Industry overview
Over the course of the past 15 years microfinance has expanded beyond the realm of NGOs and government agencies into a sophisticated industry that has attracted the attention of private corporations, commercial banks, investment fund managers and international capital markets complete with rating agencies and regulators (Link to more . . .). It is not our purpose to cover all of this or to give advice to the large investor, but to help the small donor make sense of the giving opportunities offered by US-based non-profits who seek the donor’s dollar in the name of microfinance.
Non-profits that raise money to provide financial services to the poor do so primarily to facilitate financial services (often local level Savings and Credit Associations that may be operated by a local church or self-help group) or to provide financial services (often through a local MFI partner) or to strengthen local providers.
Facilitators – Within any community there is a mix of people who wish to save as well as others with a need to borrow. The needs of both of these groups can often be met through a Savings and Credit Association (SCA) that can be run by a self-help group or local organization such as a local church. This can be a very effective approach and requires little or no outside capital. Some development organizations facilitate the formation of locally owned and operated SCAs and provide specialized training in the accounting and organizational systems necessary for successful operation. They often also provide curricula for training SCA members in basic business skills necessary for starting and operating a micro-enterprise. World Relief is a strong facilitator of locally owned SCAs, particularly in Rwanda where it is focused on using the local church in community development. CARE is also a large facilitator of village SCAs in Africa. The Chalmers Center for Economic Development is a strong advocate of SCAs and has a well designed curriculum to empower local churches to facilitate the formation of SCAs owned and operated community members.
Providers – An alternative to relying on multiple small self-managed Savings and Credit Associations is to provide financial services directly with a team of trained professionals, often beginning with outside capital that can be made immediately available for loans. This is done by Microfinance Institutions (MFIs) that are often able to realize economies of scale that enable them to provide services at lower cost and with greater reliability than informal systems. In many developing countries there are many local MFIs that operate on a regional level, with only a few large enough to have national or international presence. The US-based nonprofits that raise money for microfinance for the most part do not directly provide microfinance services, but rather partner with local MFIs, which in some cases are their local affiliates. The funds raised by the US-base nonprofits (through donations and by borrowing on international capital markets) are used to capitalize local MFI partners, to build their capacity to provide quality services through training and consulting services, and to provide oversight that ensures donor/borrowed funds are used effectively and client needs are being met. Opportunity International and Kiva are in the provider category.
Support Services – Some organizations are dedicated to building capacity of local MFIs and the funds they raise are used for consulting and training rather than for funding loans. Peer Servants is an example of this.
Some organizations such as Five Talents and Hope International provide a combination of all three of these services, and this is true of many of the larger organizations as well, such as World Vision and World Relief.
Microfinance Metrics
The microfinance industry has matured considerably over the past decade, and MFIs increasingly report on a wide variety of indicators to cater to the needs of investors and regulators. For an illustrative list seehttp://www.themix.org/sites/default/files/Indicator%20Definitions.pdf
In our discussions with microfinance experts, we find that they consistently draw attention to several key indicators that can be helpful for a non-expert as they seek to compare organizations, and we outline these below. Richard Rosenburg also has a nice discussion you can access here http://www.cgap.org/gm/document-1.9.36551/Indicators_TechGuide.pdf:
The difficulty for the non-expert donor is that to be meaningful these indicators need to be examined at the level of individual lending contexts. Even within one country, performance metrics considered “good” will be different for operations targeting urban clients than for rural clients, for instance. The US-based non-profits that raise funds for microfinance work across many countries and client types, making direct comparison on the indicators described below meaningless. Loan repayment rates in Moldova will be different than in Uganda, and operations may be more self sustaining for a partner in the Philippines than in Liberia and cannot be meaningfully captured in one figure. Likewise, even counting numbers of borrowers is not straightforward. If a US-based organization has a 10% stake in an MFI in Ethiopia, should it count 10% of the borrowers or all of them?
The microfinance sector has matured greatly in the past 10 years, and the US-based non-profits that raise money for microfinance are professionally run and are subjected to the regular scrutiny of international capital markets. The measures we outline for you below are good for a donor to understand, but we recommend that the lay person look at other organizational distinctives in making a giving choice. These can include ministry models, countries of operation, range of financial services offered, types of borrowers targeted (urban, rural, poorest of the poor, women, unserved populations etc.), ease of raising loan capital (organizations that devote resources to spiritual integration may find it more difficult to borrow from international capital markets).
Basic Microfinance Indicators
Indicators of size:
The number of active borrowers and depositors (savers) captures the number of people that are using the services of the MFI. This is a better measure of the scale of operations than total number of loans disbursed, a figure sometimes referenced in marketing material that might include loans from past years and thus favor organizations that have been in business longer.
The Gross Loan Portfolio is a good measure of the total value of outstanding loans. It does not include interest payments or portions of loans that have been repaid.
Indicators of Client Characteristics
Many MFIs claim to target the poor or the very poor. One way to judge this is by examining the average loan size. Smaller loans meet the needs of poorer people. One way to adjust this figure to account for varying levels of national wealth is to express average loan size as a percentage of per capita national income. Some regard a figure below 20% to indicate that borrowers are poor. In many developing countries this translates into a loan range of $50 to $100.
As loan size goes down, the cost of operations for an MFI goes up, requiring them to either pass these costs on to clients in the form of higher interest charges or to subsidize their operations from other profits or donations. Your donated dollar can help an MFI reach poorer people.
Other metrics related to clients can include the percentage who are women, or that are rural (urban clients are cheaper to serve).
Indicators of Loan Repayment
It is common among MFIs to cite high rates of loan repayment that are often 96% or higher. One problem with this measure is that it is a historical measure, rather than a measure of current status (not to mention varying definitions of loan repayment). The standard international measure of portfolio quality is the Portfolio At Risk (PAR) which is the outstanding principal balance of all loans past due more than 30 days as a percentage of outstanding principal of all loans. Figures on the order of 2% to 3% are not unusual, whereas anything above 5% probably warrants further scrutiny.
Indicators of Sustainability and Efficiency
Three common indicators used for gauging MFI sustainability are Return on Assets (ROA), and Return on Equity (ROE) and Financial Self Sufficiency. Cost Per Client (or loan) is a common measure of efficiency used in the microfinance sector. Comparing MFIs on these indicators is tricky, particularly for those that have recently moved into a market as well as for those meeting the needs of marginalized/hard-to-reach client groups. For more on this see Rosenburg’s guide to microfinance indicators http://www.cgap.org/gm/document-1.9.36551/Indicators_TechGuide.pdf.