Shifting goals in microfinance: from social performance to financial
performance
By Lâma DAHER 1 and Erwan LE SAOUT 2
1
Lâma DAHER is a PhD student in Finance at University of Paris 1 Panthéon-Sorbonne.
Her subject deals about the financial performances and risks of Microfinance. She’s
member of PRISM and participant at the Convergences 2015 World Forum. E-mail
address : lama.m.daher@gmail.com
2
Erwan LE SAOUT is a Professor of financial markets and risk management at ESCEM
Business School and University of Paris 1 Panthéon-Sorbonne. He’s head of both Masters
programs Corporate Finance and Cash Management, and member of PRISM and
CRESCEM. E-mail address : erwan@lesaout.com
Abstract
Microfinance has evolved from providing high interest rate microcredits to respond to the
furthermost financial and non-financial needs of the bottom of the pyramid category. Its
original objective is to eradicate poverty and increase financial inclusion. Yet, the rapid
growth of the sector during the last decades shifted the goals of microfinance institutions and
a new target was set: to become financially sustainable, self-sufficient and subsidy-free.
Achieving the double bottom line of social mission and profitability is the challenge of
successful microfinance institutions.
Introduction
The term “poor” refers to low-income persons excluded from the traditional financial system,
and who need to have access to a variety of financial products and services - practical,
flexible, and at a reasonable price. Microfinance is defined 1 as a powerful tool to fight
poverty, through the provision of basic financial services, including credit, savings, insurance
and transfer of funds. These financial products and services are delivered by microfinance
institutions, which cover a range of service providers differing by their legal structure,
mission, and methodology.
The demand of microfinance services consists of two types: in the one hand, the income
generating activities, and in the other hand, the small enterprises. The income generating
activities are defined as non-permanent activities, like an individual owning a retail shop or a
micro-service provider. The small enterprises are of two types: microenterprises, composed of
one entrepreneur assisted or not by his family members, and small enterprises, composed of a
few number of employees supervised by an entrepreneur.
On the supply side, the microfinance offer has evolved to take into account the growing
demand. MFIs have expanded their offer from providing only microcredit – grouplending and
individual lending – and savings, to include additional services and reach a wider market of
unbanked and under-banked clients. The new offer embraces financial and non-financial
services. Financial services involve micro-insurance, housing credits, transfer of funds, and
remote financial services. Non-financial services include development support services, such
as technical trainings, trainings in marketing and in management, and social services, such as
education, healthcare, nutrition, and illiteracy eradication. According to Brau and Woller
1
Definition by the Consultative Group to Assist the Poor (CGAP).
1
(2004), MFIs providing non-financial services, in addition to their financial offer, have a
better performance in comparison with microfinance organizations that provide only financial
services, also known as minimalists.
This paper is organized as follows. First, we trace the historical development of microfinance;
we reveal its principal players and its central social mission. Second, we exhibit some results
of academic papers on financial and market performances of microfinance institutions. And
finally, we identify three financial performance indicators and apply them to our study.
1.
Microfinance: a fast-moving sector
Microfinance, has been, for a long time, approximated to microcredit. Yet, these two words
do not hold the same denotation. This topic will be clarified in the following section, where
we highlight the beginnings of microfinance, its current framework, social objectives and key
players.
1.1. Microfinance 1.0
1.1.1. History of microfinance at a glance
The idea of providing the poor the possibility to have access to financial services is
longstanding. Informal credit and savings mechanisms have existed long ago. Researchers
remind the establishment of a charitable institution, in 1462, to fight against usury. It was the
Monte di Pietà, founded by the Italian monk Barnabé de Terni. Two hundred years later,
Lorenzo Tonti, a Neapolitan banker, created the Tontine in 1653. The tontine is described as
an investment plan, in which each subscriber invest a specific sum of money in a common
fund and receive an annuity that increases every time a subscriber dies, until the last survivor
or those who survive after a specified time take the entire fund. The tontine system did not
vanish. It inspires, nowadays, the system of mutual life insurance, which compels the
procurement of benefits solely by those participants who survive and maintain their policies
throughout a stipulated period. Many other informal financial services have existed and still
exist today, particularly in the developing countries.
Starting the 19th Century, new formal forms of financial services have emerged. In 1849, in
Rhineland, the Prussian mayor Friedrich-Wilhem Raiffeisen established the first credit and
savings co-operative company. Its purpose was to offer for labor populations, excluded from
the traditional banking system, the basic banking services of credit and savings. In 1853, the
French brothers Pereire suggested to Napoleon III to create the Credit Unions. In France
again, Father Ludovic de Besse founded in 1880 the Crédit Mutuel et Populaire, which is the
antecedent of the Banques Populaires. Later, the French government launched the Crédit
Agricole, based on the Raiffeinsen model, trying to restructure and support the national
agriculture sector.
In the 1960s and 1970s, this model of financial organization reached the developing countries.
