DAMEN SUPPORT PROGRAM. Social Audit Report Pakistan Microfinance Network Audited by: Saba B. Abbas

Transcription

1 DAMEN SUPPORT PROGRAM Social Audit Report 2017 Pakistan Microfinance Network Audited by: Saba B. Abbas

2 OBJECTIVES OF THE AUDIT The social gap assessment of the Damen Support Program (DSP) was conducted using SPI4 during April SPI4 is a comprehensive social audit tool that allows Financial Service Providers (FSPs) to evaluate their level of implementation of the Universal Standards of Social Performance (Universal Standards). The SPI4 tool assesses a FSP s strengths and weaknesses on both Social Performance Management and Client Protection Principles, with the goal of using this information to help the FSP improve its management systems and practices over time. The SPI4 includes a core module that consists of: The Universal Standards for Social Performance Management - a comprehensive manual of best practices created by and for people in microfinance as a resource to help financial institutions achieve their social goals. Smart Campaign Client Protection Certification Standards - the minimum standards that clients should expect to receive when doing business with a financial institution. All the Smart certification standards and their associated indicators are incorporated into the USSPM. ACTIVITIES CONDUCTED The onsite mission was conducted in April 2017: The first step entailed an introductory workshop on SPM, client protection and SPI4 tool to kick off audit process with the FSP senior management, preparing the FSP to fill and use the SPI4 questionnaire. The second step was to review the documents and conduct interviews. The social audit involved interviews with relevant staff and board members guided by the SPI4 tool. Interviews were held with management and staff. Preliminary findings from the onsite visit were presented during the exit meeting with top management. The SPI4 tool was revised and completed by Saba Abbas, based on the preliminary assessment by the FSP, information collected during the interviews and verification from the documents (refer to Appendix A for the list of documents reviewed during the audit). The report presents the findings, action planning for priority activities set based on gaps identified. The action plan identifies person in charge per activity, timeframe, and existing resources to support implementation and how this should be linked with other processes going on in the FSP. About Damen Support Program Damen Support Program (DSP) is one of the leading Non-Banking Finance Company (NBFC) licensed to carry out Investment Finance Services as NBFC by SECP under NBFC rules & regulations, The mission of DSP is Taking measures for social and economic uplift of the marginalized, with focus on women, to enhance their economic prosperity & self-reliance through financial inclusion and capacity building. DSP s head office is located in Lahore, Punjab while it operates in Central Punjab through a network of 31 branches. At the end of Q1 2017, it had 53, 481 active borrowers and a gross loan portfolio (GLP) of PKR 1,623,060,303

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4 BOARD AND STAFF COMPOSITION Number of staff 252 Board 3 5 Staff turnover rate 47.6% Management 3 6 Staff productivity (outstanding loans / field staff) 215 Credit and front office Social performance criteria in employee appraisals Yes Total Staff Women Men KEY CHARACTERISTICS OF LOANS SEGMENTATION OF LOAN PORTFOLIO Active borrowers Portfolio by lending methodology Lending Methodology Outstanding loan balance per borrower Solidarity Group 19.2% of GNI/capita 0% 0% 2% 0% 0% Individual Interest rate method Declining balance interest method Average APR 40% per year Borrowers retention rate 113% per year 100 % Women Men Legal entities 98 % Rural Urban 100% Solidarity Group Village Bank / SHG Other RESPONSIBLE FINANCE INITIATIVES MOST RECENT SOCIAL RATING Endorser? Agency Date Result Certified? Reporting of social data? Annual reporting CLIENT SATISFACTION Number of complaints received in the last 3 months? 32 Client satisfaction rate in recent satisfaction survey FINANCIAL SERVICES Loans Yes Microenterprise loans Yes Loans for education No SME loans No Housing loans No Loans for agriculture No Emergency loans No Express loans No Other microcredit for consumption Compulsory Insurance Yes Other financial services Yes Voluntary Insurance No Debit / credit card No Credit Life insurance Scholarships/educational grants No Life/accident insurance Mobile banking services Yes Agriculture insurance Savings facilitation services No Health insurance Remittance/money transfer services No NON FINANCIAL SERVICES Enterprise services Yes Health services Yes Education services No Women's empowerment services No

