore, the initiative will
nervous and skeptical, coordinate with other industry initiatives
which spells disaster for There is widespread support for establishing to ensure there is no duplication of efforts
the industry as a whole.” a central body to guide industry efforts on and to avoid “re-inventing the wheel.”
“The industry needs microfinance reporting standards.
an entity to lead the Eighty-three percent of respondents
stakeholder engagement agreed that establishing a central entity
process to develop to guide industry efforts on microfinance
reporting standards… financial reporting standards would be
The committee could a worthwhile addition to the industry.
play this role.”

The SEEP Network • 1875 Connecticut Avenue, NW • Suite 414 • Washington, DC 20009 • USA
5 Phone: +1(202) 464-3771 • Fax: +1(202) 884-8479 • www.seepnetwork.org
Microfinance Industry
Financial Reporting Standards Initiative

SECTION 4, CONTINUED

What Survey COMMENTS D SEE SIDEBAR chart 6). Externally, the International
Accounting Standards Board (IASB)
Respondents The survey data raised both answers and
questions about the committee’s structure
was the single most popular option (26
Had To Say and logistics. Although respondents
percent), followed by establishing an
independent entity (21 percent response).
generally support forming a central
COMMENTS D Housing this initiative within an existing
entity, organizational details must now
“Oversight of reporting MFI institution was the most common
be resolved to move the process forward.
standards requires response at 44 percent. This was split
leverage (e.g., ability
There were multiple suggestions regarding
among the MIX at 18 percent, SEEP at
to assess penalties), where a committee should be housed,
14 percent, and CGAP at 14 percent.
otherwise the with no answer receiving a majority (see
committee is unlikely CHART 6
to gain credibility.”
Where Should the Initiative be Housed?
“There are enough
entities working on IASB
reporting standards.
And, adding another Independent Entity
one dealing with it could
complicate a correct the Mix
use of information.” SEEP Network 44%
CGAP

0% 5% 10% 15% 20% 25% 30%

Respondents noted important development of useful tools, and help


considerations affecting the decision on for external auditors. No suggestion
where to house the entity. Their comments received more than 25 percent of the
emphasized the importance of impartiality, votes. Therefore, a diverse and coherent
industry connections to on-the-ground dissemination strategy, as well as an on-
organizations, global reputation, and the going process will be necessary to ensure
host’s core competencies. To gather an “uptake” of standards. Primary suggestions
informed response to these comments, for managing information flows throughout
the initiative investigated business the industry to a central body and then back
models of standards bodies in other out included conducting surveys, working
industries to see how others addressed with industry coordinating bodies, using
similar problems. The “Business Models an advisory council, and going through
Report” is available as a corollary work, MFI associations at the national level.
available at http://www.seepnetwork.
In conclusion, the initiative thanks the
org/files/6171_file3_MFI_Reporting_
survey respondents for providing their time
Standards_Biz_Models_11_4_08.pdf.
and opinions. The information gleaned
There were multiple suggestions on was highly valuable and informative.
how best to inform the industry about More time and support will be needed
standards and encourage their widespread across industry sectors to collectively make
adoption. The leading ideas included these next important steps forward.
trainings, publications, specific web site,

The Microfinance Industry Financial Reporting Standards Initiative is supported by the SEEP Network. It is currently
housed as a sub-committee of the Financial Services Working Group. Project information is available online at
www.seepnetwork.org and http://communities.seepnetwork.org/edexchange/node/1799. The project facilitator is
Drew Tulchin, Social Enterprise Associates. He can be reached at drew@socialenterprise.net. We welcome input,
comments, opinions, and support to advance this for the benefit of the entire industry. Full data from this survey,
provided in anonymous form, is available on request.
6 The SEEP Network is a membership association of international organizations that support micro- and small enterprise
development programs around the world. SEEP’s mission is to connect microenterprise practitioners in a global
learning community. William Tucker, Executive Director.

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