EVALUATION OF PERFORMANCE OF MICROFINANCE INSTITUTIONS USING BALANCED SCORECARD: A CASE OF GULU DISTRICT
This research evaluates the performance of microfinance institutions in Gulu District using the Balanced Scorecard framework. The study employed both descriptive and cross-sectional approaches with quantitative methods, surveying 74 respondents from 8 MFIs. Findings indicate that MFIs were indirectly using BSC principles, which proved effective for performance measurement through its blend of financial and non-financial metrics. However, weaknesses were identified in learning, growth, and innovation perspectives, affecting overall service delivery and performance levels.
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
DECLARATION
I Abwola Morro James, hereby declare that this dissertation is my own original work, that all reference sources have been accurately reported and acknowledged, and that this document has not previously, in its entirety or in part, been submitted to any University or Institution of higher learning, for an award of a degree or other professional qualification.
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Abwola Morro James Date
APPROVAL
This dissertation entitled “Evaluation of Performance of Microfinance Institutions Using Balanced Scorecard: A Case of Gulu District”, was approved for examination, as a partial fulfilment of the requirements for an award of a degree of Master of Business Administration of Gulu University
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Mr Uwonda Gilbert Mr Biryomumeisho Justus
Supervisor Supervisor
DEDICATION
I would like to dedicate this work to my late father Mr. Besaleri Morro Odwar, my mother, Mrs. Kasalina Akech Morro, my dear wife, Mrs. Filder Abwola Morro. All our loving children; Grace Alanyo, Godfrey Morro, Abwola Peter, Beatrice Abwola, Nightie Lajara, Patrick Okello, David Odong, Pascal Abwola, Prince Joel Otim, Sandra Aya, and Herbert Lubangakene. My two sisters, Mrs Consy Olweny & Mrs Doris Opiyo Lutara, my two brothers Samuel Baker Okot & Geoffrey Olanya Olenge, all grandchildren and other dependants, all friends and relatives. Your words of encouragement in one way or another, gave me a strong spirit of endurance despite all challenges.
Special dedication goes to my late father, whose commitments to my education and his dedication to work during his lifetime, inspired me to work hard, and this enabled me to complete this dissertation within the stipulated period. May the Almighty God rest his soul in eternal peace, Amen.
ACKNOWLEDGEMENT
I wish to express my sincere gratitude and appreciation to my supervisors; Mr Uwonda Gilbert and Mr Biryomumeisho Justus, for their intellectual guidance and advice they gave me during the production of this dissertation. Without their efforts, this work would not have been a success.
I also register my thanks to my research assistant, Mr Obonyo Boniface Newton, who worked tirelessly to collect the data from the microfinance institutions in Gulu district.
My sincere gratitude also goes to all my lecturers in Gulu University, who, despite my age, natured and shaped me to be able to cope with the rigours of the MBA course. They are Mr. Nicholas Okello (Dean Faculty of Business & Development Studies, and lecturer in Financial Management & International Business Finance), Mr.
Gilbert Uwonda (Deputy Dean Faculty of Business and Development Studies & Lecturer Quantitative methods), Mr Kenneth Olido (Research Coordinator, Head of Marketing, and lecturer in Marketing management, Creativity, Innovations, and Change), Mr Augustine Okech (Head of Finance & Accounting, and lecturer in Basic Accounting & International Accounting), Mr Delewa Onyango (Management Accounting, Strategic Management Accounting & Financial Reporting), Mr.
Joe Ocen (Strategic management), Mr Abel Mucunguzi (General Management & Human Resource Management), Mr. Ferdinand Olang (Organisation Behaviour & Organisational Development), Mr. Fabius Okumu Alya (Legal framework in Business), Dr. Charles Okello Ayai (Managerial Economics & Operations Management), Dr. Christopher Oyat (Research Methods), and Mr. Godfrey Tabo (Information Technology).
I would also like to acknowledge the support I got from all other university staff and friends whom I have not mentioned by name.