A large number of public banks and credit and savings unions have been settled in Asia and
Latin America. And the “modern” microfinance sprang in the mid-1970s, remarkably in these
two regions. The star model was the Bangladeshi Grameen Bank micro-financing model,
created in 1976 by Professor Muhammad Yunus. The whole project started in this same year,
when Yunus decided to help 42 women in the village of Jobra near Chittagong University where he used to teach - by lending them the equivalent of USD 27 in local currency. This
first loan made to the poorest households of the village was totally repaid, which
demonstrates that the poor are able to borrow and pay back their loans. These small loans
2
have permitted the women to work, make business, feed their families and survive, and at the
same time, interest payments made this experience profitable to Yunus as well. Inspired by Dr
Akhtar Hameed Khan, founder of the Pakistani Academy for Rural Development, he decided
then to create the “village bank” or Grameen Bank, based on a grouplending system
addressed at first exclusively to women. Small loans were made to small groups of persons,
called solidarity groups. The advantage of this system is that all group members act as coguarantors of repayment and support one another's efforts at economic self-advancement.
This model has developed and has been copied in several countries around the word taking
into account the specification of each society. The Grameen Bank, alongside with its founder
Professor Yunus, have received the Peace Nobel Prize in 2006 rewarding their efforts in
fighting poverty in Bangladesh. By this initiative, Yunus has made microcredit a formal
financial product – microcredit being the “supply of small loans to individuals usually within
groups as capital investment to enable income-generation or for self employment” (Weber,
2004). Though, the industry of microfinance involves more than microcredits.
Until the beginning of the 1990s, microfinance institutions of the urban and rural areas in
developing countries were still very reliant on subsidies, donations and grants from
development agencies and public and private donors. Since that time, MFIs began seeking
self-sufficiency and financial sustainability. Later, profitable ones started restructuring their
business and their organization, in order to attract and raise commercial investments from
both public and private sectors. Their argument was that bankers and investors would not
accept to lend money to operationally non-sustainable, subsidy-dependent and financially
unprofitable MFIs. Hence, MFIs have to concentrate their efforts on improving their financial
situation, in order to grow and have access to new sources of funding. Besides borrowing
from banks, such new funding can come through opening their capital to outside investors or
even to the public throughout an IPO. Four IPOs in the recent history of microfinance are
worth to be recalled: Bank Rakayat of Indonesia (BRI) was listed in 2003 on the Jakarta Stock
Exchange, Equity Bank in Kenya went IPO in 2006, Banco Compartamos in Mexico went
public in 2007 and SKS Microfinance Ltd made a stock offering in 2010 becoming the first
and only India’s listed micro-lender. Banco Compartamos and SKS differ from the first two
MFIs by the fact that, at their early stages, at the beginning of the 1990s, they entered the
business as nonprofit organizations offering microcredit and funded by public donations. And
later in the beginnings of 2000s, these two NGOs have been shifted to become for-profit
enterprises and given the right to collect savings as formal banking institutions.
1.1.2. Microfinance schism
This organizational transformation from not-for-profit to for-profit was strongly criticized by
the welfarists, and even by Grameen Bank’s founder, Professor Muhammad Yunus. The
welfarists’s argument is that this financially highly rewarding strategy has a detrimental social
impact on the poor. Actually, Banco Compartamos charged its clients interest rates as high as
100% and its investors have been earning an average return on equity of 53%.
The welfarists support the poverty lending approach (Robinson, 2001) that “concentrates on
using credit to help overcome poverty, primarily by providing credit with subsidized interest
rates”. Subsidizing interest rates is fundamental in this approach. The welfarists’ view stresses
the importance of social impact and outreach and the threat of focusing too much on
efficiency and financial sustainability (Hermes et al., 2009). Outreach is defined by Conning
(1999) as the effort by MFIs to extend loans and financial services to an ever-wider audience
(breadth of outreach) and especially toward the poorest of the poor (depth of outreach).
Consequently, impact is the extent to which the incomes and welfare of those reached is
raised. Welfarists are opposed to institutionists, for whom financial sustainability and
3
efficiency are more important than outreach (Christen, 2001; Rhyne, 1998). Their approach
exhorts microfinance providers to aggressively pursue sustainability through raising interest
rates and lowering costs. Sustainability, according to Conning (1999), refers to full cost
recovery or profit making, without the need to government subsidies or donor funds.
Beyond the controversial microfinance schism, the sector of microfinance continues to grow
allowing more unbanked and excluded people to profit from the products and services they
provide. At the time, this growth allows new players to enter this market and widen the
microfinance offer.
1.2. Microfinance 2.0
A growing number of microfinance institutions are using the Internet to raise funds. The
development of new technologies and particularly the Internet played a catalytic role in the
expansion of the microfinance sector. To date, we count around 10,000 MFIs operating in the
five continents. In this section, we present the main types of existing MFIs and the dilemma
about their intentions.