5 ANALYSIS - UNIVERSAL STANDARDS RESULTS BY DIMENSIONS The analysis provided below is only a summary. The detailed analysis is available in the SPI4 Excel document. A. DEFINE AND MONITOR SOCIAL GOALS (Compliance score - 85%) 1. Define and monitor social goals Mission Statement: Taking measures for social and economic uplift of the marginalized, with focus on women, to enhance their economic prosperity & self-reliance through financial inclusion and capacity building. Vision: Sustainable Development through financial inclusion 1A. The provider has a strategy to achieve its social goals + DSP has a well-specified target population which its strategy document defines as the women entrepreneurs, who fall under the definition of a poor person as per State Bank of Pakistan s regulations for Microfinance Banks, meaning a person with meager means of subsistence but is involved in livelihood activity and has an ability to repay debt from an annual income (net of business expenses) up to Rs. 500,000 and do not have access to financial services from other FSPs. It also specifies the business activities of its potential clients, as trading and business, handicraft and embroidery, tailoring and clothing and livestock. + DSP s purported social goal is social and economic uplift of the marginalized women that it aims to achieve through a four-pronged strategy of a) financial inclusion, b) health and life insurance, c) training and capacity building and d) developing linkages for their clients. + The provider has a wholistic approach for social and economic uplift of its clients. DSP aims to achieve its social goals through clear strategy of expansion of loans as well as usage of branchless banking to remove barriers to financial inclusion. Other than provision of financial loans, the provider also provides mandatory health and life insurance to its borrowers to protect them any health-related shocks. Additionally, they have set out a plan of enhancing business skills of its clients but it remains at a nascent stage. For clients with livestock, they have started vaccination and artificial insemination services as well. + The senior management as well as branch staff seemed well-aware of the institution s mission and goals. As per HR manual, schooling the staff regarding organization s mission is part of the orientation training and a refresher is given three months after the orientation. Management also reviews its statement in times of institutions changes.

6 1B. The provider collects and discloses accurate client data specific to its social goals + The provider has qualitative and quantitative indicators defined for its Women Empowerment Initiative (WEI). + Training on various tools like SPSS has been conducted for the research team and before every data collection initiative, the teams are imparted an orientation on why this data is being collected and how to go about it. + The data in MIS can be disaggregated as per gender, geographical location and poverty levels. Poverty data is collected for every client for every loan cycle using PPAF s poverty scorecard. Areas for Improvement Currently the research team along with the field staff defines indicators and collects data but it ought to be more methodical. The small amount of social data that is presented in hard copies with the management and does not make it to the MIS, making analysis over time difficult. While the provider has defined indicators for its WEI project, data collection functions needs to be further streamlined especially when it comes to qualitative indicators, with well-defined roles and responsibilities and well-maintained database. Training on data collection protocols remains informal and needs to be formalized in collaboration with the research team and the HR department. The audit department selects 5 branches and one area office every month to ensure and monitor smooth operations, however, currently, they do not consider social performance data. It is suggested to develop a list of social performance indicators for every parameter and make a part of regular monthly audit activity (for examples of social performance indicators, please refer to Suggested Resources Section). Currently the provider does not adhere to any comprehensive environmental framework nor espouses any commitment to environment in its strategic framework, but it is recommended for them to look into it.

7 B. Ensure Board, Management and Employee Commitment to Social Goals (Compliance score - 77%) 1. Ensure Board, Management and Employee Commitment to Social Goals 2A. Members of the board hold provider accountable to its mission and social goals + The board members are well-aware of the organizations social goals and mission. Board education on USSPM started about 6 months ago. They have a designated SPM champion. The provider gave an orientation of USSPM and its significance to the board members, in which they decided to further streamline the USSPM at DSP and this SPI4 audit is part of the process. COO and Advisor also attended the Annual SPTF conference 2017 as part of the board education. + The board reviews social performance topics like employee satisfaction, client retention and client dormancy/drop outs, profit allocation on a quarterly basis. 2B. Senior Management oversees implementation of the provider s strategy for achieving its social goals + The senior management assesses the social performance related risks like reputational risk, employee dissatisfaction, gender inequality and incidents resulting harm to clients on annual basis. 2C. Employee selection and evaluation is based on social performance criteria + The provider has a comprehensive Performance Appraisal Management System (PAMS) to gauge performance of its employees In yearly employee appraisal, for field staff, factors such as behavior towards clients, ability to recruit and retain clients and portfolio quality is analyzed. Ample consideration is given to gender sensitive practices. + The provider imparts sufficient trainings to its staff needed for them to carry out their jobs in an effective manner. One training at the time of induction, one after three months in the field and then annual refreshers are imparted for all staff members. Areas for Improvement Considering social data collection is in nascent stages, there is no segregation of financial and social indicators when gauging performance of senior management. It is recommended that in performance appraisal system, social indicators be introduced as well.

