Dimension 6 - Responsible Growth and Returns

Standard 6A. The provider manages growth in a way that promotes its social goals and mitigates risks to clients.

This standard has 2 essential practices:

• Essential practice 6.A.1: The provider's strategic and/or business plan establishes responsible growth targets.
• Essential practice 6.A.2: During times of high growth, the provider monitors more frequently data related to responsible growth

Resources for standard 6A

• SPM Essentials #4 Responsible Use of Profits

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

Most providers target positive growth rates of their client 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 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 pursuing growth (e.g., to achieve economies of scale and reach sustainability, to meet social goals of financial inclusion), providers must ensure that their target growth rates are sustainable. Sustainability means growing only as quickly as providers can adapt and expand their quality-control systems, such as employee training and MIS capacity, as well as risk monitoring. Sustainable growth rates will allow to expand while maintaining adequate portfolio quality, providing good customer service, respecting clients’ rights, and giving employees manageable workloads.  

Providers set target growth rates by branch and/or region over a three- to five-year time horizon. During this process, the following factors must be analyzed while 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, client demand, current and future market penetration of competitors, market saturation, and market infrastructure should be analyzed carefully to set sustainable target growth rates. Market information should be segmented by different types of clients and different products because pockets of saturation can exist within an otherwise fairly unsaturated market. Providers should also assess whether an “intensive” or “extensive” growth strategy is most appropriate: an “intensive growth” strategy means adding new clients 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” clients 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 providers should never pursue “intensive growth,” but rather consider whether growth in existing branches will promote positive outcomes (e.g., financial inclusion) or may lead to negative outcomes (e.g., client over-indebtedness).

The table titled Analyze External Factors to Inform Your Growth Policy sets out the external factors to analyze, the data needed for this analysis (“resources needed”), and what insight to gain from each analysis (“analysis”). Using Global Data to Calculate Market Potential demonstrates how providers can use Global Findex data to help determine their potential market.

Analyze internal factors

The growth policy must also consider the provider’s internal capacity for balancing growth with service quality. Table Analyze Internal Factors to Inform your Growth Policy lists the internal factors to examine, and it summarizes the insights to gain from each analysis.

Field Examples and Resources for 6.A.1

• Analyze External Factors to Inform your Growth Policy
• Using Global Data to Calculate Market Potential
• Analyze Internal Factors to Inform your Growth Policy

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

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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.

Some questions need to be analyzed:

• 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?

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

• Score ’yes’, if the provider has a systematic process in place to
  1. adjust its growth targets per branch and staff in line with evolving market saturation, based on verifiable knowledge of the market,
  2. review these targets on a regular basis and
  3. the reason(s) for each adjusted growth target is documented.
• Score ‘partially’, if the three requirements are not fully met. For instance, the market saturation analysis is based on official statistics and/or primary data only or the documentation of the reason(s) for adjusting growth targets is inconsistent.
• Score ‘no’, if the provider lacks a systematic process to monitor market saturation and/or did not review its growth targets during the past 24 months.

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 growth 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

• Financial Service Providers in Serbia and Bosnia-Herzegovina Monitor Market Saturation and Over-indebtedness Risk
• Incofin Defines Responsible Growth

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.

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Different client segments have unique levels of demand and risks of saturation with regards to credit and other products. To understand these characteristics, providers must differentiate market demand and saturation according to client segment and region / branch areas. Market and sector level research findings should lead to adjustments of responsible growth targets based on client needs and context. Refer to the sections on the essential practices 3.A.1 and 3.A.2 for more information about client-centric market research and analysis of client needs by segment and sector.

Scoring guidance

• Score ‘yes’, if the provider has a systematic process in place to
  1. carry out regular market research differentiated by its most relevant client segments and
  2. adjust each product’s growth targets based on the demand, level of indebtedness, and level of market saturation of its most relevant client segments.
• Score ‘partially’, if the two requirements are not met fully. For instance, market research is not differentiated by all most relevant client segments or market research does not cover level of over-indebtedness per client segment or not all product growth targets are based on the client-segmented market research.
• Score ‘no’, if the provider lacks a systematic process to client segmented market research and/or did not review its product growth targets based on client-segmented market research during the past 24 months.

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 client-segmented market research and product growth target review practices that the provider implemented.

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

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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. Providers need 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. They must ensure that sufficient staff and monetary resources are in place to build and maintain their internal capacity during times of significant growth.

Scoring guidance

Detail 6.A.1.3.1:

• Score ’yes’, if the provider’s internal control and internal audit capabilities keep pace with operational growth in terms of
  1. maintaining internal control functions in scope and quality at branch level,
  2. conducting qualified audits of each branch at least annually covering file reviews and interviews of at least 3-5% of total clients.
• Score ‘partially’, if the two requirements are not met fully. For instance, at branches with rapid growth over the past 12 months, internal control functions could not be fully maintained or below 3% of total clients were audited.
• Score ‘no’, if internal control and internal audit capabilities failed to keep pace with operational growth

Detail 6.A.1.3.2:

• Score ’yes’, if the provider, in keeping pace with operational growth,
  1. has sufficient staff (and agents, if applicable) to maintain good client service (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) and
  2. conducts both a) annual refresher trainings for all existing staff (and agents, if applicable) and b) orientation trainings for all new staff (and agents, if applicable) within three months of their start date.
• Score ‘partially’, if the two requirements are not met fully. For instance, at branches with rapid growth over the past 12 months, staff shortages occurred or not all staff received annual refresher trainings or the orientation trainings for some new staff was shortened.
• Score ‘no’, if the provider failed largely in hiring and/or training staff (and agents, if applicable) while keeping pace with operational growth.

Detail 6.A.1.3.3:

• Score ’yes’, if, in keeping pace with operational growth, the MIS capacity allows the provider to
  1. keep all social and financial information about all its clients in one stable, secured and complete database (or two databases that are linked by unique client ID) and
  2. monitor regularly the situation of each client, in particular regarding the PAR.
• Score ‘partially’, if the two requirements are not met fully. For instance, the client database is not fully secured with daily back up or not complete as client data input is delayed by a few days.
• Score ‘no’, if the MIS capacity cannot keep up with operational growth.