1.2.1. Current typology of the sector
About 30 years ago, the microfinance industry was represented by a dozen of NGOs.
Currently, alongside with the development of the sector, the number of stakeholders has
raised. On the one hand, a variety of formal and semi-formal microfinance institutions are
sharing the market (non formal lenders still exist): cooperatives, credit unions, nongovernmental organizations (NGO), non-banking financial institutions (NBFI), rural banks,
postal banks, and commercial banks. And on the other hand, players of different kinds and
intents are contributing in the market: government agencies, public donors, insurance
companies, investment funds, individual investors, rating agencies, money transfer
companies, and mobile network carriers.
Out of the above-mentioned types of microfinance institutions, 34% are NGOs, 28% are
NBFIs, 19% are credit unions or cooperatives, 6% are banks, and 6% are rural banks
(figure1).
Figure 1
Typology of MFIs
Rural banks
6%
Banks
6%
Other
7%
NGOs
34%
Credit unions
19%
NBFIs
28%
Source: Mix Market (2,000 MFIs worldwide – 12/31/2011)
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NGOs are created and run with donations from private foundations, governments,
international aid agencies and even individuals donors. Usually, they are registered as nonprofit for tax purposes, and do not take deposits. NGOs are typically not regulated by a
banking supervisory agency, and face two major problems: a risk of dependency towards
external donors, and fragile governance. Originally, this type of organizations do not seek to
make profits, but as with the development of the microfinance sector, many NGOs are in the
process of institutionalization, i.e. to turn into profit corporations.
NBFIs are non-banking financial intermediaries that do not have direct access to central bank
reserves, since they are not licensed under the same category as banks. Though, these microloan organizations provide similar services to those of banks. NBFIs differ from banks over
three things: supervision under a different state agency, limitations on financial service
offerings, and lower capital requirements.
Credit unions and cooperatives are non-profit member-based financial intermediaries, i.e. they
are owned and managed by their members. These organizations collect savings from their
members, and then use these deposits to grant them loans. Credit unions are not regulated by a
state banking supervisory agency, but may come under the supervision of regional or national
cooperative council.
Banks are licensed financial institutions regulated by a state banking supervisory agency.
They are owned by outside stockholders whose main objective is making profit. Banks
provide the wider range of financial services among the three other types of institutions. Their
offer includes: lending, deposit taking, payment services, and money transfers.
Rural banks are banking intermediaries that target micro-entrepreneurs who live and work in
non-urban areas and who are generally involved in agricultural-related activities, such as
farmers, fishermen and traders. Rural banks provide customer-tailored financial services,
including micro-loans and savings.
Intentions of MFIs vary according to their type. Consistent with Bédécarrats et al. (2010),
non-for-profit MFIs have better social ratings than for-profit MFIs. Actually, NGOs are
supposed to be the most socially oriented institutions since they do not have a lucrative drive.
They follow a social agenda, are accountable towards the donors and care about the outcomes
and the impact of their projects. At the second place, credit unions and cooperatives are
highly concerned about improving the living of their members and do not target profit
making. And then, NBFIs, rural banks and banks are commercially oriented, more or less
depending on their ownership structure and are likely to care to maintain a sound financial
status.
1.2.2. Social performance of MFIs
Social performance is defined by the “Social Performance Task Force” (SPTF) as "the
effective translation of an institution's social mission into practice in line with accepted social
values that relate to serving larger numbers of poor and excluded people; improving the
quality and appropriateness of financial services; creating benefits for clients; and improving
social responsibility of an MFI". It is not only based on studying the impact of microfinance
programs, it also evaluates social objectives set by the MFI and practices and measures taken
by the MFI to meet its objectives.
Accordingly, a social performance assessment (SPA) enables an institution to measure its
social performance relative to its social mission and objectives. It includes analyses of the
social performance of an MFI at different levels (Figure 2):
 Process: Institutional process and internal systems. Analysis of the declared social
objectives of an MFI, an evaluation of the effectiveness of its system and services in
meeting these objectives.
5

Results: Client condition. An assessment of social performance at the client level to
determine related outputs and success in effecting positive changes in the lives of
clients.
Figure 2
Dimensions of Social Performance
Internal
Systems/
Activities
Intent and
Design
Outputs
Outcomes
Impact
Source: SPTF, 2012.
Microfinance institutions concerned with improving their social performance examine the
whole process of translating MFIs mission into social impact, and analyze several dimensions
of the social performance pathway. However, there is a difference between social impact and
social performance. The evaluation of social impact – assessing the impact on beneficiaries
and analyzing the breadth, the depth, the scope, the cost and the worth of outreach – comes
only after the assessment of the outputs and outcomes of the MFI. Karlan and Zinman (2008,
2011) and Copestake (2007) have conducted impact studies. Table 1 shows some results of
academic studies on microfinance social performance.