My special thanks go to the staff and clients of all the selected microfinance institutions, for willingly responding to the questionnaires and interviews when they were contacted.
Above all is the creator, thank you Almighty God for giving me the strength and wisdom that enabled me to complete the coursework and this dissertation within the required periods.
TABLE OF CONTENTS
Page
DECLARATION i
APPROVAL ii
DEDICATION iii
ACKNOWLEDGEMENT iv
TABLE OF CONTENTS v
LIST OF TABLES viii
LIST OF FIGURES ix
ACRONYMS & ABBREVIATIONS x
ABSTRACT xi
CHAPTER 1 – INTRODUCTION 1
1.1 – Background of the Study 1
1.1.1 – Microfinance and Poverty Eradication 1
1.1.2 – The Balanced Scorecard 2
1.1.3 – Problems in running Microfinance Institutions 3
1.2 – Area of Study 4
1.3 – Statement of the Problem 5
1.4 – Objectives of the study 6
1.5 – Research Questions 6
1.6 – The Scope of the Study 7
1.7 – Significance of the study 7
1.8 – The Conceptual Framework of the Research 8
1.9 – Justification of the Study 12
1.10 – Limitation of the Study 12
CHAPTER 2 – LITERATURE REVIEW 13
2.1 – Introduction 13
2.2 – Performance Measurement 13
2.3 – Balanced Scorecard & Performance Measurement 15
2.4 – The Balanced Scorecard’s four strategic processes 17
2.5 – Evaluation of the Balanced Scorecard 19
2.6 – Definition and Status of Poverty 21
2.7 – Role of Microfinance in serving very poor people 21
2.8 – Categories of Microfinance Institutions 22
2.9 – Performance of Microfinance institutions 24
2.10 – Evaluation of Performance of MFIs 26
CHAPTER 3 – RESEARCH METHODOLOGY 29
3.1 – Background 29
3.2 – Research Design 29
3.3 – Study Area 29
3.4 – Study Population and Sample Size 30
3.5 – Sampling Procedure 30
3.6 – Data Collection Methods 32
3.6.1 – Primary data collection 32
3.6.2 – Secondary data collection 34
3.6.3 – Reliability of the research questionnaires 34
3.7 – Data Analysis Methods 35
3.8 – Limitations to the study 36
3.9 – Conclusion 36
CHAPTER 4 – DATA PRESENTATION, ANALYSIS & INTERPRETATION 37
4.1 – Introduction 37
4.2 – Customers background information 37
4.2.1 – Gender of customers 38
4.2.2 – Educational level 39
4.2.3 – Age of the customers 40
4.2.4 – Period for the Customers with the MFIs 41
4.2.5 – Type of loans received by customers 42
4.2.6 – Customers ability to pay the loans on time 43
4.2.7 – Customers Satisfaction survey 44
4.2.8 – Customers views on improvement of MFI Services 45
4.2.9 – Impact of the MFIs on Customers’ income & Livelihood 45
4.2.10 – Alternative financial services for the Customers 46
4.3 – Employees background information 47
4.3.1 – Number of employees in the MFIs 47
4.3.2 – Employee educational status 48
4.3.3 – Employees positions of responsibilities 49
4.3.4 – Employee length of service with the Organisation 49
4.4 – Status of the Microfinance Institutions 50
4.5 – Establishing extent of the use of BSC 51
4.6 – Evaluation of performance measurement 54
4.7 – Evaluation of Service delivery levels 56
4.8 – Linking Performance & Service delivery levels 58
4.8.1 – Correlation Analysis 58
4.8.2 – Regression Analysis 60
CHAPTER 5 – DISCUSSIONS, CONCLUSIONS & RECOMMENDATIONS 65
5.1 – Introduction 65
5.2 – Customer background information 65
5.2.1 – Gender of customers 66
5.2.2 – Educational level 66
5.2.3 – Age of the customers 67
5.2.4 – Period for the customers with the MFIs 67
5.2.5 – Type of loans received by customers 68
5.2.6 – Customers ability to pay the loans on time 68
5.2.7 – Customers satisfaction survey 68
5.2.8 – Customers views on improvement of services 68
5.2.9 – Impact of the MFI on Customers Income & Livelihood 69
5.2.10 – Alternative financial services for the customers 69
5.3 – Employees background information 70
5.3.1 – Number of employees in the MFIs 70
5.3.2 – Employees Educational Status 70