Sources of information

• Interview with the internal audit staff and/or manager.
• Interview with the IT manager or head of MIS.
• 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

• Guidelines for Case Load Limits

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

Institutional growth has a direct impact on the providers’ ability to maintain high service quality and institutional sustainability. This calls for quarterly monitoring of key indicators, including:

• Internal indicators of portfolio 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 provider and from other sources)  
  • Change in PAR 30  
  • Productivity (borrowers or clients/employee or borrowers or clients/field staff)  
• Vintage analysis per branch for each product or per loan officer. 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 schemes, or operational organization.
• The evolution of the local market demand and saturation differentiated by main client segments and/or product type.

Quarterly - instead of annual - assessments of these indicators can capture periods of fluctuation, such as high growth followed by contraction. Monitoring growth by branch is important to identify potential problem behavior at specific branches, such as excessive growth, which would stay hidden in the case of aggregated data analysis. Providers should compare these indicators to their product growth targets and analyze any differences. If detecting unexpected changes in the external conditions, management should act to prevent negative consequences for the provider 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, providers must also monitor whether their 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 for each branch or regional office, for each field agent, and for each product, as well as how to analyze these indicators, in order to address risks related to the provider’s capacity to handle growth.

Enhance internal capacity as needed

Periods of high growth are associated with additional risks. Enhancing/adjusting operations are thus required 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 the 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 the MIS is required to hold, process, and analyze a more substantial data load, it is not uncommon for a provider to find that upgrades or even, in the worst case, a more powerful new MIS 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, for example.

Field Examples and Resources

• Analyze Internal Factors to Inform your Growth Policy
• Incofin Defines Responsible Growth

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

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When analyzing growth rates at the aggregate level only, providers likely miss the nuances that may be affecting certain areas of the portfolio. Analysis of the growth rates indicators by branch and/or region at a more granular level enables providers to take action in time before one branch’s problems affect the overall portfolio quality.

Scoring guidance

• Score ’yes’, if the provider has a systematic process in place to analyze all its portfolio growth rates
  1. by branch and/or region and
  2. at least annually, but preferably quarterly.
• Score ‘partially’, if the two requirements are not met fully. For instance, not all portfolio growth rates (e.g. just loan, but not deposit, portfolio growth rates) are analyzed by branch and/or region at least annually.
• Score ‘no’, if the provider lacks a systematic process to analyze all its portfolio growth rates and/or it did not analyze its portfolio growth rates during the past 24 months.

Sources of information

• Reports on planned and actual portfolio growth for all financial products.
• The type and capabilities of the MIS to produce such reports.

Evidence to provide

Key elements of the reports that show data on portfolio 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)

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As providers are seeking to grow, they should have a protocol that requires this data collection at all times. The first detail is designed to help providers to prevent mission drift by making sure that the size of new loans stays appropriate for target clients and monitoring client 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 problems spread to the institutional level. The productivity and turnover data help ensure that the internal capacity is keeping pass with 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

Detail 6.A.2.2.1:

• Score ‘yes’, if the provider has a systematic process in place during times of growth to
  1. monitor outreach indicators (incl. average loan size of new clients, share of new clients who are from the provider's target client group) monthly at institutional and branch level and
  2. analyze and report them monthly to senior management.
• Score ‘partially’, if the two requirements are not met fully. For instance, quality of data collection is sometimes not assured fully or reports to senior management are often delayed.
• Score ‘no’, if the provider lacks a systematic process during times of growth to monitor outreach indicators monthly at institutional and branch level and/or there is no analysis and reporting of outreach indicators to senior management during the past 12 months.

Detail 6.A.2.2.2:

• Score ‘yes’, if the provider has a systematic process in place during times of growth to
  1. monitor quality-of-service indicators (incl. PAR by branch, number of client complaints) monthly at institutional and branch level and
  2. analyze and report them monthly to senior management.
• Score ‘partially’, if the two requirements are not met fully. For instance, quality of data collection is sometimes not assured fully or the analysis of PAR does not cover all loan products.
• Score ‘no’, if the provider lacks a systematic process during times of growth to monitor quality-of-service indicators monthly at institutional and branch level and/or there is no analysis and reporting of quality-of-service indicators to senior management during the past 12 months.

Detail 6.A.2.2.3:

• Score ‘yes’, if the provider has a systematic process in place during times of growth to
  1. monitor HR capacity indicators (incl. clients per field officer, ratio of internal audit staff to total number of staff, hours of training for new employees (by position), employee turnover by position, especially for field officers) monthly at institutional and branch level and
  2. analyze and report them monthly to senior management
• Score ‘partially’, if the two requirements are not met fully. For instance, the HR capacity is measured by quantitative indicators only (e.g. hours of training, but not the effectiveness of training) or the analysis of HR capacity does not cover the actual staff qualifications.
• Score ‘no’, if the provider lacks a systematic process during times of growth to monitor HR capacity indicators monthly at institutional and branch level and/or there is no analysis and reporting of HR capacity indicators to senior management during the past 12 months.

Sources of information

• Monthly operational reports for the credit staff
• Business intelligence reports
• HR reports
• Training reports/summaries
• Internal Audit reports
• SEPM or CP assessments/audits/ratings, if available

Evidence to provide

List the past three reports on outreach, quality-of-service, and HR capacity indicators to senior management and indicate which of the above data points can be found in these reports.

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.

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The Essential Practices of this standard (6A) encompass that providers set responsible portfolio 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.
The worse client risk is over-indebtedness. Providers must discuss this most critical client and market risk at the highest level and also with other market players. Necessary actions can include reducing growth targets, limiting the amount of credit available to its clients, setting limits on multiple lending for shared clients etc.

Scoring guidance

• Score ‘N/A’, if you have evidence that the provider has analyzed thoroughly that its growth is not harmful to clients, and that the board and senior management are concerned and monitor potential over heating of the market. This may be the case if it
  1. had already strong client protection practices in place and
  2. had always pursued a very prudent loan portfolio growth strategy in line with internal capacities and market demand and saturation.
• Score ’yes’, if, in cases of economic recession and/or potential over-heating of the lending market with rising over-indebtedness, the provider’s senior management and board
  1. monitor closely any potential and actual incidences of “harmful growth” in the past 12 months and
  2. have taken mitigating action (e.g. applying more conservative loan approval criteria) to bring the potential and/or actual harmful growth down to a level that does not represent a risk to the wellbeing of clients.
• Score ‘partially’, if the two requirements are not met fully. For instance, the board has not been pro-active in monitoring incidences of “harmful growth” or the mitigating action has not been sufficient enough to prevent all clients from harm.
• Score ‘no’, if one or both requirements are not met. For instance, neither senior management nor the board had monitored incidences of “harmful growth” during the past 12 months and/or no mitigating action had been taken during the past 12 months.  