Table 1
Academic results on social performance of MFIs
Authors (year)
Cull
et
al.
(2006)
Marr
Awaworyi
(2012)
and
Sample
124 MFIs
worldwide
878 MFIs
worldwide
Period
19992002
20002010
Results
The most profitable category of lenders (individual-based MFIs)
serves the poor to the least extent.
The lenders most sharply focused on reaching the poor and facing the
highest average costs (village banks and group-based lenders) are the
most subsidy-reliant.
Financially self-sustaining individual-based lenders tend to have
smaller average loan size and lend more to women, suggesting that
pursuit of profit and outreach to the poor can go hand in hand.
Larger individual-based lenders and group-based lenders tend to
extend larger loans and lend less frequently to women.
Older individual-based lenders also do worse on outreach measures
than younger ones.
Older MFIs as well as regulated ones tend to perform less socially as
compared to younger and non-regulated MFIs.
MFIs with more assets and higher ratios for loans per loan officer
have the tendency of performing more socially.
Evaluating the social impact of microfinance remains the main subject of most of
microfinance surveys. The difference between measuring social impact and social
performance was recently emphasized, enabling practitioners to establish a new framework
for social performance management and assessment, as well as identifying social performance
indicators. However, since about 15 years the focus of microfinance institutions has shifted to
assessing and improving their financial performance. This is the subject of the following
section.
But before exploring microfinance financial performance, we would like to underline that
many institutions try to find a compromise between social performance and financial
performance, though only few are likely to succeed achieving this goal. This dilemma leads
us to the paradox of sustainable microfinance institutions, mentioned by Tucker and Miles
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(2004). It features the trade-off between poverty alleviation and financial self-sufficiency. The
researchers point out that, with the purpose of attaining sustainability, MFIs try to gain
economies of scale by concentrating their efforts in servicing better-off clients. This strategy
results in reducing expenses per loan and increasing the probability of repayment. Another
way to attain sustainability, consistent with Tucker and Miles (2004), is to increase profits by
raising interest rates, fees, or both. The risk of this option is that it expands the costs for
clients and consequently raises default rates. In both cases, the very poor are marginalized and
could not benefit from microfinance services. Yet, concentrating efforts on microfinance
institutions sustainability and profitability is strengthened by two evidences: first, financially
self-sufficient MFIs can broaden their financing possibilities by borrowing from banks and in
private capital markets (Gibbons and Meehan, 1999), and second, without sustainability MFIs
cannot reach the goal of poverty alleviation (Otero, 1999). In addition, CGAP emphasizes the
necessity to insure the financial sustainability of the operations of MFIs in order to cover a
large number of poor people.
2.
Financial performance
According to Hermes and Lensink (2007), the financial systems approach, which
“emphasizes the importance of financial sustainable microfinance programs”, is likely to
prevail the poverty lending approach. The argument is that microfinance institutions have to
be financially sustainable in order to guarantee a large-scale outreach to the poor on a longterm basis. In this section, we exhibit a review of some studies’ results on financial and
market performances of MFIs, and then we do our own survey using a dataset from the
MixMarket.
2.1. A review of the literature
2.1.1. Financial performance of MFIs
Today, microfinance institutions are seeking financial sustainability. Many MFIs were
restructured in order to achieve financial sustainability and finance their growth.
Sustainability is defined as the capacity of a program to stay financially viable even if
subsidies and financial aids are cut off (Woolcock, 1999). It embraces “generating sufficient
profit to cover expenses while eliminating all subsidies, even those less-obvious subsidies,
such as loans made in hard currency with repayment in local currency” (Tucker and Miles,
2004).
Tucker and Miles (2004) studied three data series for the period between March 1999 and
March 2001 and found that self-sufficient MFIs are profitable and perform better, on return
on equity (ROE) and return on assets (ROA), than developing-world commercial banks and
MFIs that have not attained self-sufficiency. However, aggregate data of all MFIs in the
sample show that MFIs are unprofitable and perform bad compared to their geographic
commercial peers. In order to optimize their performance, MFIs are seeking to become more
commercially oriented and stress more on improving their profitability; therefore selfsustainable MFIs are not likely to be servicing the smallest and costliest loans to the poor.
Yet, the authors emphasize on the fact that most of MFIs will continue to require subsidies,
and thus not to be self-sustainable, because their mission is not only to provide financial
services and earn interest, they provide also non financial services without requiring any gains
in order to help their clients to better manage their living and their business. Tucker and Miles
(2004) recalled the use of the Accion CAMEL rating system (a modification of the CAMELS
system used by U.S. commercial lenders) by the microfinance industry to report financial
7
measures, such as capital adequacy, asset quality, management, earnings, liquidity
management and sensitivity to market risk (see table 2). The adoption of the Accion CAMEL
rating model made the comparisons between MFIs possible based on standard accounting
practices.
