Jacob Yaron

Key Issues in Assessing the Performance of Microfinance Institutions

Abstract The microfinance revolution and the tremendous growth of the industry have drawn attention to performance assessment of microfinance providers, the operations of which are often supported by substantial public funds. In this paper we discuss five related issues: a) the search for an adequate measure of financial sustainability, b) the trade-off between outreach and sustainability, c) the question of how to determine the opportunity cost of concessionary borrowings, d) the conceptual framework of performance assessment, and e) the integration of saving services into performance assessment and subsidy dependence measures.

Measuring the performance of microfinance providers: an assessment of past and present practices

Measuring the performance of providers of financial services to poor individuals and to micro and small enterprises is a relatively new phenomenon, and the paper discusses the reasons for this. It is argued that using traditional financial ratios to assess performance of microfinance institutions (MFIs) is inappropriate, owing to the high level of subsidies popular in the industry, which these measures ignore. In contrast, two performance measures that are becoming increasingly popular in the microfinance industry do attempt to adjust for subsidies granted to MFIs. These two performance measures, financial self sufficiency (FSS) and the subsidy dependence index (SDI), are compared and contrasted. The paper points to the superiority of the SDI over the FSS, and suggests the use of the outreach index alongside the SDI, to measure the degree to which the MFI has achieved social objectives.

Information Transparency and Agency Costs in the Microfinance Industry

The microfinance sector is an important ingredient in the process of global integration of the financial markets. The rapid development of the microfinance sector in many developing countries motivated prominent donors to develop systems for standardised and comparable reporting of financial and social performance. This effort has yielded substantial results in terms of promoting transparency, reducing information asymmetries and mitigating agency conflicts in an industry vulnerable to such problems. The article discusses these problems and the steps initiated by the industry to overcome them. We also point to conflicts of interests that may persist because the information platform and the indicators that are being reported are managed and selected by the industry itself. In particular, we use a common indicator of performance, the Operational Self-Sufficiency Index, to highlight the tendency of selected indicators to overstate performance and understate subsidies and costs.

Dilemmas and Directions in Microfinance Research

Associating microfinance with alleviation of poverty has become a truism. Subsequently, the microcredit movement has enjoyed wide support from governments, international development agencies, wealthy philanthropists, renowned financial institutions and even the Noble Peace Prize Committee. Indeed, in awarding the Nobel Peace Prize to Muhammad Yunus and Grameen Bank in 2006, the committee noted that ‘Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty’. Consistent with this trend, success stories abound on the internet and in countless reports of microentrepreneurs who set up successful businesses, lifting their families and neighbouring poor out of poverty.

Challenges and Innovations in Promoting Microfinance

The competitive advantage and the distinctive feature of microfinance relative to conventional lending and saving institutions lie in its core mission of providing access to financial services to those considered unbankable by the formal financial services industry. This is based on the idea of inclusion and on the belief that increasing access to financial services should encourage entrepreneurial activity, generate growth and contribute to the alleviation of poverty (Khavul et al., 2013). It is also generally accepted that providing the unbankable with access to financial services should contribute to the empowerment of weaker populations and help them to build individual and social capital (Howson, 2012; Bateman, 2010).