Volume 5, Issue 4 (April, 2016) Online ISSN-2320-0073 Published by: Abhinav Publication Abhinav International Monthly Refereed Journal of Research in MEASURING THE PERFORMANCE OF INTEREST-FREE MICROFINANCE: A THEORETICAL FRAMEWORK Ameer P. A. Research Scholar, School of Management Studies, CUSAT, India Email: pazhamayil@gmail.com ABSTRACT Interest-free microfinance (IFMF) is currently being promoted as a key strategic tool for poverty alleviation and socioeconomic development. The objectives of these financial institutions are offering finance to the poor, microenterprises development, family empowerment and poverty alleviation. There is already an impression that interest free microfinance institutions are successful in reducing poverty. But the question, how to measure the Social performance of these financial institutions is still remaining unanswered. Even though there are different concepts, methodologies and theoretical framework in the literature for measuring social performance of microfinance, the comprehensive method which encompasses both the poverty outreach approach to microfinance and financial sustainability approach is lacking. So the present study tries to conduct an in-depth review of available literature on social performance of microfinance and propose a theoretical framework for measuring the social performance of interest free microfinance institutions. Keywords: DTH Service Aspects of loan; Breadth; Cost; Depth; Interest-free Microfinance; Length; Outreach INTRODUCTION Give a man a fish; he will eat for a day. Give a woman microcredit, she, her husband, her children and her extended family will eat for a lifetime (Bono, 2000). This is the notion of poor people about microfinance, which is widely accepted as a magic bullet for poverty alleviation among development practitioners and policy makers. There are two schools of thoughts- Welfarists (poverty lending approach) and Institutionists (Financial system approach) for the measurement of performance of microfinance (Robinson, 2002). The welfarists argue that microfinance can achieve sustainability without attaining financial sustainability (Baru and Woller, 2004). They put more emphasis on poverty alleviation than breadth of outreach and measure institutional success according to social metrics. On the other hand, the institutionists argue that the microfinance institutions should be able to meet its financing and operating costs with its program revenues (Baru and Woller, 2004). They give more importance to financial sustainability than the poverty alleviation mission of microfinance. So the welfarists criticised the new thought as mission drift in microfinance. In the mean time, a new approach has been emerged which states that microfinance must have dual mission; a social mission to provide financial services to a large number of low income people to improve their welfare and a commercial mission to provide these financial services in a financially viable manner (Wrenn, 2005). It is a win-win approach in which both goals of microfinance, financial performance and outreach should go hand in hand and the former goal should be the complementary goal of the latter objective. It is in this context the present study tries to propose a theoretical framework which Available online on www.abhinavjournal.com 45
encompasses both the poverty outreach to microfinance and financial sustainability for measuring the social performance of interest-free microfinance institutions. OBJECTIVES OF THE STUDY The following are the specific objectives of my study 1. To study the different dimensions of outreach performance of microfinance 2. To study the various outreach measurement techniques 3. To suggest a comprehensive framework to measure the outreach performance of interest-free micro finance institutions. LITERATURE REVIEW The Concept of Outreach Outreach means the total number of poor served under the microfinance scheme, including the number of women beneficiaries (Meyer, 2001). It explains how well a microfinance institution reaches the poorest and the variety of financial products it offered. It is defined as the ability of an MFI to provide high quality financial services to a large number of poor clients (Martin & Frederic, 1999). Schreiner defined outreach as a social benefit of microfinance which will help the poor to improve their well being (Schreiner, 2002). Prof. Rama explained the term outreach as the depth and width of the major services of microfinance institutions such as credit provision, savings mobilisation, micro insurance, money transfer and payment services (Rama, 2013). According to Yaron, outreach is a hybrid measure that assesses the extent to which a Rural Financial Institution has succeeded in reaching its target clients and the degree to which the Rural Financial Institution has met the clients demand for financial services (Yaron, 1997). Conning (1999) defined outreach in terms of breadth and depth. These two measures are widely used in the microfinance sector to measure