An Exploratory Study of the Performance of Microfinancing Institutions Using the Balanced Scorecard Approach
More than 3,000 microfinancing institutions (MFIs) in developing countries provide financial assistance to the needy poor who are denied access to institutional credit from other sources. This study's motivation comes from the importance of MFIs and the lack of knowledge about them. Adopting the balanced scorecard (BSC) model, this exploratory study investigates the critical performance measures that MFIs need to emphasize in their performance reporting to drive high performance. The study first argues that four dimensions (sustainability, increasing the outreach, depth of outreach, and portfolio at risk) are needed to measure the performance of MFIs, and then analyzes the impact of eight performance-reporting measures on these dimensions using multiple-regression analysis. Of the eight measures selected, the emphasis on "net cash flow" has a significant impact on improving two dimensions of performance: sustainability, and increasing the outreach. The latter is also affected by the emphasis placed on the "ratio of zero security loans to total loans" in performance reporting. The study also finds that the depth of outreach performance dimension is predicted by the emphasis placed on the two performance reporting measures: "ratio of operating expenses to number of loans" and "the average time to process a loan application."
Keywords: Microfinancing institutions, balanced scorecard, performance measurement, performance reporting, organizational performance
Global poverty is a major problem facing both developing and developed nations in the world today. In the Asia Pacific region alone, 900 million people live in poverty. This is about one-third of the population in the developing countries in the region [Asian Development Bank, 2000a]. Other than the well- understood negative social impacts of poverty such as crime, low literacy rates, and poor health, it is strongly believed that poverty even breeds terrorism. In the recent past, there has been a greater effort by developed nations and international aid agencies to reduce poverty. For example, the Asian Development Bank (ADB) has adopted poverty alleviation as one of its key objectives. The total loans approved under its poverty reduction program amount to US$ 3.5 billion
Over the last two decades, "microfinancing" has grown in popularity as an effective tool in reducing poverty in developing countries. The concept of microfinancing is basically providing financial services to the poor to improve their income levels and standard of living. The typical loans are small and have to be repaid with interest over short periods, but require no collateral. They help the poor borrow to finance an asset (e.g. a bicycle, sewing machine, a cow) to become self-employed.
The concept of microfinancing was introduced to the world by Professor Muhammad Yunus, who concluded that one of the major causes of poverty was the inability of the poor to get any access to institutional credit. In 1976, Yunus tested his research findings by lending US$ 27 without any security among 42 poor people. This was the birth of the Grameen Bank (GB), considered by many to be the first microfinancing institution (MFI). After years of successful operation under this concept, by 1998, its loan portfolio had grown from US$ 27 to US$ 2.3 billion with a client base of 2.3 million poor people. Its operation covers 38,551 villages and employs more than 12,000 staff[Jolis, 2001]. The amazing success of the Grameen Bank was considered revolutionary since it shattered the popular belief that the poor are not credit worthy. Yunus was awarded the Nobel Prize in 2006 for his contribution.
The success of the Grameen Bank sparked a growth in the number of MFIs all over the world. The ADB estimates that, from a few thousand in the 1970s, the number of borrowers has grown to more than 10 million poor people in the late 1990s [ADB, 2000a]. A survey in 2007 has found more than 3,000 MFIs serving 133 million poor people around the world [Microcredit Report, 2007]. …
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