How does microfinance performance evaluation reveal hidden strengths and weaknesses? This research uncovers surprising insights from Gulu District’s microfinance institutions, demonstrating the Balanced Scorecard’s effectiveness while highlighting critical gaps in innovation and growth, reshaping our understanding of performance measurement in this sector.
Gulu University
Faculty of Business and Development Studies
A dissertation submitted to the Faculty of Business and Development Studies
In partial fulfillment of the requirements for the award of a degree of Master of Business Administration
Finance & Accounting
Of Gulu University
Evaluation of Performance
of Microfinance Institutions, Using Balanced Scorecard: A Case of Gulu District
By
Abwola Morro James
BSc (Hons) (Physics/Maths) with Concurrent Dip. Educ. (MUK)
Post Graduate Dip. Computer Science (MUK)
November 2009
Project presentation
Evaluation of Performance of Microfinance Institutions Using Balanced Scorecard: A Case of Gulu District
Abwola Morro James
Supervised by: Prof. Name & Dr. Name
2009
Microfinance institutions (MFIs) have evolved as an economic development tool intended to benefit low-income people. The benefits can only be achieved if the institutions have a good financial and outreach performance. The purpose of this study was to evaluate the performance of the microfinance institutions using balanced scorecard (BSC). Applying the BSC in the evaluation of MFIs was appropriate given its blend of quantitative and qualitative measurements perspectives.
The study adopted both descriptive and cross-sectional approaches while incorporating mainly quantitative research methods. The sample comprising of 74 respondents was drawn from the 8 MFIs selected for the study. Data was collected using questionnaires, and documentary review; and analysed using Statistical Package for Social Scientists (SPSS) software.
The findings showed that the selected MFIs were indirectly using BSC in their organisations, and BSC was found an appropriate performance measurement & management tool for the MFIs given its blend of financial and non-financial measures. However, weaknesses were seen in the areas of learning, growth, and innovation perspectives of the BSC.
The study showed that good learning and growth, improved internal business processes, which in turn, improved customer satisfaction and financial performance. Customer satisfactions also encouraged more customers to join the MFIs, resulting to customer loyalty & retention, effective loan repayment, and good financial outcomes. The employees’ welfare was poorly addressed, and staffs were not provided with appropriate tools and equipments to improve on the internal business processes.
These affected the performance levels and service delivery levels of the MFIs. The study also showed that, there were a direct proportionate relation between performance and service delivery levels, implying a good performance resulted into a good service delivery.
In summary, the researcher believes that the conceptual framework of the BSC implementation, and strategic management as represented in the strategy map (Appendix B, Figure 23), developed by the researcher, if used by the MFIs, could help in aligning the MFIs to have an effective performance and efficient delivery of services, resulting into satisfied customers, motivated employees, happy shareholders, and above all, a profitable, socially viable, and sustainable MFIs. However, this study is not conclusive for all MFIs, since it does not cover a wide scope of study, although it can serve as a pedagogical tool to change the reader’s awareness and inspire changes.
Chapter 1 – Introduction
1.1 – Background of the Study
A study on the evaluation of performance of the MFIs operating in Gulu District was carried out, in which the MFI sector was selected for the study because MFI in Uganda in general, is undergoing a strong process of regulations as well as dynamic changes. In Gulu district in particular, a number of MFIs are being formed, and in consideration of the post conflict situation prevailing in the area, the MFIs encountered many challenges in the delivery of effective services.
Local MFIs are shaky or non-existent, individuals lack collaterals, and paradigms for successful operations, and best practices models are blown away with uncertainties. Many groups desire a jump-start to economic survival, although, their specific requirements vary widely. Returnees, the internally displaced, the recently demobilized, and the local populations all seek individual specialized services (Jessica L. J, 1999).
1.1.1 – Microfinance and Poverty Eradication
Microfinance is an effective tool in alleviating poverty by increasing incomes of poor households and reducing their vulnerabilities. Its operations involve disbursements of small loans, savings, money transfers, insurance, and other financial services to the low-income earners who cannot access financial services from the mainstream financial institutions or banks. It has emerged over the past few decades as an important tool for economic development and the empowerment of the world’s poor.
Microfinance stands poised to transform itself from a “movement” into an industry that can meet and sustain the vast demand for financial services among the world’s poor. As a key element in this transformation, practitioners, donors, and service providers will have to recognize and embrace the need for transparency on the performance of the MFIs.
Transparency in this context means, the free flow of publicly available, accurate, and comparable information. This serves two main goals: First, the information about an MFI’s performance enhances managers’ ability and incentive to improve, and the incentive increases when managers and outsiders can compare an MFI’s performance with other MFIs, agreed standards, and/or supervisory requirements.