the social performance microfinance institutions. According to Rhyne, Depth of outreach refers to the poverty level of the clients served, whereas breadth of outreach refers to the scale of operations of an MFI or number of clients served and volume of services (Rhyne, 1998).Depth of outreach can also be assessed in relation to the increase in branch network and staff hired over time (Rhyne, 1998). In other words, depth of outreach is the value that society attaches to the net gain of a given client (Schreiner, 2002). The loan size is usually taken as a proxy for the depth of outreach (Navajas et al, 2000; Cull et al, 2007). The assumption is that the smaller the loan size, the deeper the outreach, or poorer the client; smaller the amount or shorter time, indicate better depth. Another assumption is that the number of female clients is high and the loan size is small, the deeper the outreach. According Mayer (2002) outreach has different dimensions like the number of people now served that were previously denied access to formal financial services, the number of women served, depth of poverty and the variety of financial services provided (Mayer, 2002). Hermes et al (2008), suggested average loan balance per borrower, the percentage of loans below US$ 300, Percentage of woman borrowers, Average saving balance per saver, percentage clients below the poverty line, percentage clients in the bottom half of the population, as the outreach indicators (Hermes et al 2008). The Measurements of Outreach There is a multitude of performance indicators that an MFI might use to analyze its poverty outreach performance. Since the basic purpose of microfinance is poverty alleviation, there has been many outreach performance measures were introduced since its inception. The following are the important frameworks available in the literature which were used repeatedly for measuring the outreach performance of microfinance institutions. Depth of Outreach Index (1991) VOL. 5, ISSUE 4 (April 2016) 46
Von Pischke had developed the Depth of Outreach Index (DOI) in 1991 for measuring the outreach performance of microfinance institutions. He described a frontier between the formal and informal financial sectors. In his view, those outside the frontier do not have access to formal financial services. These categories, which are usually, do not served by formal financial institutions include, the poor, women, rural inhabitants and the uneducated. So he stated that, in the measuring outreach performance of microfinance institutions, the level of participation of these excluded categories should be properly measured. So he used these categories (poor, female, rural and illiterate) to define and measure a depth of outreach indicator (DOI) for the institutions under analysis. He further stated that, these categories were chosen not only for their association with the degree of exclusion from financial services, but also for their relative ease of measurement in simple rapid-appraisal surveys of program clienteles. To analyze the degree to which financial institutions serve poor, female, rural and illiterate clients, he suggested constructing a depth of outreach diamonds. These diamonds provide a simple graphic representation of the four outreach indicators for the clients of microfinance institution and compare them with overall country averages. The DOI sums the difference between the institutional outreach average and the country average for each category of people frequently excluded from the formal financial sector. A positive number indicates that the clientele servedby the institution is more rural, poor, female and illiterate than the country average. In his belief, although it s not a perfect measure of outreach, it improves on traditional outreach proxies such as loan size because it incorporates several outreach indicators and takes country average into account. Yaron Outreach Indicators (1992) In 1992, Yaron the famous microfinance expert came up with detailed outreach indicators. He suggested seven different measures which could be used to measure outreach of an MFI. 1. The value of the outstanding loan portfolio and average value of loan extended 2. The amount of savings and average value of savings accounts 3. The variety of financial services offered 4. The number of branches and villages, posts/ units 5. The percentage of total rural population served 6. The annual growth of MFI assets over recent years in real term 7. Women participation Yaron Outreach Indicators (1997) In 1997, Yaron along with Benjamin and Piprek modified his old version and came up with a condensed approach for outreach measures. He introduced three main indicators which are Table 1 Outreach Indicators SL NO MEASUREMENTS 1 CLIENT & STAFF Number of Clients or members Percentage of total target clientele served Number of women as percentage of total borrowers Number of women as percentage of total depositors Number of staff Number of urban branches or units Number of rural branches or units Ratio of rural to urban branches or units Ratio of volume of deposits to volume of outstanding loans VOL. 5, ISSUE 4 (April 2016) 47