Table 2
CAMELS Performance indicators for banks
Capital
adequacy
Asset quality
Management
efficiency
Earnings quality
or Profitability
Liquidity
CAR
Non performing
loans to total
loans ratio
Profit per bank
branch ratio
ROA
Liquidity
indicator
Capital to asset
ratio (CA)
Profit per employee
ratio
Non interest income
to non interest
expense ratio
Sensitivity to
market risk
Market value
of stocks to
equity ratio
ROE
NIM
Source: Teker et al., 2011
Luzzi and Weber (2006) used a data set composed of 45 MFIs for the period 1999-2003.
Their objective is to measure MFIs’ performance, including financial performance. In their
study, they retained one only variable referring to sustainability or financial performance
(factor 2), and five variables to assess outreach or social performance (factor 1). Luzzi and
Weber (2006) used factor analysis methodology to construct synthetic indices of both
outreach and sustainability. They estimated a seemingly unrelated regressions model (SUR) to
assess the determinants of the performance. Their results for the year 2003 are represented in
table 3. The four most significant determinants of financial performance are: interest rate
ceiling (the higher the interest rate, the higher is the MFI financial return), number of clients
per loan officer (the higher the number, the higher the financial return), competitiveness
(more competitors, less profits), and number of days for processing a first loan (the shorter the
processing time, the more profitable for the MFI).
Table 3
Determinants of multidimensional MFIs Performance
Determinants of
Processing time for a first loan
Competitors
Number of clients per loan officer
Percentage of rural clients
Number of loan officers by branch
Interest rate ceiling
Number of financial services offered by the
MFI
Scale of operation (size of portfolio)
Number of active clients
Social performance
(factor 1)
No
No
No
Yes / positive
Yes / positive
No
Financial performance
(factor 2)
Yes / positive
Yes / negative
Yes / positive
No
No
Yes / negative
Yes / negative
No
Yes / negative
Yes / positive
Yes / positive
Yes / negative
Source: Luzzi & Weber, 2006
Bartual Sanfeliu et al. (2011) made an interesting statement about the fact that “there has been
a lot of literature dealing with aspects like sustainability/profitability, asset/liability
management, and/or portfolio quality, whereas there is little literature on the
efficiency/productivity of these institutions”. In their paper, Bartual Sanfeliu et al. (2011)
chose to measure the performance of MFIs that have a banking side and a social side, using a
goal programming based multicriterion methodology. The global business performance
ranking combines all the twelve used variables (table 4), assuming that the higher the value of
8
any of the criteria, the higher the perception of the performance, except for the following
aspects: FEA, PEA, CPB and PA, which had a negative effect. Accordingly, for these four
variables: the higher the value of these criteria, the lower perception of the performance. The
authors found that the two categories representative of the general performance tendency are
OFP and R&L, followed by IC, which represent the size of the company, then by E. Bartual
Sanfeliu et al. (2011) completed their work by carrying out a spearman correlation analysis in
order to analyze the correlation between each of the single-criterion measurements and the
final performance. They found only two variables that have highly significant correlations
with multicriterion performance: ROE and PTA are the two key factors for improving MFIs’
performance.
Table 4
Variables representing business performance categories
Factors
O: offices (number of branches)
P: personnel (number of employees)
PTA: portfolio to assets (gross loan portfolio/total assets)
ROE: return on equity (net income/shareholder’s equity)
FEA: financial expense/total assets
PEA: personnel expense/total assets
CPB: cost per borrower (operating expense/average number of active
borrowers)
LPLO: loans per loan officer (number of loans outstanding/number of
loan officers)
PA: personnel allocation ratio (loan officers/personnel)
PR90: portfolio at risk > 90 days (value of loans outstanding /gross
loan portfolio)
LL: loan loss rate ((write-offs – value of loans recovered)/average
gross loan portfolio)
RC: risk coverage (impairment loss/average assets)
Business Performance Categories
IC: institutional characteristics
IC: institutional characteristics
FS: financial structure
OFP: overall financial performance
E: expenses
E: expenses
E&P: efficiency and productivity
E&P: efficiency and productivity
E&P: efficiency and productivity
R&L: risk and liquidity
R&L: risk and liquidity
R&L: risk and liquidity
Source: Bartual Sanfeliu et al., 2011
Tucker (2001) studies the importance of benchmarking and competition in improving MFIs’
financial performance. He states that the rise of competition and the emergence of the
possibility to compare the financial performance of MFIs with each other and to benchmarks.