5.3.3 – Employees positions of responsibilities 71
5.3.4 – Employees length of service with the organisation 71
5.4 – Status of the Microfinance Institutions 71
5.5 – Establishing the extent of the use of BSC 72
5.6 – The evaluation of performance measurement 72
5.7 – The evaluation of service delivery levels 73
5.8 – Linking Performance measurement and Service delivery 74
5.9 – Conclusions 74
5.10 – Constraints and Limitations of the Study 75
5.11 – Recommendations 76
5.12 – Areas of further research 77
REFERENCES 78
APPENDIX A – RESEARCH QUESTIONNAIRES 83
APPENDIX B – MICROFINANCE STRATEGY MAP 88
APPENDIX C – MAP OF UGANDA, AMURU & GULU DISTRICTS 89
APPENDIX D – THE MICROFINANCE INSTITUTIONS 90
APPENDIX E – GLOSSARY 91
LIST OF TABLES
Table 1 – The Ugandan Financial Sector Structure 23
Table 2 – Distribution of respondents during the study 31
Table 3 – Cronbach’s Coefficient Alpha Scores 35
Table 4 – Customer responses from the selected MFIs 38
Table 5 – Customer responses by Gender 39
Table 6 – Educational level & Age in Cross tabulation 41
Table 7 – Age in years & Periods with the MFIs in years 42
Table 8 – Type of loan received & Ability to pay the loan on time 43
Table 9 – Data on how MFIs should improve their services 45
Table 10 – Impact on Customers’ income & living standard 46
Table 11 – Where customers accessed financial services 46
Table 12 – Organisations and the Employee Respondents 47
Table 13 – Extent of the use of Balanced Scorecard 52
Table 14 – Evaluation of level of performance 54
Table 15 – Evaluation of service delivery levels 57
Table 16 – Performance Measurements 59
Table 17 – Service delivery 59
Table 18 – Correlations of Performance Measurement & Service delivery 60
Table 19 – Standardised & Unstandardised Coefficients 61
Table 20 – Model Summary 62
Table 21 – Analysis of Variance (ANOVA) 63
Table 22 – Extent of the use of the balanced scorecard 86
Table 23 – Evaluation of performance levels 86
Table 24 – Variables used in responding on obstacles to improving performance 87
Table 25 – Evaluation of service delivery levels 87
Table 26 – Variables used in responding on obstacles to improving customer service 87
Table 27 – Key statistics for Deposit Mobilising Institutions in Uganda 90
Table 28 – List of microfinance institutions in Gulu District as of 2006 90
LIST OF FIGURES
Figure 1 – A Conceptual Framework for the Research 11
Figure 2 – Four Perspectives of Balanced Scorecard 16
Figure 3 – Managing Strategy – Four processes 17
Figure 4 – Critical Micro-finance Triangle 26
Figure 5 – Customer responses by Gender 39
Figure 6 – Educational levels of the customers for the MFIs 40
Figure 7 – Age in years 40
Figure 8 – Periods of being with the MFIs 41
Figure 9 – Type of loans received by customers 42
Figure 10 – Ability to pay the loan on time 43
Figure 11 – Satisfaction with the products or services 44
Figure 12 – Satisfaction with the treatment 44
Figure 13 – Number of employees in the MFIs 48
Figure 14 – Formal education 48
Figure 15 – Position of responsibility 49
Figure 16 – Length with the organisation 49
Figure 17 – Status of organization 50
Figure 18 – Sources of funds for the MFIs 51
Figure 19 – Appropriateness of using BSC & measures adopted 53
Figure 20 – Obstacle to improving performance 56
Figure 21 – Biggest Obstacle to improving service delivery levels 58
Figure 22 – Scatter plot for Performance measurement & Service Delivery 60
Figure 23 – The Microfinance Strategy Map 88
Figure 24 – The Map of Uganda and that of Gulu & Amuru Districts 89
ACRONYMS & ABBREVIATIONS