8 C. Design products, services and delivery channels that meet client s needs and preferences (compliance score 78%) 1. Design products, services and delivery channels that meet clients needs and preference 3A. The provider understands the needs and preferences of different types of clients +Formal market research is conducted before opening a branch in new areas. Data is collected from various sources including FGDs with the community. Other MFIs operational in the area are also approached Research studies potential barriers (crime, infrastructure), characteristics of clients (educations and financial health) and need and preference of delivery channels + The provider carries out client satisfaction surveys on annual basis using a representative sample of clients, to assess their satisfaction with products and services. 3B. The provider s products, services and delivery channels are designed to benefit clients and in line with their social goals + The provider is sensitive to clients needs and payment capacity, offering a 12 or 18 months payment cycle. General loan product was modified to suit client needs after a study by the shore bank. A Shariah compliant product was launched after through research by Al-Hud and Attijara Institute. Studying the client s ease, most of the recovery is now being conducted through Branchless Banking channels. + Owing to the group model used, there is not a requirement of having a guarantor as the group works as each other s guarantor. Considering DSP serves women entrepreneurs, this is well in line with their client s context where it can become difficult for women to arrange for one and be excluded by design. + The provider charges loan processing fee of 3% which also covers health and life insurance of clients. + At the time of induction, all new inductees are given a training on the appraisal process which includes training them on accessing client s needs and repayment capacity so as to sell them the product most suitable for them. Modules on respectful treatment of clients are also part of the orientation training. The provider does not have any incentive linked to disbursement so as not to promote aggressive sales techniques. A multitiered appraisal process is in place to ensure that a client is not being sold a product through unfair means.

9 D. Treat Clients Responsibly (Compliance Score 84%) 2. Treat Clients Responsibly 4A. Prevention of Over-indebtedness + The provider s appraisal process is rigorous complete with a cash flow analysis to gauge the clients capacity for repayment. Up to 80 percent of the disposable income can be serviced for loan repayment as per policy. Three-tiered appraisal process is in place with field manager overseeing the process. First appraisal is done by the loan officer, second by the field manager and third round of appraisal is carried out by the appraisal team that works with the risk department. Then loan approval team which consists of appraisal officer, area manager and field manager gives a verdict on the loan. Audit reports depict a thorough analysis of application process. + The provider uses the local credit reporting information bureau i.e. MF- CIB during the appraisal process to evaluate applicant s credit history to avoid over-indebtedness and multiple borrowing. + Area and field manager conduct a monthly analysis of the portfolio to catch any over-indebtedness bubble. Chief Operating Officer also provides oversight to the process. 4B. Policy and documented processes are in place to require transparency on product terms, conditions and pricing. + Clients are provided with a passbook which includes information on total loan amount, pricing, disbursement date, loan term, repayment schedule with principal and interest amounts. All terms and conditions related to loan are also presented on the loan book. The provider does not give a copy of the contract to the clients. The passbook also includes a balance column which is updated with every installment paid so the customer is aware of the outstanding amount. Information about pre-payment penalty and insurance products bundled with the loan product is given on the group consent form. + The orientation for loan officers includes modules on how to communicate pricing and other terms and conditions to clients in the easiest possible manner. The LOS use local language to aid the understanding of clients pertaining to product features. Also considering new clients are recruited through community mobilization, clients approach the provider after they have decided to avail the loan. + The provider s risk department has robust processes in place and internal audit also does regular visits of the branches to ensure compliance to organization s policies and procedures. 4C. The provider promotes and enforces fair and respectful treatment of clients in line with the code of conduct.