He used the results of a study made by Jansson and Taborga (2000) with a database composed
of 17 MFIs, 9 regulated and 8 unregulated, including BancoSol Bolivia and FINCA
Nicaragua. He selected three benchmark ratios and used their adjusted measures, obtained
after adjusting the data by removing subsidies. These ratios are gross financial margin (GFM),
ROA and ROE, and the target benchmark ratios were calculated based upon the measures of
the better performing MFIs. ROA and ROE are higher in unadjusted measures than in
adjusted measures (AROA and AROE) due to the high level of subsidies disbursed in the
MFIs. GFM adjusted and unadjusted measures are high for MFIs and well above that obtained
by the commercial banks. Commercial banks have lower GFM because they benefit from
economies of scale and lower operating expenses to assets. Regulated MFIs achieve better
economies of scale than unregulated MFIs, and have a better Debt to equity (D/E) ratio than
unregulated MFIs but still lower than commercial banks. Tucker (2001) concludes that using
benchmark measures improves business practices. The author also stress on the importance of
having benchmarks in order to be able to compare MFIs with each other, particularly on the
basis of financial performance.
Hudon (2010) analyzes the relationship between financial performance of MFIs and their
management mechanisms. 83 MFIs of three types (non-profit institutions and NGOs, nonbanking financial institutions, for-profit institutions and cooperatives), from Latin America,
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Africa, Central Asia and NIS, North Africa and the Middle East, and Asia, constitute the
dataset provided by PlaNet Rating. All these MFIs are evaluated based on three financial
indicators (ROA; AROA; Financial self-sufficiency FSS) and four management dimensions
(Decision making: board governance competencies; Accounting and control: planning
budgeting and reporting competences, competencies; Top management: competencies of the
top managers; Human resources: competencies of HR management). The results of Hudon
(2010)’s analysis show that management ratings influence drastically the MFI financial
performances. However, except for the cooperatives where the management variable
(specifically HR human resources management) has a negative impact on the ROA, no
organizational structure exhibits better results for the three financial indicators. The author
underscores that regulated MFIs have significantly better management ratings than nonregulated ones. It is also the case for larger MFIs, in terms of loan portfolio, total assets or
borrowers. Conversely, younger MFIs may be more financially profitable, as suggested by
Stephens (2005), but not particularly better managed. According to this study, the top
management is a key indicator of financial success among the four management dimensions,
and seems to have also a positive influence on the amount of received subsidies.
Cull et al. (2006) studied the possibility for MFIs to earn profits while serving the poor. They
used a data set of 124 MFIs (village banks, individual-based lenders, and group-based
lenders) from 49 developing countries for the period, between 1999 and 2002, to search
patterns of the relationship between financial performance and outreach of MFIs. Cull et al.
(2006) used three dependent variables: FSS, unadjusted measure of OSS and ROA. The
evidence demonstrates that raising interest rates to very high levels does not ensure greater
profitability, nor does cost minimization. This evidence is coherent with Stiglitz and Weiss
(1981)’s assumption, which says that raising interest rates will undermine portfolio quality
due to adverse selection and moral hazard. The researchers found that individual-based
lenders that charge higher interest rates are more profitable than others, but only up to a point.
Beyond threshold interest rates, profitability tends to be lower. In contrast, for solidarity
group-lenders, financial performance tends not to improve as yields increase. Consistent with
the economics of information, they also found that individual-based lenders with higher labor
costs (as a fraction of total assets) are in fact more profitable. For solidarity groups, who
exploit local information to select and monitor customers, they found no significant
relationship between labor costs and profitability. Moreover, Cull et al. (2006) found that
institutions that make smaller loans are not necessarily less profitable. Larger loan sizes are
associated with lower average costs for both individual-based lenders and solidarity group
lenders.
Tchakoute-Tchuigoua (2010) studied the relationship between the performance of MFI and
their legal status. For that, he compared the performance of 202 MFIs between 2001 and
2006. Three forms of ownership were chosen: cooperatives, private microfinance
cooperatives and non-profit making organizations (NGOs). He analyzed five types of
performance: financial performance, social performance, and organizational efficiency,
quality of portfolio and size and solvency. To assess financial performance of microfinance
institutions, the author chose to measure the following ratios: ROA, OSS and profit margin
(PM). Regarding sustainability, Tchakoute-Tchuigoua (2010) found no significant difference
between NGOs and cooperatives, and that private microfinance corporations have better
financial performance than NGOs and better portfolio quality than cooperatives and NGOs.
2.1.2. Market performance of listed MFIs
In 2006, a new component was added to the CAMEL rating system in order to take into
consideration the sensitivity of the MFI performance towards market risk (see section 2.1.1).
10
The market performance of a listed microfinance institution is an important factor impacting
its overall performance. Therefore, we decided to include this section in our paper.
To date, there are two types of public investments in microfinance: Microfinance Investment
Vehicles (MIVs) and Listed microfinance institutions. Up to 2010, ten microfinance
institutions went public. They are displayed in table 5.
Table 5
Listed MFIs and their IPO year
Microfinance institution
African bank
Dananmon
Capitec Bank
Bank Rakyat Indonesia
Equity Bank
Blue Financial Services
Compartamos Banco
BRAC Bank
Financiera Independencia
SKS Microfinance
Market
South Africa
Indonesia
South Africa
Indonesia
Kenya
South Africa
Mexico / NYSE
Bangladesh
Mexico
India
Year of IPO
1990
1990
2002
2003
2006
2006
2007
2007
2007
2010
Microfinance investment funds mobilize funding for microfinance institutions from
foundations, individual and institutional investors and development agencies. Estimations
show that a variety of around 74 different MIVs existed at year-end 2006 (Dieckmann, 2007).