2 3 LOAN SAVING Source: Yaron, 1997 The Seven Aspects of Loan Size (2001) Mobile banking in use Number of currently active borrowers Total balance of outstanding loan Average outstanding portfolio Real annual average growth rate of loans outstanding during the last three years Loan size minimum maximum Average disbursed loan size Average disbursed loan size as a percentage of GDP per capita Average outstanding loan size Average outstanding loan size as a percentage of GDP per capita Average loan term Nominal interest rate Effective annual interest rate Value of loans per staff member Number of loans per staff member Total balance of voluntary savings account Total annual average savings as a percentage of annual average outstanding loan portfolio Number of current voluntary saving clients Value of average saving account Average saving deposit as a percentage of GDP per capita Value of saving deposit per staff member Number of savers per staff member Nominal deposit interest rate Another important measure of outreach is seven aspects of loan size coined by Mark Schreiner. He made an attempt to redefine the loan size, which has been widely used as the proxy for depth of outreach for many years. He introduced seven aspects of loan and explained why each one matters and how they affect the outreach and profitability of microfinance institutions. The seven aspects are: Table 2. The Aspects of Loan Size Sl No Aspects of loan Formula 1 Term to Maturity 12xAnnual average number of loans outstanding Number of loans disbursed in a year 2 Dollars Disbursed Dollars disbursed in a year Number of loans disbursed in a year 3 Average Loan Balance Dollars outstanding at year end Number of loans outstanding at year end 4 Time between Instalments Average term to maturity Average number of instalments 5 Number of Instalments Average term to maturity Average frequency of instalments 6 Dollars per Instalment Average dollars disbursed Average number of instalments VOL. 5, ISSUE 4 (April 2016) 48
7 Dollar year of Borrowed Resources Average annual dollars outstanding Number of loans disbursed in a year Source: Mark Schreiner, 2001 The Six Aspects of Outreach (2002) In 2002, Mark Schreiner proposed a framework for outreach social benefits of microfinance- in terms of six aspects. The framework encompasses both the poverty outreach to microfinance and the self sustainability approach. In his view, the poverty approach assumes that great depth of outreach can compensate for narrow breadth, short length and limited scope. The self sustainability approach assumes that wide breadth, long length, and ample scope can compensate for shallow depth. The six aspects of outreach are: Table 3. The Six Aspects of Outreach Sl No Aspects of Outreach Explanation 1 Depth of outreach Value society attaches to the net gain from the use of microcredit by a given borrower 2 Worth to Users How much a borrower is willing to pay for a loan 3 Cost to Users What is the cost to the user? It includes both price and transaction cost 4 Breadth of Outreach Total number of users 5 Length of Outreach The timeframe in which an MFI produces loans 6 Scope of Outreach Number of types of Financial contracts offered by an MFI. Source: Nara Hari Dhakal, 2013 Outreach Measurement Framework for Interest Free Microfinance Gary Woller and Mark Schreiner presented a conceptual framework in a workshop organized by USAID, which was conducted in 2004 with an objective to make a comprehensive framework for measuring outreach of microfinance institutions. This conceptual framework (six aspects of outreach) later becomes the reference and guidance for every microfinance outreach measurement frameworks. According to Mark, each of six dimensions of outreach was developed to capture different dimensions of net social return. He had grouped this net social return into two components: net customer benefit and net social benefit. Net customer benefit is the private benefit customers derive from the consumption of financial services. In his view, the net benefit to customer satisfaction is a function of whether and to what extent products and services satisfy customers needs and wants over time and adjusted for cost. All else equal, the net satisfaction of the customer needs and wants will be greater (a) the more worthwhile the products and services offered (b) the lower the cost of products and services offered (c) the greater the number and variety of products and services offered (d) the longer the lifetime of products and services offered (Schreiner, 2004). On the other hand, the net social benefit is any net increase in total social welfare over and above the benefit to customers that result from consumption of financial services (Schreiner, 2004). The net social benefit is determined by the depth, breadth and length of outreach (Schreiner, 2004). Depth of outreach matters, because society places greater value on helping the poor than the well-off(schreiner, 2004). Breadth of outreach matters, because society values helping more poor people than fewer poor people(schreiner, 2004). Length of outreach matters, because society cares about the poor both now and in the future(schreiner, 2004). All else equal, the greater the depth, breadth and length of outreach the greater the net social benefit (Schreiner, 2004). The following table depicts Schreiner s framework of outreach. VOL. 5, ISSUE 4 (April 2016) 49