10 + The provider has a code of conduct drawing upon the Smart Campaign principles, highlighting basic ethics for its employees while interacting with their colleagues as well as clients. Upon joining, the newly inducted LOs undergo an extensive training on loan appraisal process and the training includes materials on fair and respectful treatment of clients. Recovery of loans is only allowed during office hours and visiting the clients after that is discouraged. + Area Risk Officer visits clients in order to do post-appraisal of the approved loan. The purpose of the visit is to check whether the client is utilizing the loan as per her claim or using it for consumption 4D. Privacy of client data + Safeguards for privacy of client data are mentioned in the IT Manual as the data is stored on servers the smart campaign graph shows that DSP skewed towards privacy of the client +Permission from clients sought while data collection that their data can be shared with donors, regulator (as part of the appraisal process). It is part of the consent form. 4E. Mechanisms of Complaint Resolution + The clients are informed about the avenues of complaint registration at the time of appraisal. + The provider has installed complaint boxes at branch level and in Area Office. A toll free landline number (given on passbooks and displayed at branches) is also given, which is handled by relationship officer, member of the risk department Areas of Improvement While a manual register for complaints is managed at the head office level, owing to its rudimentary nature, analysis for observing trends and patters is difficult. For instance, while turnaround time for complaints is 7 days, at head office, it was seen that many complaints do not get resolved within the suggested time frame. While most of these complaints concerned insurance claims, there is a need for analysis and systematic resolution, to avoid recurrence. Evidence of complaint management at the branch level is also sparse. It is recommended to streamline the data collection and storage in these domains, using MIS and findings should be shared with the senior management. A written policy spelling out acceptable collection practices in highly recommended (guidelines given in the resources).

11 E. Treat Employees Responsibly (Compliance Score 92%) 3. Treat Employees Responsibly 5A. The provider follows an HR policy that protects employees and creates a supportive working environment + A Human Resource manual is in place which covers employee rights including wages, benefits, grievance, non-discrimination, antiharassment and disciplinary procedures. Code of conduct also advocates equal employment and advancement opportunity for all qualified individuals without distinction or discrimination because of age, color, national origin, race, religion, sex, or physical or mental disability or any similar status or condition. + Overall, salary levels are considered to be market competitive. Loan officers are paid 20k which above market average and national minimum wage, which has led to a decline in staff turnover rate. + The provider has a written policy for handling employees grievances. There is a special anti-harassment committee to discuss matters pertaining to employees. 5B. The provider communicates to all employees the terms of their employment and provides training for essential job functions + The employment contract includes information on salary levels, benefits, working conditions, job description and sanctions. Employees are informed during the orientation session that their performance will be evaluated through annual performance review process which is separate for every position. + All new inductees receive orientation training. Learning and development representative conducts orientation session on vision, mission, core values and organizational structure of department, awareness on policies and procedures, code of conduct, work ethics etc. Following this, new inductees also receive on job training on needs basis. 5C. The provider monitors employee satisfaction and turnover + Last employee satisfaction survey was conducted in 2014 by the HR department, one is currently under way. It is recommended to make it an annual exercise. + Exit survey is mandatory for all employees who are leaving.

12 + The provider analyzes employee turnover and reasons of employee exit on an annual basis and the findings are shared with the board. Based on the discussion, salary for loan officers was increased and incentives were introduced, which is indicative of corrective measures being taken. + Internal audit and risk department tries to ensure that policies spelled out in the HR manual and actual working conditions are in tandem with each other. Areas of improvement The HR manual should also include policies regarding provision of compensation to employees for work related injuries. The institution should provide specific trainings to employees on Health Safety Environment F. Balancing social and financial performance (Compliance score 92%) 6. Balancing financial and social performance 6A. The provider sets and monitors growth rates that promote both institutional sustainability and social goals + As per the strategic plan, targeted growth rates take into account both internal and external factors including demand by credit type, market potential, peer growth rates, potential changes in the sector and trends in client over-indebtedness. + Growth plans take into account internal factors including higher headcount requirement in various departments. Operations department seemed satisfied with their capacity to meet the intended growth targets. HR department is taken into the loop while planning expansion so they can recruit more people if needed. + The provider is modifying and improving their MIS system as it has grown to cater to the needs of expanding data points. 6B. The equity investors, lender, board and management are aligned on the provider s social goals and implement an appropriate financial structure in its mix of sources, terms and desired returns + Annual report is prepared in line with International financial reporting standards and provides disclosure on risks faced by institution, contingent liabilities and equity details. + As per policy, the provider reinvests 70 percent of the total surplus back in operations. However, changes can be made to this after discussion with the board.

