Thinking About the Performance and Sustainability of Microfinance Organizations

I. Introduction This document presents a framework for thinking about the performance and sustainability of subsidized microfinance organizations. A framework is a guide to analysis. It suggests questions, highlights the links among questions, and proposes ways to answer the questions. The goal is to improve social welfare by measuring performance better. The performance of MFOs bestows benefits and inflicts costs on five groups: customers, society, donors, managers, and investors. Each group has its own goals, so each group asks its own questions about performance. No single measure informs all the questions, nor does any single measure give all the useful information for any single question. Humans must analyze many measures to come up with ways to improve performance. This chapter gives measures that inform the questions drawn from the goals of each group. The measures differ in the resources with an opportunity cost, in the opportunity cost itself, and in the time frame. This framework nests the traditional framework in the field, the Subsidy Dependence Index (Yaron, 1992a and 1992b). Sustainability is defined as repeating performance in the future. Such permanency requires a flexible organization and a structure of incentives to maintain performance in spite of changes in the environment Judging measures as they stretch into the future is qualitative and so takes human work and smarts. No quantitative measure is sufficient for self-sustainability. Performance is progress in reaching the mission of microfinance. The mission is to make the lives of poor people better by producing outreach, loans and deposits used by the poor. Measuring performance sparks better performance and casts light on bad performance (Von Pischke, 1991). Measuring performance from points of view other than that of society matters because society is not the only stakeholder in the MFO. Measurement is worthwhile if the benefits of better performance are more than the costs of measurement. One goal of the explicit framework in this chapter is to halt the spread of variant strains of indicators and interpretations. The next section characterizes MFOs. The next two sections discuss the concept of analysis and the distinction between the concepts of subsidy and of subsidized resources. The section after that discusses measuring performance from the points of view of each of the five groups with a stake in an MFO. The last section discusses sustainability.