Sources of information

• Publications on market context
• Interview with Board
• Interview with CEO
• Interview with Head of 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

• Detecting and Monitoring Over-indebtedness Risk in the Market

Resources for indicator 6.A.2.3

• Over-indebtedness Case Study: Bangladesh 2008

Standard 6B. The provider sets prices responsibly.

Though the financial services industry does not have a single definition for “responsible,” there are objective and quantitative ways to determine whether prices are responsible. A responsible price is one that is sustainable for the provider and affordable for the client. This standard discusses how to determine whether prices fit that description.

This standard has 3 essential practices:

• Essential practice 6.B.1: The provider charges fair prices.
• Essential practice 6.B.2: The provider charges reasonable fees.
• Essential practice 6.B.3: The provider does not transfer unnecessary costs to clients.

6.B.1 The provider charges fair prices.

Use a formal pricing policy

Providers should have a formal (internal) pricing policy that balances their interests with those of the clients. 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 vulnerable and poor people.

Providers are likely taking on costs that more conventional financial intermediaries 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, providers must decide which of the “investments” in future profitability should be funded by the clients through higher prices and which should be absorbed by the providers (or their investors) through lower retained earnings or dividends.

Set Responsible Prices on Insurance and Payments Products

Many clients are unfamiliar with or untrusting of insurance, and clients may lose trust in insurance products if they are discontinued or undergo drastic changes repeatedly or unexpectedly. Providers must thus have clear pricing strategies from the onset when offering insurance coverage to their clients (or to specific client segments) via group policies because they should aim at sustainable continuity of coverage. As they consider the insurance coverage as a benefit for clients, they mostly aim at cost-covering pricing, if not at cross-subsidizing it. The former should cover all effective costs like premiums paid to the insurance partner and direct expenses related to client on-boarding, product education, and support in the claims settlement process minus reduced provisions for client risks.

First premiums are based on predicted claims/payouts. However, they should be later adjusted based on actual claims experience as measured by the claims ratio (defined as claims paid out to clients as a percentage of total amount of premiums collected). A claims ratio below 60% raises a red flag, signaling that the insurance product does not create enough value for clients. The provider should renegotiate with its insurance partner for a lower premium and/or higher benefits and pass the benefits 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 insurance coverage.

Providers should charge market rates for payments services as the payment transaction costs should be comparable to those charged by their peers.

Calculate Interest Earned on a Daily Basis

Providers should 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.

Providers should either be currently covering costs (OSS greater than or equal to 100%) or rapidly approaching break-even to maintain their capital base. Sustainability is essential for the institutional longevity for clients be able to depend on service continuity. In sum, sustainability is as important to client protection as it is to financial performance.

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 can tell whether products are priced responsibly.
While a provider can control its operating costs, its credit risk, and its expected levels of profits, and take action to reduce or increase them, on the other hand, financial expenses are one of the components of pricing that providers have less control on (costs of funds often rely on market rates).

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.

Use declining balance calculations

Providers should use the declining balance method for calculating loan interest rates and advertise their loan products by Annualized Percentage Rates (APR) or Effective Interest Rates (EIR) that include all loan costs (processing fees, compulsory savings, etc.). This constitutes the responsible loan pricing practice whereas the flat calculation method (i.e. 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) is irresponsible as it is deceiving clients about their full loan costs. This short video explains how flat methodology is unfair to clients.

Many providers are afraid to use declining balance methodology, APR or EIR as their prices may look much higher than competitors who quote a flat nominal rate. However, they can be a first mover in setting responsible pricing standards in their market and position themselves as the leader in treating clients fairly. They need to ensure 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, they might consider lobbying the 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

Providers should know whether the price of each of their products is higher, lower, or similar to those of their competitors. They need to compare similar products (type, size, term, repayment frequency etc.) and to compare prices that have been calculated in the same way. The first step when assessing the price of a loan product is 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.

Calculating the APR for each product is the most standard way to compare prices. Consider an individual client’s perspective: it does not matter to him/her that the provider’s average price for all credit products is on par with competitors if the one product s/he uses is priced too high. Therefore, loan price analysis should be done at the product level first and foremost, and at the portfolio level secondarily.

The pricing diagnostic also identifies any areas that need further exploration. For example, if the Operating expense ratio exceeds the expected maximum, the provider should examine its business model for explanatory factors. 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 services that are useful to clients but costly. However, if these or similar factors are not present, the provider must improve its efficiency so that its high operation costs are not passed on to clients through too high product prices. However, client and employee well-being should be taken into account when improving operational efficiency by seeking an appropriate balance between efficiency and social goals such as customer service and strong client protection.

Consider whether prices are affordable for clients

Apart from the above-outlined methods for responsible product pricing, providers should also consider the affordability for clients by analyzing the following qualitative data:

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. The analysis of client stress/financial health should be combined with the data below to understand whether the product costs are contributing to the problem.  
2. Client feedback on prices and satisfaction with products: Gather client feedback on current prices, 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 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. Are clients able to build assets and cope with cash flow uncertainties?

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

Field Examples and Resources

• Components of Responsible Pricing
• Sustainability Trends

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.

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Interest rates should be set to be affordable to clients and sustainable for the provider. It should cover all direct costs involved in providing credit, including a profit margin to build reserves and invest in further client outreach. 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 risk assumptions. Returns to capital, or profit margins, are defined by the top management and/or board by their expected or desired level of profit. A formal pricing policy is not mandatory as long as the provider has a documented basis for setting and reviewing its loan interest rates.

