Innovation in microfinance performance reveals surprising insights about the effectiveness of the Balanced Scorecard framework in Gulu District. This research uncovers critical weaknesses in learning and growth perspectives, challenging conventional views and offering valuable implications for enhancing service delivery in microfinance institutions.
2.9 – Performance of Microfinance institutions
The distinctions between MFIs and other financial institutions have significant implications for assessing the performance of MFIs. Thus, the nature of MFIs dictates that assessment approaches and results may vary according to a number of factors (Koveos & Randhawa, 2004), including: the objectives of the MFI; the person, group, or organization performing the assessment and/or impacted by the MFI; the environment in which the MFI operates, and the time and other dimensions of the assessment
In the simplest sense, assessing the performance of an organization means evaluating its progress toward the accomplishment of its mission or objectives. An MFI’s mission includes the improvement of the lives of the poor through the provision of deposits and loans as well as various forms of outreach. In order to accomplish its mission, the MFI must address both private and public objectives.
The MFI’s nature is very much affected by conditions in the country of its operation. Deposits, as well as loans, are usually small, thus affecting operational efficiency and the ability to raise capital. To fill the gap, the MFI must receive subsidies. These subsidies play the role of redistributing income to the poorest.
However, this redistribution gives rise to an opportunity cost that the MFI must ultimately address. To have sustainability, then, the MFI must deal effectively with a variety of stakeholders, including customers, donors, investors, managers and staff, and society as a whole. Its performance, then, may be assessed separately and differently by each stakeholder (Schreiner, 1999).
The nature and objectives of MFIs reveal that traditional measures used for the assessment of most other financial institutions are not applicable to this sector. In addition, the complicated environments in which MFIs operate point to the need for developing multifaceted, rather than single, assessment methodologies. This study used the BSC approach, in evaluating performance of the MFIs.
The BSC approach is meaningful in the case of MFIs, since in addition to measurement, the BSC can also be used as a strategic management system (Kaplan and Norton, 1996, p.10), something necessary for the sustainability of the MFIs.
As in the case of most other financial institutions, interest rates are an important aspect of the MFI’s operations. The reality of high administrative costs force MFIs to charge interest rates that are substantially higher than those of other financial institutions and often a multiple of market rates. The ratio of administrative costs to total costs can be at least three times that of other institutions.
However, loan loss rates for MFIs can be less than 2%. Financially successful and sustainable MFIs need to generate their capital base from their own profits, rather than donor grants or loans. Indeed, after adjusting for both implicit and explicit subsidies, the better performing microfinance programs generate real returns on average total assets of between 2% and 5% (Christen, 1998).
Financial performance also depends on the quality of the institution’s portfolio. For MFIs, the small size of loans and high administrative costs necessitate high loan performance standards. The high costs and inability to access outside funds in the initial years make it vital for the institution to recover loans.
Group monitoring creates the appropriate incentives for screening initial loan applicants and ongoing monitoring and assistance to those facing adverse market conditions.
MFIs have various stakeholders that include their customers, society as a whole, the donors, investors, and managers. Each group may have different, and perhaps divergent, perspective on the MFI. According to Schreiner (1999, p.12), MFI customers use the institution’s services if they become better off with the institution’s services.
This may occur, for example, if customers receive greater benefits than those attained using another institution’s services.
They have a simple way of showing their approval for the institution’s performance, by coming back for more. Of course, the benefits received by the customer must not rise to the point of threatening the institution’s sustainability. The period over which these benefits are generated is a crucial element of assessment.
Society as a whole benefits from the operations of an MFI, if the institution delivers services to the poor in a manner that is financially and socially effective. From a financial perspective, the benefits generated by, and for the customers whether directly or indirectly, must be greater than the costs.
Customers may receive benefits, for example in terms of cost and availability of credit that cannot be attained elsewhere. The generation of these benefits, may imply lower transfer payments from the rest of society to the poor. In addition, society benefits if the MFI’s services provide customers with a sense of empowerment, alleviating the potential for certain social problems.
For agencies and individuals donating funds to MFIs, assessment entails comparison of the benefits derived by the donor and the relevant costs. The benefits and opportunity costs emphasized vary from donor to donor. Donors have their own objectives, financial constraints, and donation portfolios. For those investing in MFIs, performance is reflected in the profitability of the institution.
The relevant indicator, then, is the contribution of the investment to the investor’s wealth. In addition to investors, MFIs need to maintain their on-going relationship with creditors. Thus, the institution will need sufficient cash flow and exhibit adequate capacity to service its debt on a timely basis.
For the MFI’s manager, the institution performs successfully if it achieves its organizational objectives and enables the manager to achieve his/her own professional objectives.
Thus, the MFI’s sustainability and ability to support managerial positions are tantamount to good performance. MFI clientele are generally characterized by low literacy levels. They often lack the ability to enquire about financing opportunities, and are even more handicapped about knowledge on the additional financial and advisory services MFI staff can offer.
Staffs at MFIs have to be more proactive and need to garner savings from a wide clientele base. The need for a secure, stable channel for savings is paramount amongst the poor. Location of branches in population centres enables savings mobilization at a low cost. Easy access to the institution for funds and business advice are hallmarks of successful MFIs (Koveos & Randhawa, 2004).
Frequently Asked Questions
What is the Balanced Scorecard approach in microfinance?
The BSC approach is meaningful in the case of MFIs, since in addition to measurement, the BSC can also be used as a strategic management system, something necessary for the sustainability of the MFIs.
How do microfinance institutions assess their performance?
Assessing the performance of an organization means evaluating its progress toward the accomplishment of its mission or objectives, which for an MFI includes the improvement of the lives of the poor through the provision of deposits and loans.
Why are traditional performance measures not applicable to microfinance institutions?
The nature and objectives of MFIs reveal that traditional measures used for the assessment of most other financial institutions are not applicable to this sector due to the complicated environments in which MFIs operate.