ADBAfrican Development BankAECAfrican Economic ConferenceAMFIUAssociation of Micro Finance Institutions of UgandaASCAsAccumulating Savings and Credit Association ATMAutomated Teller MachineBOUBank of UgandaBSCBalanced ScorecardCBOCommunity Based OrganisationCELTELCellular TelecommunicationsCERUDEBCentenary Rural Development BankCGAPConsultative Group to Assist the PoorFAOFood & Agricultural OrganisationHDIHuman Development IndexIDPInternally Displaced PeopleLRALords Resistance ArmyMDIMicro-Deposit taking institutionMFIMicrofinance InstitutionMTNMobile telecommunication NetworksNGOsNon-governmental organizationsPBUPost Bank UgandaPEARLSProtection, Effective financial structure, Assets quality, Rates of return & costs, Liquidity, Signs of growthPPPPurchasing Power ParityROSCARotating Savings and Credit AssociationSACCOsSavings and Credit Cooperative Society SMEsSmall and Medium Scale EnterprisesSPSSStatistical Package for Social ScientistTQMTotal Quality ManagementUBOSUganda Bureau of StatisticsUCCUganda Communication CommissionUNCCUnited Nations Conference Centre
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APPENDIX E – GLOSSARY
The following definitions have been used in this research and may be useful to the reader.
• Accumulating Credit and Savings Association (ASCA) resembles ROSCAs, but is slightly more complex. In an ASCA, all members regularly save the same fixed amount while some participants borrow from the group. Interest is usually charged on loans. ASCAs require bookkeeping because the members do not all transact in the same way. Some members borrow while others are savers only, and borrowers may borrow different amounts on different dates for different periods. If members pay interest on their loans, the return to savings has to be individually calculated and fairly shared among the group.
• Benchmarking is the process of comparing the cost, cycle time, productivity, or quality of a specific process or method to another that is widely considered to be an industry standard or best practice. The result is often a business case for making changes in order to make improvements. The term benchmarking was first used by cobblers to measure ones feet for shoes. They would place the foot on a « bench » and mark to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.
• Customers: Direct beneficiaries of the services or products offered by the MFIs
• Destination statement – Is a description including quantitative detail, of what the organisation is likely to look like at an agreed future date. Typically the destination statement is sub-divided into descriptive categories that serve a similar purpose (but may have different labels) to the perspectives in 1st and 2nd generation BSCs. (Lawrie & Cobbold, 2004)
• Goals: What to achieve by a certain time
• Just-in-time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated carrying costs. In order to achieve JIT the process must have signals of what is going on elsewhere within the process. This means that the process is often driven by a series of signals, which can be Kanban (看板 ,Kanban?), that tell production processes when to make the next part. Kanban are usually ‘tickets’ but can be simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organization’s return on investment, quality, and efficiency.
• Lean manufacturing or lean production, which is often known simply as « Lean », is a production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. In a more basic term, More value with less work. Lean manufacturing is a generic process management philosophy derived mostly from the Toyota Production System (TPS) (hence the term Toyotism is also prevalent) and identified as « Lean » only in the 1990s It is renowned for its focus on reduction of the original Toyota seven wastes in order to improve overall customer value, but there are varying perspectives on how this is best achieved. The steady growth of Toyota, from a small company to the world’s largest automaker, has focused attention on how it has achieved this.