Scoring guidance

• Score ‘yes’, if
  1. the provider has an analytical approach to loan pricing based on funding costs, operating costs, loan losses, and returns to capital (e.g. analysis of the cost per loan) and
  2. the senior management and Board reviews the rationale for its loan interest rates at least annually.
• Score ‘partially’, if the two requirements are not met fully. For instance, the provider has not defined its expected level of profit or its last review of loan interest rates had been within the past 12 to 24 months.
• Score ‘no’, if the provider doesn’t have a documented basis to set its loan interest rates, based on all four above-listed cost items and/or it has not reviewed its loan interest rates during the past two years, and/or the Board is not involved in interest rate setting at all

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

• Give the reference to the Pricing policy or the documented pricing reviews, if applicable.
• Explain how interest rates are defined e.g. based on a cost analysis, based on what competitors charge, etc.
• Explain the expected level of profit defined by the Board or the top management, if applicable.
• Describe in detail how the loan interest rates are set and what information is used to set them.

Resources for indicator 6.B.1.1

• CGAP Occasional Paper 1 Microcredit Interest Rates
• CGAP Occasional Paper 1 Las Tasas de Interés de los Microcréditos
• CGAP Occasional Paper 1 Les taux d'intérêt applicables aux microcrédits

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.

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The financial inclusion 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, grace period and all side costs like a guarantee deposit, commission, fees, etc.

It requires precise and sufficient peer information that is often difficult to collect. The tool needs to be fed with as many loan samples as possible in terms of loan terms and size for both the provider’s and peers’ products. The loan product sample of comparable peer information should be large and relevant enough with five to six comparable peers from the same market, a variety of different loan sizes and at least 60 data points from peers. The APR Benchmark graph should show a fairly linear average, with very few spikes.

Providers charge responsible (or ‘fair’) loan prices, if the APR of each of their main loan products is within 15% of their peers. A “main loan product” represents more than 20% share of the total loan portfolio. 15% deviation means that, if the peer APR is 20%, then the providers’ APR should range between 17% and 23%.

If with comparable loan sizes, the APR appears above or on the borderline of being responsible (or ‘fair’), the SPI auditor must exchange with senior management (CEO, CFO, etc.) why loan prices are elevated and determine whether their justification is acceptable (e.g. operating in insecure markets near war zones where income and expenses are unpredictable, large foreseen expenses in the short term, such as transformation into a regulated provider, spending the proceeds from earnings on things to improve the client’s lives, such as financial education, market studies for new products, etc.).

Scoring guidance

• Score ‘yes’, if
  1. the sample of comparable peer information is large and relevant enough (the graph shows a rather linear average line with at least 60 data points), and
  2. the main loan products’ APR are within 15% of peers.
• Score ‘partially’, if the two requirements are not met fully. For instance, if market studies provide some limited information about peers’ prices, and the provider appears to be in the acceptable range, or if the APR of one of the main products is higher than the 15% deviation from peers.
• Score ‘no’, if the provider or other sources do not provide sufficient comparable peer information and/or the main loan products have higher APR than the 15% deviation from peers.

Sources of information

• Results from the APR Estimation and Benchmarking tool.
• Provider’s detailed loan product specifications (or factsheets) and their average loan term and size.
• Relevant peer information to calculate APR on their main loan products. Sometimes providers have collected it through market studies or mystery shopping. Peer loan pricing data may also be obtained from the national microfinance network, country studies, or data from the provider on its competitors.

NOTE for SPI auditors: Do not use self-reported APR, which may not be calculated using the formula that is required for this analysis; opt rather for inserting raw data in the APR Estimation and Benchmarking tool.

Evidence to provide

• Ensure enough comparable and relevant loan price 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.

Resources for indicator 6.B.1.2

• APR tools and tutorials
• Microfinance TRAPS The Microfinance Transparent Pricing Supervision Handbook

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

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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 interest rates on a declining basis is international best practice and is considered the only transparent and responsible practice. In the case that all providers disclose their loan prices on a flat basis (in the absence of regulatory loan price disclosure provisions), providers must have at least a transparent client communication in place to disclose the total borrowing costs.

Scoring guidance

• Score ‘yes’, if the FSP discloses its loan interest rates
  1. on a declining balance basis
  2. according to the exact date of payment. The latter requires the MIS to calculate an exact daily interest rate in the cases of an irregular repayment schedule or anticipated payments.
• Score ’partially’, if (a) most loan interest rates are disclosed on a declining balance basis reflecting more than 50% of both total number of active loans and loan portfolio share while the peers also disclose some of their interest rates on a flat basis or (b) loan interest rates are disclosed on a declining balance basis, but the MIS cannot calculate an exact daily interest rate for clients or (c) the provider AND all its peers disclose their interest rates on a flat basis, as long as the provider has a transparent client communication in place and discloses the total borrowing costs.
  • In case of a “Yes/No” scoring approach (e.g: certification), if the provider is in the (c) situation, it may be scored “Yes” as an exception, only if the provider undertakes specific efforts for transparency of pricing disclosure to the clients.  
• Score ‘no’, if (a) loan interest rates are disclosed on a flat basis while peers disclose their interest rates on a declining balance basis and/or (b) if the market practice uses flat disclosure but the provider has no transparent client communication in place to disclose the total borrowing costs.

Sources of information

• Any document on the loan pricing and disclosure strategy and/or process, if available.
• Loan product brochures and marketing materials from all communication channels of the provider.
• Sample loan repayment schedules / amortization schedules from client files or from the MIS.
• Samples of anticipated payments reports from the MIS to verify that interest was charged according to the exact date of payment

Evidence to provide

• Findings of reviewing all loan marketing materials on all channels (incl. information consistency across the channels).
• Findings from reviewing several repayment schedules from different loan products and client files, including anticipated payments.
• In the case of a ‘partially’ score despite the disclosure of some or even all loans at flat interest rate, a corresponding justification is required and the demonstration that all clients receive a thorough and transparent communication on their total borrowing costs.

Resources for indicator 6.B.1.3

• Key Facts Document Worksheet and Example

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

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When clients fall into delinquency, regular interests usually continue to accrue, meaning it increases the clients’ 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 clients enter more than 180 days in arrears, whether the loans are 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, but not charged to the clients.

Scoring guidance

• Score ‘yes’, if the provider enforces a policy and/or complies with a regulatory provision specifying that both regular and penalty interest should not be charged to clients after 180 days of arrears.
• Score ‘no’, if the provider charges clients penalty and/or regular interest past 180 days of arrears.
• 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

• Interviews with managers of Finance/Accounting, MIS, and Credit.
• Management Information System (MIS) parameters.
• Sample transactions computed on a sample of delinquent loans.
• Loan Policy & procedures manual(s).

