Microfinance is designed to improve the lives of very poor people. That goal, often called a “social” bottom line, is an important measure for microfinance programs, but is hard to gauge. Grameen Foundation has long recognized the need to develop a practical and accurate tool to measure social performance, just as there are financial tools to measure financial performance.
Our search for an innovative solution for the microfinance industry lead us to develop the Progress Out Of Poverty Index™ (PPI™) as an easy to use, flexible tool that is easily customized for a particular country.
The Progress out of Poverty IndexTM (PPI™) is a simple and accurate tool that measures poverty levels of groups and individuals. Using the PPI, MFIs can better determine their clients’ needs, which programs are most effective, how quickly clients leave poverty, and what helps them to move out of poverty faster.
CGAP, Grameen Foundation and the Ford Foundation endorse the use of rigorous poverty assessment tools and believe the Progress out of Poverty Index™ (PPI) is a highly effective tool for those institutions interested in measuring the likelihood of client poverty.
The PPI is based on an approach developed by Mark Schreiner of Microfinance Risk Management, L.L.C. It is a user-friendly tool that estimates the likelihood that clients fall below the national poverty line, the poverty line that defines the poorest half below the national poverty line or the $1/Day/PPP and $2/Day/PPP international poverty lines. While the PPI is built on a universal methodology, each PPI is country specific and based on that country's best nationally representative income and expenditure household survey.
For each country, the process starts with a nationally representative income and/or expenditure survey. The data from the survey are analyzing to rank indicators that strongly correlate with poverty. These indicators are then tested and vetted with local MFIs and their representatives. Each of these steps is described in detail below.
MFI field staff visit the homes of clients to collect key information. Using a practical list of ten indicators such as family size, the number of children attending school, the type of housing and others, staff members interview clients while observing their households. Each indicator receives a score that reflects client response, and all ten indicators receive a total score.
The indicators in each country are drawn from either that country’s national household survey (such as Mexico’s INEGI database or Pakistan’s Integrated Household Survey), or the country-specific World Bank Living Standards Measurement Survey, depending on which data set has the most complete information. This index then serves as a baseline from which client progress is measured.
Field staff match the total points from a client’s PPI to a poverty level estimate using a simple chart. In this way, individuals are ranked according to the applicable poverty line. Using this analysis, institutions can assess the poverty likelihood of clients by branch, by rural or urban setting and by client history (new or current).
By tracking poverty levels against other client demographic information, the results of the PPI allow an MFI to make key decisions about its mission and how to carry it out. By using the PPI over time, MFIs can:
1. Better define and adhere to their missions.
2. Increase their competitive edge, profitability, and ability to retain clients by responding more quickly and effectively to changes in their communities and by showing documented results.
3. Provide timely and accurate information to socially responsible investors who may want to provide financial resources to their programs.