MIVs are funding structures of three types differentiated according to their respective degree
of commercialization. Commercially-oriented MIVs include debt and sub-debt instruments
but rarely equity investments, because equity stakes are perceived as more risky by investors
and exit strategies are difficult, thus these instruments are not easily placed at a reasonable
price.
The first category of MIVs is composed by microfinance development funds, which are nonprofit entities or cooperatives providing funding usually below market rates and often
complemented by technical assistance, and without necessarily seeking a financial return.
Investors are development agencies, corporations or private donors (individuals and
foundations) and target microfinance institutions approaching financial sustainability.
Investors in these microfinance development funds focus on social returns but are more
commercially minded than other socially minded investor groups; they usually refrain from
providing grants and donations.
The second category is composed of dual-objective microfinance or commercially oriented
microfinance investment vehicles, which seek to realize a financial return eventually and are
satisfied of that return being below market-based returns. Investors in these dual-objective
microfinance vehicles are private donors, development agencies and socially responsible
investors.
The third category includes commercial funds, which have a predetermined financial target
rate of return while social returns play a secondary role. Investors in this category are
individual and institutional investors, and with the development of the microfinance sector,
commercial funds are expected to raise their proportion of sub-debt and equity stakes over the
medium term and to become open also to investing in riskier parts of MIVs such as equity
pieces.
Brière and Szafarz (2011) evaluate the profitability of investing in microfinance via stock
markets. The authors build microfinance indices: one microfinance index per country and one
global microfinance index. These indices differ from the LIFI index developed by JP Morgan
11
that includes microfinance institutions and other financial institutions serving the same public.
The authors choose to analyze only listed microfinance institutions, thus the results of their
study should be analyzed with precaution. Brière and Szafarz (2011) found that investing in
microfinance is very profitable, since as at December 31, 2010, the majority of listed
microfinance institutions have high returns (profitability), except a few MFIs like Blue
Financial Services in South Africa. Volatilities of MFIs in the Emerging markets are very
excessive, ranging from 39.41% to 106.87%, while the average volatility on these markets is
of 28%. The authors found that starting 2001, the correlation between financial markets and
listed MFIs is getting stronger. This suggests that MFIs, especially those listed on a stock
market, are becoming more like commercial banks.
Nevertheless, according to a study by JP Morgan (2010), microfinance institutions listed or
their equivalents have a discount of between 13 and 23% compared to traditional commercial
banks according to the multiple capitalization retained. In 2010, price earnings ratios were
estimated 16,2 for commercial banks while investors 12.4 times earnings for MFIs. Moreover,
although the return on equity displayed by them is higher than traditional banks (22% vs
19%), the ratio of market value to book value was 2.6 times for MFIs against 3 times for
traditional banks.
In terms of risk analysis based on the CAPM leads to a higher sensitivity of MFIs. In contrast,
exposure to currency risk is similar for both types of assets. Brière and Szafarz (2011)
conclude that a reduction of the effect of MFI diversifier. Simulations generate different
portfolios consisting of 10 to 30% of MFI after risk aversion of the investor.
2.2. Survey on financial performance
2.2.1. Dataset and indicators
In this section, we undertake a statistical analysis on financial performance using a dataset of
MFIs referenced by Mix Market. Mix Market is the primary source for microfinance data and
analysis. Nearly 2,000 MFIs around the world publish their financial and organizational
information on the online platform. As of 12/31/2011, the Mix Market covers 92 million
borrowers and more than 1,900 MFIs around the globe, out of which 23% are in Latin
America and the Caribbean, 23% are in Africa, 21% are in Eastern Europe and Central Asia,
13% are in East Asia and the Pacific, and 4% are in the Middle East and North Africa. Almost
51% of the MFIs are regulated and 40% are not.
We retained 1,956 MFIs and calculated, over the period 2005-2010, three indicators of
performance and risk: return on assets, yield on gross portfolio and portfolio at risk.
Return on assets ratio (ROA) is an indicator of how well an institution uses its total assets to
generate returns. It’s calculated as follows:
Net Operating Income − Taxes
Average Assets
Yield on gross loan portfolio, or portfolio yield ratio, measures income from the loan portfolio
as well as the average interest rate charged to borrowers by the MFI (including loan-related
fees). It’s calculated as follows:
Cash Financial Revenue From Loan Portfolio
Average Gross Loan Portfolio
Portfolio at risk (PAR) measures the value of all loans outstanding that have one or more
installments of principal overdue more than a certain number of days. The ratio gives the
12
percentage of loans outstanding that are at substantial risk of default as signaled by difficulties
that have already emerged. The PAR 30 days is calculated as follows:
Portfolio at risk (after 30 days)
Gross Loan Portfolio
The aim of this study is to support the review of the literature by examining the three most
representative financial indicators for microfinance.