Evidence to provide

Explain the accrual process used by the provider 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.

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.

Providers should encourage clients 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 that such savings account fees must be kept low or preferably not charged at all. Providers 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 provider’s client base, which can have a negative impact on the market (and ultimately on clients) by driving prices up and/or locking a provider into long-term arrangements with an insurer. Providers monitor the fees that their agents or other third-party providers may be charging to their clients (e.g. a transaction fee charged by an agent at the point of sale) and ensure that third-party fees are reasonable when compared to other similar actors in the market.

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

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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

• Score ‘yes’, if the provider provides all its clients with free-of-cost
  1. confirmation receipts for all transactions and
  2. account balance inquires.  
• Score ‘partially’, if the two requirements are not met fully. For instance, account balance inquires incur a charge after 3 times per month or group loan coordinators only receive free-of-cost confirmation receipts for the weekly/monthly loan repayments of the entire group.
• Score ‘no’, if the provider does not provide free-of-cost confirmation receipts for transactions and/or account balance inquires.

Sources of information

• Interviews with Operations manager and front-line staff
• Branch/field observations and interview of clients
• Description of fees in product factsheets or product policy & procedures manuals or product brochures

Evidence to provide

Explain the way clients receive confirmation of their transactions and 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.

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Most providers apply a prepayment penalty to discourage clients from early repayment (anticipated payment) of their loans which would lead to lower loan margins. However, clients should not pay any future interest on already repaid principal amounts.

Acknowledging that early loan repayment comes with a lower margin or even a loss, providers may apply penalties 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 remain reasonable compared to the outstanding principal due. Both market practice and professional judgement should be used to determine if the fee is reasonable.

This indicator only applies for early repayment of the loan principal and not of prepaying loan installments, which is covered by indicator 6.B.1.3.

Scoring guidance

• Score ‘yes’, if
  1. the provider does not charge all the interest that would have accrued between the time of prepayment and the end of the loan term and
  2. the prepayment fee compared to the outstanding principal due represents less than 10% of the outstanding principal.
• Score ‘partially’, if the prepayment fee is considered high (according to professional judgement and market practice).
• Score ‘no’, if the prepayment fee is greater or equal to all the interest that would be due until the end of the loan term.

Sources of information

• Sample loan contracts which mention 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
• Loan Policy & procedures manual(s) – section(s) on prepayment of loans

Evidence to provide

• Describe the policy that the provider 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.
• Professional judgement whether the penalty/fees are reasonable.

ion 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.

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When clients fall in arrears, providers 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

• Score ‘yes’, if the provider
  1. does not apply any penalty for arrears or charges reasonable lump sum arrears penalties as compared to the current outstanding amounts and
  2. charges reasonable arrears interest based on the current outstanding amounts.
• Score ‘partially’, if (a) the provider charges lump sum arrears penalties which are high compared to the outstanding amount for some clients in arrears with small amounts or (b) if the provider charges high arrears interest based on the current outstanding amounts.
• Score ‘no’, if the provider charges arrears penalties and/or interest based on principal and interest.

Sources of information

• Sample loan contracts, look for where they mention 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 reports for delinquent loans

Evidence to provide

• Describe the policy and practice the provider uses to calculate arrears penalties and interest.
• Professional judgement whether the arrears interest and penalties are reasonable.

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.

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Savings or deposit account fees can be for: account opening, account management, each withdrawal, not fulfilling certain conditions (e.g. maintaining a minimum balance), or a specific term before withdrawal, account closure, etc. Savings accounts should clients accumulate useful lump sums they can use to improve their life or manage emergencies. Therefore, fees on the savings accounts, especially those that are serving low-income clients, should have reasonable fees that don’t represent a burden to clients or, preferably, providers charge low-income clients no fees on savings accounts.

For detail 6.B.2.4.2, if there is a recurrent fee that may eventually zero out a dormant savings 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.

Scoring guidance

Score ‘N/A’, if the provider does not offer savings products.

Detail 6.B.2.4.1:

• Score ‘yes’, if the provider does not charge any fees on deposit accounts or just very low fees for low-income clients who tend to have low deposit balances.
• Score ‘partially’, if the provider charges low deposit account fees, but not still lower fees for low-income clients who tend to have low deposit balances.
• Score ‘no’, if the provider charges savings account fees that discourage low-income clients from saving small amounts or from not using savings products at all.

Detail 6.B.2.4.2:

• Score ‘yes’, if the provider does not charge any fees on deposit accounts or has no repetitive fees (e.g. for each withdrawal or for not keeping the monthly minimum balance) that zero out savings balances within two years.
• Score ‘partially’, if repetitive fees do not zero out savings balances within two years, but already limit the savings behavior of some low-income clients (e.g. limiting the frequency of savings withdrawals to avoid withdrawal fees).
• Score ‘no’, if the provider charges repetitive fees on deposit accounts that zero out savings balances within two years.

Sources of information

• Savings product factsheets and brochures that describe all fees
• A sample of savings account statements
• The terms and conditions that clients sign when they open a savings account
• Interview with product manager for savings
• Interviews with low-income clients with and without savings accounts

Evidence to provide

• Describe the types and sizes of all the fees that are charged on savings accounts.
• Professional judgement whether each of these fees are reasonable or not.

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

Providers with a social mission have a responsibility to operate efficiently and spend money prudently in ways that create value directly or indirectly for their clients. Forcing clients to pay excessively high prices to cover unnecessary costs (e.g. salaries of senior managers above comparable market salaries of the peers) or inefficiencies likely undermine social goals, like improving the lives of its clients and their families, reducing vulnerability in their country etc. The goal of this practice and accompanying indicators is to prompt providers to analyze their expenses and make sure that those costs are in line with their social strategy.

Field Examples and Resources

• CP4 companion tool

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.

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For 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.