13 + The management and board ensures that incoming investors and lenders are cognizant of and in alignment with their social goals 6C. The provider sets prices responsibly + The board monitors provider s performance against policy. Over the next three years, they intend to reduce their interest rate which is calculated on declining method. Loan Loss Expense Ratio (LLER) is hovers between percent and Operations Expense Ratio (OER) is at 5 percent, which is reasonable as per local context. The provider s APR is within acceptable range. Returns on Assets (ROA) is at percent which again is acceptable as per the market trends. + Fee structures at the organization are reasonable. 6D. The provider compensates its senior manager in a way that is appropriate to the provider s social goals + Board evaluates the top management s performance on an annual basis. + Salary scale is determined based on the portfolio yield. Areas for improvement The provider should develop a written document to guide them while engaging with new investors and lenders specifying the provider s mission and goals, expectations of financial returns, timeframe for investment/support and the investor/lender s willingness to cater to these goals. The annual appraisal and compensation/bonus decision should take incorporate social performance results with manager being incentivized on both social and financial performance criteria

14 CONCLUSION As depicted by the results, the provider has exhibited strong performance on four out of six dimensions, i.e. dimension 1 (Define and monitor social goals), dimension 4 (treating clients responsibly), dimension 5 (treating employees responsibly) and dimension 6 (balancing financial and social goals) by scoring 85%, 84%, 92% and 92% respectively in compliance. With little improvements, the provider can easily reach 100 percent compliance score. However, much work needs to be done on two dimensions; dimension 2 (ensuring board and senior management s commitment to social goals) and dimension 3 (provider s products, services and delivery channel meet the client s needs and preferences). While the provider has many strengths in dimension 2 with a fully committed board, absence of defined social outcomes and subsequent indicators render effective monitoring difficult. By linking measurable outcomes with their goals and designing appropriate indicators, score in this dimension can be improved drastically. By systematically gathering social data, the provider will be able to make informed decisions at the board and senior management level ensuring that the organization is making progress towards its professed social goals (resources given in next section). Designing innovative products, revising terms of the existing ones (size, repayment schedules, penalties) as per client needs can help the provider in improving their score in the dimension 3. However, it is understood that performance on this dimension is tied up with broader contextual circumstances (industry outlook, funding sources and restrictions). Hence a timeline cannot be assigned to improvement in this dimension.

15 SUGGESTED RESOURCES The provider can refer to the following resources for improvement in its compliance to social performance standards. 1. A guide for training staff on collecting social data %20guide%20.docx 2. Imp-Act/MicroSave Guidance Note on Governance 3. Lean Data Field Guide Tips for collecting customer data to build more impactful businesses 4. Guidelines on outcomes management for financial service providers 5. List of recommended outcome indicators 6. Your Board's Social Responsibilities: Guiding Your Board to Manage Social Performance 7. Handbook on SPM for Boards 8. Encyclopaedia of Occupational Health and Safety 9. First aid training presentation (VF AzerCredit, Azerbaijan) Collection guidelines for financial service providers For a complete list of resources, please visit

16 Annex A List of documents and Manuals Reviewed 1. Audit Reports 2. Board meeting minutes 3. Client Exit Surveys 4. Code of Conduct Collection Policy 5. Code of Conduct HR policy 6. Complaints Policy 7. Complaints Reports 8. Contracts consent form 9. Credit policy products manuals 10. Credit Policy credit appraisal form 11. Drop out forms 12. Employee satisfaction survey 13. Exit forms 14. Financial Statements 15. Health and Safety Risk Report 16. HR Manual 17. HR reports 18. Market Research reports 19. Loan Contract 20. MIS platform 21. MIS reports 22. Privacy policy HR manual 23. Product description 24. Product manual 25. Risk policy 26. Salary scale 27. Staff turnover analysis 28. Strategy/business plans 29. Training materials/training plans