Table 4. Aspects of Outreach and its Measurements SL No ASPECTS OF MEASUREMENTS 1 Worth of Outreach Clint retention rate Repayment rate Portfolio at risk Number of referrals made Percentage of current clients willing to refer others Percentage of new clients joined because of referrals Percentage of clients with multiple account Fee charge as a percentage of market fee Age of savings account Length of participation of clients Clients satisfaction level 2 COST OF Profit & Loss ratio Fee and commission paid Cash transaction costs like transportation and documentation and photocopies Opportunity costs Whether the MFI is forcing clients into join liability contract with people they do not know. 3 SCOPE OF The number and type of different loan products offered The number and type of different saving products offered The number and type of different voluntary nonfinancial services offered 4 DEPTH OF Average loan size as percentage of GNP per capita Seven aspects of loan size Whether the MFI explicitly targets the poor Whether the MFI tracks poverty related indicators Whether the MFI conduct market research Location of branches Whether the MFI offer poor friendly products Group Loans Loans not requiring collateral Short quick emergency loans Low minimum balance liquid saving The number of loan clients 5 The number of voluntary savers BREADTH OF The number of financial accounts The number of saving transactions Financial leverage 6 LENGTH OF Financial self-sufficiency ratio Operational self-sufficiency ratio Number of years in operation Source: Schreiner, 2004 VOL. 5, ISSUE 4 (April 2016) 50
CONCLUSION After an in depth review of current literature, the present study projected a theoretical framework which was proposed by famous microfinance experts Gary Woller and Mark Schreiner in 2004 for measuring social performance of interest free microfinance institutions. This framework offers several benefits both in terms of methodology and potential contribution to the microfinance industry as a whole. Schreiner (2004) had operationalised each dimensions of outreach with a set of indicators that really helps to easy to collect data and easy analysis by management. The framework would facilitate better social investment decisions by donors and socially responsible investors through creating social performance benchmarks. It would also be helpful in makings comparison across multiple dimensions and across institutions, lending methodologies that would highlight the relative strength and weakness of each dimension and in turn helps the development of appropriate social performance benchmarks. REFERENCES 1. Conning (1999) Outreach, Sustainability and leverage in monitored and peer monitored lending journal of development economics. 2. Herms.N and Lensink.R (2007) The Empirics of Microfinance: What do we Know, The Economic Journal, 117, 1-10. 3. Hulme and Mosley (1996) Finance against poverty (Volume I & II) London: Routledge 4. Ledgerwood (1999) Microfinance Hand Book: Institutional and Financial Perspective, Washington DC, The World Bank 5. Manfred Zeller and Richard L Mayer (1999) The Triangle of Microfinance: Financial Sustainability, Outreach and Impact The International Food Policy Research Institute, The Johns Hopkins University Press, Lendon. 6. Mark Schreiner (1999) Aspects of Outreach: A framework for Discussion of the Social Benefit of Microfinance,Centre for Social Development, Washington University 7. Navajas (2000) Microcredit and the poorest of the poor: Theory and Evidence from Bolivia, World Development, 28(2), pp. 333-336 8. Otero and Rhyne (1994) Principles and Institutions for Microenterprises finance: Building Health Financial Institutions to the Poor, Kumarian Press Inc, West Hartford 9. Rhyne (1998) The yin and Yang of Microfinance: Reaching the Poor and Sustainability,MicroBanking Bulletin, Issue 2 1998. 10. Schreiner (2001) Seven Aspects of Loan Size, Journal of Microfinance, 3(2), 27-48 11. Schreiner (2002) Evolution and Microenterprise programs in the United States, Journal of Microfinance 12. Woller, Dunford and Woodworth (1999) Where to Microfinance International Journal of Economic Development 1(1) 13. Yaron.J (1992) Successful rural finance Institutions ; Discussion paper no.150, The World Bank, Washington DC 14. Yaron.J (1994) Successful Rural Finance Institutions; Finance and Development, The World Bank, Washington DC 15. Yaron.J (1994) What makes Rural Financial Institutions Successful? The World Bank Research Observer, Vol 9, No 1. VOL. 5, ISSUE 4 (April 2016) 51