Formula

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

     Loan Loss Reserve_n – Loan Loss Reserve_n-1 - Recoveries of loans written off_{over period n}         

LLER_n = ----------------------------------------------------------------------------------------------------------        

                                     (Total Assets_n + Total Assets_n-1) / 2    

                             Net Loan Loss Provision Expense_n - Recoveries

Or LLER_n =      ----------------------------------------------------------------------

                                                    Average Assets_n

The accepted performance range is below 5% which constitutes a high threshold. It is recommended to carry out a LLER trend analysis over at least the past three years to analyze whether the LLER has changed and the internal and/or external reasons for the changes.  Both providers and SPI auditors are advised to use the CP4 Companion tool to calculate the LLER. For Client Protection Certification, this ratio needs to be analyzed as of the end of the latest quarter, as of year n (most recent year-end numbers available) and, if very volatile, as of n-1.

Scoring guidance

• Score ‘yes’, if the LLER is less than 5% or if negative during the past full year. The latter can occur if PAR has considerably decreased or if the provisioning policy has changed to a less conservative method.
• Score ‘partially’, if the LLER is equal to or greater than 5% during the past year, as long as a trend analysis over the past three years shows prior ranges below 5%, or if it can be explained by one or more external crisis situations (like economic recession, civil unrest, pandemic, etc.)
• Score ‘no’, if the LLER is equal to or greater than 5% during the past full year with no valid justification.

Sources of information

• Financial statements over the past three years
• Provisioning policy and possible changes over the past year
• Interview with CFO

Note for SPI auditors: Do not use self-reported ratios, as they may not be calculated in the same way as required by the CP4 Companion tool; opt rather for inserting raw financial data in the tool.

Evidence to provide

• Documentation of any strategic discussions held at senior management and/or board level during the past 12 months on the current level, trends and projections of the credit risk and/or provisioning policy and actions decided on how to reduce the LLER in line with responsible pricing.
• LLER ratios over the past three years as calculated by the CP4 Companion tool.  
• In the case of ’yes’ or ‘partially’ scores despite a LLER ratio outside the accepted performance range, a clear justification is required by describing the exceptional circumstances that explain the excess LLER ratio, and how the provider is taking specific measures to avoid transferring this cost to the clients.

Resources for indicator 6.B.3.1

• Assessing Responsible Pricing for Inclusive Finance Providers
• CP4 companion tool

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.

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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.
>> For this indicator, the OER ratio is calculated has a % of average assets.
The accepted performance range is determined by a multi-factor model that estimates the expected OER given the following key factors of the provider and its operating context: 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 points above the expected ratio (if the expected OER is 10%, then the maximum expected OER is 16.5%).

Both providers and SPI auditors are advised to use the CP4 Companion tool to calculate the OER and the accepted performance range for the provider. Key tips for using the 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 which 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 is 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 to be compared to the maximum expected OER.

Scoring guidance

• Score ‘yes’, if the OER is below the maximum expected OER.
• Score ‘partially’ (or “yes” in Certification), if the OER exceeds the maximum expected OER with a valid justification for the following five special circumstances of the provider:
  1. Operating in a low-security environment, requiring significant spending on non-standard security costs.
  2. Serving an exceptionally under-privileged population, requiring add-on services.
  3. Serving exceptionally remote clients, requiring large numbers of staff to regularly travel large distances. Serving rural clients does not qualify as a valid justification.
  4. Offering non-financial services that are useful to clients. In this case, it is proposed that their costs 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 service costs may be allowed.
  5. 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 be considered justified only if OERs outside this period comply (in the past and in the projections).
• Score ‘no’, if the OER exceeds the maximum expected OER.

Sources of information

• Financial statements of the past three years
• Interview with CFO
• Results from the CP4 Companion tool

NOTE for SPI auditors: Do not use self-reported ratios, which may not be calculated the same way; opt rather for inserting raw financial data in the CP4 Companion.

Evidence to provide

• Documentation of any strategic discussions held at senior management and/or board level during the past 12 months on the current level, trends and projections of the cost structure, efficiency and productivity levels and actions decided on how to reduce the OER in line with responsible pricing.
• Both the OER and the expected OER as calculated by the CP4 Companion tool as well as the data inserted into the tool.
• Precise explanation of valid justifications to award another score, like the above-listed special circumstances with the required background information.

Resources for indicator 6.B.3.2

• CP4 Companion
• Assessing Responsible Pricing for Inclusive Finance Providers

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.

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Return on assets (ROA) 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 adjusted 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.

The question of “what level of profit is deemed acceptable” is more driven by moral rather than financial and economic concerns, but a line has to be drawn somewhere. The cap of 6% has been chosen to leave room for providers 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 to benefit clients. 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.

Both providers and SPI auditors are advised to use the CP4 Companion tool to calculate the average ROA (adjusted by compulsory savings) over the past 3 years.

Scoring guidance

• Score ‘yes’, if the average ROA falls into the normal range between 1% to 6%.
• Score ‘partially’, if the average ROA falls into the low range below 1%, and the long-term sustainability of the provider is not endangered.

A ‘partially’ score may also be given (and “yes” in the case of Certification) when the average ROA exceeds 6%, ONLY in the following four exceptions (with a substantiated justification):

1. Inflation: average ROA can be in the high range but cannot exceed the period’s average inflation (average inflation over the past 3 years).
2. 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%.
3. Borrower retention rate above 75%: this can be an appropriate justification, only up to 7% average ROA.
4. Time-bound exceptional event: If excess ROA is observed only during a limited time-period, linked to recovering after a specific event outside the provider’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 providers 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 an average ROA above 6%:  

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 transforming into a regulated provider)
• Growing outreach under limited access to equity
• Profits shared with clients

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
• Score ‘no’, if the average ROA falls into the high range above 6%.

Sources of information

• Financial statements of the past three years and ROA projections
• Dividends policy as defined in the shareholder agreement or in the minutes of a board meeting
• Interview with Board
• Interview with CEO and CFO

Note for SPI auditors: Do not use self-reported ratios, which may not be calculated the same way; opt rather for inserting raw financial data in the CP4 Companion tool.

Resources for indicator 6.B.3.3

• Assessing Responsible Pricing for Inclusive Finance Providers
• CP4 companion tool

Standard 6C. The provider uses profits responsibly.

This standard has 3 essential practices:

• Essential practice 6.C.1: The provider engages with equity investors whose investment strategy is aligned with the provider's social goals.
• Essential practice 6.C.2: The provider uses its profits for expenditures that benefit clients.
• Essential practice 6.C.3: The provider has a transparent financial and social structure.