• Malcolm Baldrige National Quality Award is given by the United States National Institute of Standards and Technology. It was established by the Malcolm Baldrige National Quality Improvement Act of 1987 – Public Law 100-107 and named for Malcolm Baldrige, who served as United States Secretary of Commerce during the Reagan administration from 1981 until his 1987 death in a rodeo accident The program recognizes quality service in the business, health care, education, and non-profit sectors and was inspired by the ideas of Total Quality Management or TQM. This is the only quality award that is actually awarded by the President of the United States. This award and the Ron Brown Award are the two U.S. presidential awards given to corporations.
• Metrics – A modern definition of Metrics is a form of measurement or evaluation.
• Mission: What we are about (e.g., “Our mission is to provide…”)
• Objectives: Strategy components; action items that must be done (e.g., improve processing time, increase employee skills, develop a new claims process)
• Outcomes: accomplishments or results of a program activity compared to its intended purpose.
• Outputs: results of resources transformed into products & services.
• PEARLS, is a system of 39 financial ratios, which the World Council of Credit Unions (WOCCU) employs to provide a detailed picture of credit union operations. The PEARLS was originally designed and implemented with Guatemalan credit unions in the late 1980s. WOCCU now uses it worldwide to monitor the performance of credit unions, to create a universal language that each credit union can speak and understand, to generate comparative credit union rankings, and to provide the framework for a supervisory unit at the second tier. In addition, PEARLS presents financial variables upon which credit unions can base their business planning (Ann C. Evans, 1997).
• Performance goal – A target level of activity expressed as a tangible measure, against which actual achievement can be compared.
• Performance management – The use of performance measurement information to effect positive change in organizational culture, systems, and processes, by helping to set agreed-upon performance goals, allocating and prioritizing resources, informing managers to either confirm or change current policy or program directions to meet those goals, and sharing results of performance in pursuing those goals
• Performance measurement – A process of assessing progress toward achieving predetermined goals, including information on the efficiency with which resources are transformed into goods and services (outputs), the quality of those outputs, outcomes, and the effectiveness of business operations in terms of their specific contributions to the MFI objectives
• Performance Measures (Lagging): Indicators of success (e.g., no. of citizens served last month) (Leading): Predictors (performance drivers) of future success (e.g., increase in employee knowledge)
• Performance objective – A critical success factor in achieving the organization’s mission, vision, and strategy, which if not achieved would likely result in a significant decrease in customer satisfaction, system performance, employee satisfaction or retention, or effective financial management.
• Perspectives: Different views of an organization (e.g., customers/stakeholders, employee & capacity, financial, internal processes)
• Rotating Savings and Credit Association (ROSCA) – An informal savings and credit group, that operates through a commitment of group members to contribute periodic fixed sums to a common savings fund that is lent in succession to all group members based on pre-existing distribution rules. Once one group member repays the loan, the fund is re-lent to another group member. This process continues until each group member has had the opportunity to borrow the fund amount. The process differs from an accumulating savings and credit association in that all group members receive loans.
• Six Sigma is a business management strategy, originally developed by Motorola, which today enjoys widespread application in many sectors of industry. Six Sigma seeks to identify and remove the causes of defects and errors in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization (« Black Belts » etc.) who are experts in these methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified financial targets such as cost reduction or profit increase.
• Stakeholders: People with interests in the products and services offered by the MFIS
• Strategic Linkage Model with Activity and Outcome Perspectives is a simplification of a 2nd Generation BSC strategic linkage model, with a single ‘outcome’ perspective replacing the financial, customer perspectives, a single ‘activity’ perspective replacing the Learning and Growth, and Internal Business Process perspectives.
• Strategic Map: Cause-effect relationships among strategy components
• Strategies: How an organisation intends to accomplish its vision and goals.
• Total Quality Management (TQM) as defined by the International Organization for Standardization (ISO), is a management approach for an organization, centred on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to society
• Vision: What we want to be in the future e.g., “Our vision is to be the leading …”