These principles ensure that an MFI designs and sells its products responsibly. They contain self-evident rules of consumer protection such as:

Loans and distribution channels must not be designed to harm customers. In particular, MFIs should make sure, through the installation of appropriate systems, that their lending does not lead to the over-indebtedness of their clients. All costs must be transparent and communicated comprehensibly to the target group. Prices must be designed so that the products are accessible to the target group and ensure the survival of the institution. Clients should be treated with respect, their data should be protected, and complaints should be established.

These minimum criteria have already been signed by 1,479 MFIs and 172 investors and donors. However, only a few, mostly large, MFIs are certified according to the “Smart Principles.” MFFs should indicate what proportion of the MFIs they have funded have signed the Smart Principles and which customer protection mechanisms are being used by non-signatories.

Extend the range of MFF instruments

Other features of MFF show how far they are geared to the needs of MFIs and help them better fulfill their mission. These features include:

• The MFF offers short, medium and long term loans

• The loans can be senior or junior

• The MFF also participates in the equity of MFIs

• In addition to financial support, the MFF offers comprehensive advice on operational management

• The MFF is a large part of the currency risk

These five criteria increase the room for maneuver and competence of an MFI, potentially increasing their social effectiveness. In particular, the MFF’s assumption of currency risk provides direct support that brings tangible benefits to clients, as currency risks can no longer be transferred to them.

However, whether and which of these five characteristics are used depends greatly on the situation. Not every MFI needs advice on business management or a co-owner. The extension of the duration of loans may also be linked to the fact that in some situations there is competition among the MFFs to finance well-established MFIs. The one who is flexible in the term, then comes rather to the train. It still draws a MFF if it has as many tools of this instrument as possible, even if not all are always applied.

Measuring and supporting social effectiveness

MFFs with a high commitment to social effectiveness are characterized by the following measures:

• The MFF offers comprehensive advice on social and environmental impact

• The MFF conducts studies on the social impact of MFIs in specific regions and publishes their findings

• The MFF is present locally through regional offices

If these characteristics are largely based on an MFF, this shows a great commitment to the social impact of their investment. In the meantime, several MFFs are conducting detailed analyzes of the impact spectrum of “their” MFIs, and the Mix Market database is increasingly gathering data on efficacy, and the variety of data mentioned in the MFI assessment literature can be grouped into three sets of criteria.

Criteria set 1

Number of young and small, medium and established MFIs (Tier 1, 2 or 3 MFIs) in the portfolio, share of rural and urban clientele, targeted MFI build-up in regions with a shortage of financial services providers (directly or indirectly through the extension of an existing MFI ), Proportion of borrowers below the poverty line, amount of loans, share of cooperatives financed.

These indicators indicate which sections of the population are reached by MFIs. Another criteria set shows how the loans are used.

Criteria set 2

Number of micro-enterprises financed, percentage of funded start-ups, number of jobs created

The third set of indicators informs about the breadth of the supply of MFIs.

Criteria set 3

The MFI offers more than five credit options, has a range of savings and insurance products and advises its borrowers on economic and also on social issues such as health care, education, etc. Loans are granted for home purchase or home construction.

Conclusion of the evaluation of MFF

The valuation of an MFF can be done according to the following scheme: First, it verifies how the management ensures that no harm comes from the MFIs in which the fund invests. Then, the instruments used can be used to assess the MFF’s commitment to MFIs, and finally to assess how the MFF reviews the impact of “its” MFIs on the ground and what proportion of the funds are in the “financial services to the poor and very poor” segment “and invested in the Financial Services for Small Businesses segment.

Yield orientation as an exclusion criterion?

Much has been argued about the question of the return orientation of MFIs. To date, no meaningful upper limit of return for MFIs or MIVs is known, beyond which a socially beneficial effect can be ruled out. For this reason, no firm criterion can be formulated on this topic. The role that unilateral profit-oriented institutions have had in microfinance crises, however, suggests a connection between unlimited profit-making and misguided development to the detriment of clients. Very negative developments of microfinance institutions in the past have often, but not exclusively, been associated with MFIs that have floated their shares and related voting rights.