Secondly, financial reporting in a format understood by the outside world is a precondition for attracting the commercial funds that will allow massive expansion of microfinance services.
In an attempt to create and build a national network of rural financial infrastructure, the government has recently developed a rural finance strategy, a component of a scheme, commonly refereed to as “prosperity for all”, to deliver microfinance services to the population, especially those living in the rural areas. The objective is to ensure that services reach out to the population in every sub-county and subsequently to every parish to encourage savings mobilisation and safe use of the savings deposits to provide investment capital to rural enterprises in form of loans.
The specific objectives of the rural finance strategy are to support the establishment of a viable and properly managed SACCOs at every sub-county and link it to a regulated financial institution. Ensure all households have access to a financial outlet and provide adequate regulation and supervision of SACCOs to safeguard member’s deposits.
The Government selected Post Bank Uganda (PBU), a government owned bank, to manage the activities, and to act as a link bank through which capacity and performance of SACCOs are monitored. However, out of the 80 districts of Uganda, PBU by 2007 was operating in 27 districts, and was expected to cover 34 districts at the end of 2008.
The bank, as of April 2009, had a deposit base of Shs50 billion and a loan portfolio of Shs25 billion, and had 32 outlets consisting of 22 branches and 10 mobile centres[1]. Other deposit taking institutions cover 46 districts, while the rest did not have any deposit taking financial institutions. PBU had also entered into an agreement with Map International; the New York based multi-dimensional financial systems that linked consumers, merchants, banks, mobile operators and service providers to deliver modern banking services throughout the country, particularly in rural areas (Muwanga, 2007).
1.1.2 – The Balanced Scorecard
Balanced Scorecard (BSC) is a tool that translates an organization’s mission and strategy into a comprehensive set of performance measures that provides a framework for a strategic measurement and management system. The strength of the BSC as a performance measuring system is its combined use of financial and non-financial measures in encouraging and rewarding employees in achieving an organization’s long-term goals.
The authors of the BSC, Robert Kaplan and David Norton, argue that in the new information age, organizations require new capabilities for competitive success such as customer relationships, product innovation, customized products, employee skills, motivation and information technology. BSC therefore focuses on four perspectives, namely, Financial, Customer, Internal business process, then learning, growth & innovations.
By including all the critical success factors in the performance measurement system, the organization will have a better idea of how to achieve its potential competitive advantage.
1.1.3 – Problems in running Microfinance Institutions
Generally, the availability and outreach of MFI services in Uganda is still limited to few customers. According to the background information obtained from the 2005/06 Uganda finance budget, out of a potential clientele of 9.5 million people, MFIs, reached only 13%. Also, the bulk of institutions involved in MFI services were biased towards urban areas and even where services were available, the interest rates charged remained high. This has in some instances led to loss of households assets to meet loan repayment obligations.
Sound microfinance activities based on best practices play a decisive role in providing the poor with access to financial services through sustainable institutions (Ledgerwood, 2000). However, there have been many more failures than successes. In the first instance, some MFIs target only a segment of the population that has no access to business opportunities because of lack of inputs, markets, and demand.
Productive credits to such people without other inputs are of no use. Many MFIs never reach either the minimal scale or the efficiency necessary to cover costs, and many MFIs face non-supportive policy frameworks and daunting physical, social, and economic challenges. Some MFIs fail to manage their funds adequately enough to meet future cash needs and, as a result, they confront a liquidity problem.
Others develop neither the financial management systems nor the skills required to run a successful operation. In the current competitive environment, an organization that develops a system capable of producing accurate, timely, and comprehensive information on operations, especially on the loans portfolio, will strengthen its financial performance, expand its client reach, and change the mode of work of its staff.
It is against the above background that, the researcher chose to make an evaluation of the performance of the MFIs. Gulu district was selected as a case for the study, in order to find out whether some of the problems mentioned are being addressed, and if not, what measures should be adopted in order to improve on the performance of the MFIs. In order to accommodate the special nature of the MFIs, the study was conducted using the BSC approach as a tool in evaluating the performance of the MFIs.
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Frequently Asked Questions
What is the purpose of evaluating microfinance institutions in Gulu District?
The purpose of this study was to evaluate the performance of the microfinance institutions using balanced scorecard (BSC).
How does the Balanced Scorecard help in measuring microfinance performance?
BSC was found an appropriate performance measurement & management tool for the MFIs given its blend of financial and non-financial measures.
What weaknesses were identified in the microfinance institutions’ performance evaluation?
Weaknesses were seen in the areas of learning, growth, and innovation perspectives of the BSC, affecting overall service delivery and performance levels.