Resources for standard 6C

• SPM Essentials #4: Responsible Use of Profits

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

When seeking equity investment, providers should look for investors with aligned expectations for financial returns, social returns, time horizons, and exit strategies. It is important that the terms of the investment transaction should explicitly recognize and seek to preserve your institution’s social goals (including growth and profitability targets) in the structuring stage of an investment agreement. 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 the investment is already in place, which often leads to tension among the old and new shareholders.

Each new equity investor should study the strategy and social goals and the strategy for achieving them (see standard 1A). This ensures that the new investor understands that the mission is not to maximize financial performance but to balance financial and social performance. A funding agreement should include an explicit articulation of the provider’s approach and goals with respect to financial and social performance. Likewise, the provider should perform comparable due diligence on potential investors so that the board and management are confident that investors share the social and financial goals.

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

Field Examples and Resources

• Aligning Social and Financial Expectations
• Equitas Micro Finance Sets Profit Policies and Aligns Management and Investor Expectation

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.

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Providers should cultivate relationships with investors who share its social goals as much as it is possible even if there are limited options as it will benefit them 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 providers’ social strategy. These differences in priorities can lead to tension between the providers and their investors or mission drift.

Scoring guidance

• Score ‘N/A’, if the provider has no equity investors (being a cooperative or non-governmental organization) or if the current (often founding) shareholders do not seek additional equity investors or no equity investor joined the last two years.
• Score ‘yes’, if the provider (senior management and/or board members) discusses
  1. its social strategy/goals and
  2. exit strategies with potential investors to seek alignment on these issues prior to any investment transaction and
  3. included them in recent investment agreement(s) concluded during the past two years.
• Score ‘partially’, if the provider discusses only its social strategy/goals or exit strategies with potential investors and included this item in investment agreement(s) concluded during the past two years.
• Score ‘no’, if the provider does neither have these discussions with potential investors nor included its social strategy/goals and exit strategies in investment agreement(s) concluded during the past two years.

Sources of information

• Board minutes
• Interviews with the CEO and CFO
• Interview with a Board member, preferably a representative of an investor

Evidence to provide

• Describe the process of taking on new equity investors from the interviews with the provider’s leadership and as documented.
• Describe whether this meets the criteria of the indicator backed up by relevant information.

Resources for indicator 6.C.1.1

• Aligning Social and Financial Expectations
• Equitas Micro Finance Sets Profit Policies and Aligns Management and Investor Expectation

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.

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Providers should prioritize accepting investment offers from investors who share their strategy and value as much as it is possible given often limited choices and negotiating power.

Scoring guidance

• .Score ‘N/A’, if the provider has no equity investors (being a cooperative or non-governmental organization) or if the current (often founding) shareholders do not seek additional equity investors or no equity investor joined the last two years.
• Score ‘yes’, if the board
  1. takes the investors’ alignment with the social strategy into account when agreeing to investments, and that
  2. this process is documented.
• Score ‘partially’, if the first requirement is met, but not the second.
• Score ‘no’, if the first requirement is not met (i.e. the provider has a new investor whose strategy is not aligned.

Sources of information

• Board minutes
• Shareholder agreements
• Interview with a board member, preferably a representative of an investor
• Interviews with the CEO and CFO

Evidence to provide

• Describe the types of investors that the provider has taken on in the last two years and whether they are aligned with the provider’s social strategy.
• Offer some information on the country and institutional context to show which, if any, options the provider has regarding sources of investment funds.
• Describe whether the above meets the criteria of the indicator backed up by relevant information.

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

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The provider’s 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. The 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

• Score ‘N/A’, if the provider has no shareholder agreements (being a cooperative or non-governmental organization) or if the latest shareholder agreement had been concluded more than ten years ago.

Detail 6.C.1.3.1:

• Score ‘yes’, if all shareholder agreements concluded within the past ten years outline the commitment to social goals.  
• Score ‘partially’, if the requirement is not met fully. For instance, the commitment to social goals is mentioned in most, but not all shareholder agreements concluded within the past ten years or the reference to the commitment to social goals is unclear and not detailed enough.
• Score ‘no’, if the requirement is not met. For instance, most or all shareholder agreements concluded within the past ten years do not mention the commitment to social goals.

Detail 6.C.1.3.2:

• Score ‘yes’, if all shareholder agreements concluded within the past ten years outline the expected level and use of profits clearly and explicitly.
• Score ‘partially’, if the requirement is not met fully. For instance, the expected level and use of profits is mentioned in most, but not all shareholder agreements concluded within the past ten years or the reference to the expected level and use of profits is unclear and not detailed enough.
• Score ‘no’, if the requirement is not met. For instance, most or all shareholder agreements concluded within the past ten years do not mention the expected level and use of profits.

Detail 6.C.1.3.3:

• Score ‘yes’, if all shareholder agreements concluded within the past ten years outline the exit strategy clearly and explicitly.
• Score ‘partially’, if the requirement is not met fully. For instance, the exit strategy is mentioned in most, but not all shareholder agreements concluded within the past ten years or the reference to the exit strategy is unclear and not detailed enough.
• Score ‘no’, if the requirement is not met. For instance, most or all shareholder agreements concluded within the past ten years do not mention the exit strategy.

Sources of information

• Shareholder agreement(s) from within the past ten years (providers are very hesitant to share them)
• Interview with a board member, preferably a representative of an investor
• Interviews with the CEO and CFO

Evidence to provide

• Quote the passages from the shareholder agreement(s) concluded within the past ten years that fulfill the criteria in the Details.
• Describe whether there is a process in place for including these criteria into shareholder agreements or whether it seems ad hoc.

Resources for indicator 6.C.1.3

• Questions to Consider When Setting Desired Profitability Ratios and Ranges

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

Higher yield targets might be acceptable if excess profit is used to benefit clients, like investments in: market research/product design/product testing so that products fit better with clients’ needs; client monitoring/outcomes management; 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. However, if high profits mainly benefit shareholders above the levels justified by the operating context (e.g., after accounting for inflation, country risk, etc.), then the provider’s profit/profit targets are most likely inconsistent with its 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.