17 Action Plan- Damen Support Program Agenda Summary of evidence and recommendations Year 1 Output Department in charge DAMEN SUPPORT PROGRAM'S COMMENTS M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Currently the research team along with the field staff defines indicators and collects data but it ought to be more methodical. The Research team: List down social small amount of social data that is presented performance indicators' data to be in hard copies with the management and collected. Refer to source no. 5 in does not make it to the MIS, making analysis suggested sources for the examples. Currently, DSP is in the process of migration of over time difficult. While the provider has Engage relevant departments such as MIS, Research Team its Data Base. Further attention it will be given defined indicators for its WEI project, data operations, internal audit, and MIS when the migration is complete and functional. collection functions needs to be further for data collection. streamlined especially when it comes to Involve MIS on each stage for qualitative indicators, with well-defined collected data's analysis. roles and responsibilities and wellmaintained database. The audit department selects 5 branches and 1.2 one area office every month to ensure and monitor smooth operations, however, currently, they do not consider social performance data. It is suggested to develop a list of social performance indicators for Social performance indicators to be added in regular field visit indicators, as given by the Research team. Reference Source: 5 Audit Department, Research team Inidcators have been selected and will come to fruition during the said time. However, further action on its collection and audit will be taken when the migration process of complete and functional. every parameter and make a part of regular Training on data collection protocols Training modules to be developed on 1.3 remains informal and needs to be formalized in collaboration with the research team and data collection protocols and training schedules to be made. Reference HR Will begin by 3rd Quarter the HR department. Source: 1 and Currently the provider does not adhere to any comprehensive environmental framework nor espouses any commitment to environment in its strategic framework, but it is recommended for them to look into it. Considering social data collection is in nascent stages, there is no segregation of financial and social indicators when 2.2 gauging performance of senior management. It is recommended that in performance appraisal system, social indicators be introduced as well. Design an environmental framework on awareness and innovative environment friendly products level. Use PPAF's ESM Frameowork and Cerise SPI4 tool'ssection on environment for guidance. revised performance appraisal forms with addition of social performance indicators once designed and decided. Research team and senior management HR DSP will work towards it in its 2nd Quarter Revision of performance appraisal will be done in the last quarter The process mentioning and training field staff on acceptable collection practices is under way. Previously, DSP launched Robo-Call services for those clients whose 4.4 A written policy spelling out acceptable collection practices in highly recommended design policy for acceptable collection practices. Reference source: 10 HR/operations repayment is near and for those who didn't repay in time. This phase was DSP's pilot phase. As of now, we look forward not only to add the written policy for acceptable and unacceptable practices but ensure its efficiency as well. We will begin to work on this in the next quarter. While a manual register for complaints is managed at the head office level, owing to its rudimentary nature, analysis for observing 4.5 trends and patters is difficult. For instance, while turnaround time for complaints is 7 days, at head office, it was seen that many complaints do not get resolved within the suggested time frame. While most of these complaints concerned insurance claims, there is a need for analysis and systematic resolution, to avoid recurrence. Evidence of complaint management at the branch level is also sparse. It is recommended to streamline Formalized client satisfaction survey report shared with the management on annual basis and designing of systemized database for complaint handling mechanism with the provision of in depth analysis of complaints and complaint patterns. Refer to CERISE SPI4 section on complaint handling for guidance. We are looking into the matter of client complaint, and trying to come up with a methodological approach Operations, MIS and to analysis the impact of audit complaints. Most probably, it will be up and running by 3rd quarter if objections are passed. the data collection and storage in these domains, using MIS and findings should be shared with the senior management. The HR manual should also include policies 5.1 regarding provision of compensation to design policy for work related injuries and how DSP can compensat HR employees for work related injuries. The institution should provide specific trainings to employees on Health Safety design training manual on Health Safety Environment. Reference Source: HR To be done in 3rd Quarter as an annual exercise Environment 8 The provider should develop a written 6.1 document to guide them while engaging with new investors and lenders specifying the provider s mission and goals, expectations of financial returns, timeframe for investment/support and the investor/lender s design guide for engaging with investors outlining the potential areas where DSP will not drift from its social goal with the investors. HR and senior management DSP will work towards it in its 3rd Quarter 6 willingness to cater to these goals. 6.2 The annual appraisal and compensation/bonus decision should incorporate social performance results with manager being incentivized on both social and financial performance criteria Revise annual appraisal and compensation/bonus decision criteria so that social performance results are incorporated. Use the social performance indicators decided by the research team as guidance. HR DSP will work towards it in the 4th Quarter