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Why microfinance is important

why microfinance is important

Thursday, July 7, 2011

Why is it important to have a monitoring system that appraises the performance of microfinance institutions?

What does a “monitoring system that appraises the performance of Micro Finance Institutions” (MFI) refer to. It can be split into two areas: internal and external monitoring and appraisal. Performance is monitored internally for management purposes, specifically for: strategic direction, operational implementation and financial performance. Externally, monitoring systems are needed for donors and investors, who require performance reports, with which to monitor how their funding is performing. The reports act as a way for the donor to decide whether to increase or decrease future funding levels going forward. “The more transparent the results, the more likely funders are to learn from successes and failures and to take corrective actions when needed ”.

In CGAP’s “Good Practice Guidelines for Funders of MFIs” they identified 5 key areas where funders should monitor MFI performance; implicitly this then requires the MFI to also monitor those same five areas, so that the MFI can report to the funders as required – a virtuous circle!

1. Breadth of outreach—How many clients are being served?

2. Depth of outreach—How poor are the clients?

3. Loan repayment (portfolio quality)—How well is the lender collecting its loans?

4. Financial sustainability (profitability)—Is the MFI profitable enough to maintain and expand its services without continued injections of subsidies?

5. Efficiency—How well does the MFI control its operating costs?

These 5 areas are commonly known as Key Performance Indicators (KPIs). KPIs (appendix 1) allow the MFI to set targets of where they are now (against target) and where they want to be (financially and operationally) in the future. They act as a catalyst to proactively implement new policies, procedures and products so as to reach those targets i.e. as per a business plan. If KPIs are not being met, then it will be reflected in the financial performance ratios of the MFI, which will then force the senior management and Board of Directors to revisit strategy, and analyse what in the business plan needs changing i.e. it provides a “snap shot summary” of the 5 key performance areas that funders

(should) monitor.

It is important to identify, monitor and manage MFI performance (both by management and funders) as this will highlight any existing: strategic, operational and financial risks (to the MFI). Risks can impact the MFIs sustainability and even viability – hence why funders should insist on performance reports.

As well as needing KPIs for management decisions, it is important to monitor and report KPIs for other third parties, as this will help “source” other funds. Transparency and reporting is an important issue in the MFI sector, especially at the moment due to the “bad press” over the last few years citing headline grabbing stories about excessive interest rates. By publishing KPIs on sector websites such as and it can show that the MFI has “nothing to hide” and is a socially responsible organisation.

Other than KPIs and financial ratios, the MFI can also conduct and number of surveys which will also help them to monitor their performance and take corrective action where necessary :

1. Impact Assessment Analysis

2. Client Satisfaction Survey

3. Loan utilisation Report

4. Exit Survey

Appendix 2 For greater overview of reports

MFIs are increasingly conducting Social Performance Analysis, a performance system which looks at the impact of the MFI at the social level i.e. all stakeholders directly and indirectly affected by the MFI’s intervention, and not just the MFI client. “Most microfinance institutions (MFIs) and those who support them (investors, bankers, policy-makers, and donors) have a social mission. A social rating complements the financial analysis of a credit rating with analysis of the social performance of MFIs, providing an assessment of the double (or triple) bottom line.”

In summary, performance systems can range from operational and financial, to social and client impact. MFIs need to have appropriate performance systems in place, not just for their own management and strategic oversight purposes, which can highlight any current or (future) risks, but also to give an accurate “picture” of the MFI’s health and sustainability to donors and investors, stating exactly what impact their (donors) financial intervention is having on all stakeholders, at both the social and financial, individual and organisational level.

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