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The use of profits determines if the level of profits is appropriate, especially if the yield on the portfolio or ROA is in the elevated range. The level of profit is acceptable, if some of it benefits clients, such as lowering interest rates, offering educational services for clients and/or their children, or designing new products to meet client needs. However, if the level of profit is in the elevated range and not used to benefit clients then it is simply over-charging clients and not complying with the goals of responsible finance.
There are four main ways of how profit can be used to benefit clients:  

1. “Strengthening social or environmental performance” includes spending on anything that allowed the provider to implement more or better any practices of the seven dimensions of the Universal Standards.
2. “Non-financial services” include any non-financial services offered to clients, such as business development or financial literacy training, access to weather and/or market information, health education or preventative health screening, educational opportunities for clients and their children, etc.
3. “Lowering prices” usually means lowering loan interest rates, 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.
4. “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.

Scoring guidance

• Score ‘N/A’, if the provider earned no profit in the past year.
• Score ‘yes’, if the provider
  1. implemented one or more of the four above-mentioned actions to benefit clients within the past 12 months
  2. with significant funds compared to its last year’s profit
  3. that benefited a large share of clients.
• Score ‘partially’, if the three requirements were not met fully. For instance, the provider spent only limited funds compared to its last year’s profit or only a small share of the clients benefited.
• Score ‘no’, if the provider did not implement any worth-mentioning action to benefit clients within the past 12 months.

Sources of information

• Interview 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 and/or a representative of the provider’s Foundation, if existent, to see what projects to implement the Universal Standards may be underway.
• Interview with staff who work on sustainability initiatives.
• Last annual report
• Last financial statements that show level of profit.

Evidence to provide

Description of the types of activities implemented in the year that benefit clients, the extent of these activities (e.g., by how much were interest rates lowered), and how many clients were reached.

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.

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As providers generate profit by selling their services to clients, including low-income and vulnerable clients, they must therefore consider when and at what level dividends may be paid to shareholders in line with their social goals/values/social strategy.

Scoring guidance

• Score ‘N/A’, if the provider earned no profit in the past year.
• Score ‘yes’, the if the provider has a dividend policy
  1. approved by the board
  2. that specifies when dividends may be paid (e.g., how many times per year) under what conditions and how much
  3. in alignment with the social goals.
• Score ‘partially’, if the three requirements are not met fully. For instance, the dividend policy is vague / not detailed to understand clearly when, how much, and under what conditions dividends are paid or the dividend policy is not well aligned with the social goals.
• Score ‘no’, if the provider has no dividend policy or any written documentation on when, how much, and under which conditions dividend are paid.

Sources of information

• The dividend policy or any written documentation on the payments of dividends which may be contained in the shareholder agreements or member charter or any other type of document.
• Board minutes
• Interviews with the CEO and CFO

Evidence to provide

Description of which document contains this information (title and page number) and a brief summary of the content of the dividend policy.

Professional judgement whether the dividend policy is in line with the 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 their providers. Providers should also be transparent on all the risks they bear, notably financial risks, in serving low-income and vulnerable clients in unstable environments with unreliable or non-existent deposit insurance. They should disclose in their financial statements all risks related to assets or liabilities (foreign exchange risk, interest rate risk, maturity risk, etc.), delineate contingent liabilities, disclose off balance sheet items, count them in leverage ratios, and provide all details of their shareholding structure and participations in other companies in compliance with the International Financial Reporting Standards (IFRS). They should make public their annual audit reports.

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

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This is a minimum requirement for the provider 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 provider. Accounting standards sometimes differ by country, however, every should publish its annual audited financial statements in accordance with their national audit requirements or the IFRS standards.

Scoring guidance

• Score ‘yes’, if the provider has a process in place to publish its latest and at least the past three annual audited financial statements.
• Score ‘partially’, if the latest annual financial statements are published, but there is no process in place to publish at least the past three audited annual financial statements or if the published latest financial statements are not audited.
• Score ‘no’, if the provider does not publish its latest audited annual financial statements.

Sources of information

• The last three audited annual financial statements available on the provider’s website.
• The non-audited latest annual financial statements, if the audited one is not yet available  

Evidence to provide

• Link to the audited annual financial statements posted online.
• Document that describes the process to publish at least the last three audited annual financial statements.

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

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Transparency in financial performance is important (refer to 6.C.3.1) and the goal of this indicator is to extend that level of transparency to the provider’s social performance as well. Social audits, social ratings, client protection certifications, outcomes studies, client satisfaction surveys, impact evaluations etc. can all help the stakeholders understand the provider’s social performance practices and priorities. Providers should disclose such reports/studies to their SPI auditors, raters, actual and potential investors and funders, national and regional microfinance networks, and other stakeholders upon request, but preferably refer to them with short summaries on their website.

Scoring guidance

• Score ‘yes’, if the provider discloses these reports/studies to its stakeholders without issue and refers to them on its website.
• Score ‘partially’, if the provider only discloses parts of these reports/studies to its stakeholders upon request or does not refer to them on its website.
• Score ‘no’, if the provider does not disclose these reports/studies to its stakeholders even upon request.

Sources of information

• The provider’s website.
• Interview of the Communication/Marketing manager.
• 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/reports/studies that the provider has commissioned in the past 2-3 years and whether and which stakeholders were able to access them.
• Sometimes links can be included to them, if they are posted or linked on the provider’s website.

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

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The goal of this indicator is to ensure that the provider’s close stakeholders can obtain the information necessary for them to determine if the compensation paid to the CEO and other senior managers, and board members is appropriate for the responsible inclusive finance sector and consistent with its 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 related parties upon request.  On a one-off basis, the provider should be able to disclose this information to its regulator, current and potential investors, raters, and SPI auditors upon request.

Scoring guidance

• Score ‘yes’, if the FSP discloses this information to its close stakeholders without issue.
• Score ‘partially’, if the FSP discloses this information to only some of its close stakeholders upon repeated requests.
• Score ‘no’, if the FSP refuses to disclose this information to its close stakeholders.

Sources of information

• The HR manager or the CEO should be able to answer questions about the compensation – both variable and fixed – for the CEO, senior managers, and board directors.

Evidence to provide

• Summarize the information from the interviews with Credit and HR managers and the CEO/CFO addressing both the transparency regarding compensation and the actual compensation.
• When documenting the compensation of senior management, it is important to describe both fixed compensation (salary, base pay, etc.) and variable compensation (may include incentives, bonuses, commissions, non-monetary perks etc.).
• As a rule of thumb, the compensation of the CEO is not more than 25 times the compensation of a newly recruited field officer.