2.2.2. Results
We excluded the extreme values, both the positive and negative ones. Therefore, our
statistical analysis is done on deciles 2 to 9. Although we have excluded two deciles, we find
that the indicators do not follow a normal distribution. Figure 3 shows the distributions of
computed performance and risk indicators. Additionally, we notice that these distributions are
asymmetric: there is a bigger proportion of MFIs with a higher performance and a lower risk
than the average.
Figure 3
Distribution of performance and risk indicators
Return on Asset (%)
Yield on gross portfolio (%)
Portfolio at risk 30 days (%)
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We report in tables 6 and 7 performance and risk indicators measured depending on the type
and the location of MFIs. We find that, out of all types of MFIs, rural banks have the higher
profitability - assessed by the ROA ratio, and the higher level of risk. It implies a positive
relationship between risk and return, as stipulated in the modern portfolio theory. Yet, the
yield on gross portfolio for rural banks is lower than the other types of MFIs, such as NGOs.
NGOs generally rely more on subsidies than banks do, which cover almost all its costs. The
reason of the low yield on gross portfolio can be explained by the fact that rural banks do not
diversify their investments as other MFIs – since they fund specifically agricultural projectsor because they invest in lower amounts per project compared to other types of MFIs,
subsidized institutions in particular.
In addition, we find that investing in Africa is currently the least profitable and the riskiest.
This is due to many reasons, including the lack of financial infrastructures, the high level of
insecurity and instability, the precariousness healthcare and sanitation, and the very high level
of poverty. Moreover, the yield on gross portfolio scores the highest level, featuring the fact
that interest rates charged by MFIs in Africa are the highest. In fact, the risk of default is more
important in this region due to the lack of maturity of the microcredit activity on the
continent. As for South Asia, we can point out that the level of yield on gross portfolio is the
less important compared to other regions. This may come from the fact that the sector is much
more developed in this region, unlike Africa. Accordingly, South-Asian MFIs benefit from
economies of scale and experience and can charge less their borrowers. Besides, there are no
statistically significant differences to highlight between the other groups of regions.
Table 6
MFIs performance and risk according their type
NGOs
Return on assets
Portfolio at risk 30 days
Yield on gross portfolio
Credit
unions
NBFIs
Rural banks
Banks
Other
1,722%
1,611%
1,994%
2,905%
1,283%
4,971%
(4,651%)
(2,381%)
(3,830%)
(1,575%)
(2,326%)
(3,949%)
2,170%
1,495%
2,080%
2,720%
1,360%
3,710%
4,292%
5,591%
3,895%
9,060%
4,104%
2,543%
(3,723%)
(3,998%)
(3,393%)
(6,262%)
(3,325%)
(2,890%)
3,370%
4,740%
3,030%
8,530%
3,040%
1,930%
33,11%
22,76%
34,19%
29,40%
26,83%
33,35%
(10,95%)
(7,08%)
(11,32%)
(7,19%)
(7,54%)
(11,92%)
30,62%
20,94%
31,99%
28,42%
25,84%
35,37%
Middle East
and North
Africa
Eastern
Europe and
Central Asia
Average – (Standard deviation) - Median
Table 7
MFIs performance and risk according region
Africa
Return on assets
Portfolio at risk 30 days
East Asia
and the
Pacific
South Asia
Latin
America and
The
Caribbean
-0,591%
2,996%
0,751%
2,330%
3,634%
3,315%
(5,575%)
(2,447%)
(3,009%)
(3,203%)
(4,281%)
(3,706%)
0,680%
2,720%
1,095%
2,165%
3,835%
2,700%
6,895%
5,304%
2,974%
5,368%
3,418%
3,031%
(5,218%)
(5,177%)
(3,203%)
(3,170%)
(3,518%)
(2,978%)
14
5,490%
Yield on gross portfolio
3,465%
1,765%
4,655%
2,235%
1,990%
30,03%
35,67%
33,23%
23,48%
33,79%
30,59%
(14,94%)
(10,52%)
(5,03%)
(11,54%)
(6,77%)
(9,55%)
31,74%
31,43%
23,26%
31,16%
31,29%
28,84%
Average – (Standard deviation) - Median
Conclusion
This article aims to present the microfinance sector and to relate the results of early research
on the analysis of financial performance. We undertook a statistical study that allow us to say
that rural banks have the highest risk/return position, and that African MFIs are the most risky
and the less profitable of all. Analysis of financial performance should not overshadow the
objective of microfinance: improving social performance. It will be necessary to build robust
social performance indicators and highlight a positive relationship with financial
performance. The lack of relationship could jeopardize the future of microfinance.
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