Professional Documents
Culture Documents
Table of Contents
1.0 Introduction......................................................................................................................................................... 2
1.1 Objectives .......................................................................................................................................................... 5
2.0 Review of Literature ......................................................................................................................................... 6
2.1 Drivers of sustainability ................................................................................................................................ 9
2.2 Productivity and Efficiency ....................................................................................................................... 10
2.3 Performance Benchmarks ......................................................................................................................... 12
2.4 Hypothesis ..................................................................................................................................................... 12
3.0 Analysis of GHAMFIN Report ...................................................................................................................... 13
3.1 Methodology ................................................................................................................................................. 13
3.2 Data ................................................................................................................................................................. 13
3.3 Variables........................................................................................................................................................ 14
3.4 Sampling........................................................................................................................................................ 14
3.5 Critique of the GHAMFIN study (Performance and sustainability)................................................ 14
3.6 Limitations .................................................................................................................................................... 15
3.7 Empirical Results ......................................................................................................................................... 16
3.8 Productivity................................................................................................................................................... 16
3.8 Efficiency ........................................................................................................................................................ 17
3.9 Test of the relationship between Productivity, Efficiency and Sustainability ............................. 17
4.0 Conclusions ....................................................................................................................................................... 18
References ................................................................................................................................................................ 19
Tables
Figures
the sector intensified as a result of the new thinking towards the reduction of poverty
in development circles. The sector has grown from primarily credit-giving institutions
The growth in volume, types and quality of microfinance programmes over the period
Microfinance has been seen as a powerful tool for enhancing development and reducing
poverty since unlike some of the other tools; it is flexible and directly empowers
beneficiaries and pay back when they become sustainable (CGAP,2002; GHAMFIN,
2006). A well targeted microfinance programme has the potential of improving the
livelihoods for beneficiaries and one of the best measurable and verifiable ways of
Microfinance has been defined as system that enhances access to financial services to
Microfinance gives opportunity for poor people to increase their sources of income as
well as protect them from vulnerable events (CGAP, 2002). Improved access to financial
services has increased the range of choices of financial products that can transform the
products are delivered through programmes run by institutions such as Rural and
Community Banks (RCBs), Credit Unions, Financial NGOs, Savings and Loans Companies
and Susu (GHAMFIN, 2004; Steel and Andah, 2003).Since MFIs are different from
payments and in some cases train the clients in micro enterprise management and
In the early days of microfinance there was a real bias towards outreach to the poor as
households (CGAP,2002, SEEP, 2009; Murdoch, 2000; Makama and Murinda, 2005).
Historically the institutions that run these programmes were invariable NGO who
integrated the giving of micro loans into their operations as one of the tools for
eradicating poverty. This approach has been variously referred to as the welfarist
approach (Murdoch, 2000). The outreach and poverty reduction missions of these
credit to poor households to the offer of many financial products to low income clients,
As the microfinance industry evolved and expanded other dynamic views emerged as it
was realised that MF programmes dependence on subsidies and donors was in the long
run unsustainable (Christen 2000; Murdoch, 2000; Woller, 2000). This realisation
shifted attention from just outreach towards more benchmarks that measures
for informal credit and an effective and powerful instrument for poverty reduction
among people who are economically active but financially constrained and vulnerable in
various countries. In effect microfinance products were extended to clients that run
micro enterprises. This brought into the industry many privately owned commercial
The Microfinance scene in Ghana has gone through similar evolution against the
background of long existing informal microfinance institutions which have existed over
many decades. This scenario created some different MFI institutions with varied core
microfinance programme across the country run by any of the different kinds of
institutions including Rural and Community bank, Financial NGOs, Credit Unions ,
Saving and Loans Companies and Susu groups. These different groups employ different
It is quite clear that the extension of these microfinance services to many households
has brought into focus the issue of ensuring the sustainability of such programme and
sustains them while fulfilling other objectives. The nature and peculiar characteristic of
MFIs makes it very difficult to achieve sustainability. These peculiar factors include
small loan sizes, small scales of programmes, large operating cost etc (CGAP,2002).
This study tries to examine the benchmarks of Productivity among FNGO programmes
and Savings and loans companies and explore their influence on sustainability of these
able cover their operating expenses, cost of funds and make profits. Some of the critical
indicators of good performance include Productivity and Efficiency (Tor et al,2003). The
purpose of this paper is to explore these two critical indicators of FNGOs and Savings
and Loans companies among MFIs in Ghana. These two types of MFIs have been
selected for comparison because of the apparent difference in their basic bottom lines;
the Savings & Loans main goals of profitability and growth while FNGOs goals of
outreach and reduction in poverty. These benchmarks are critical for the long run
supported FNGO (GHAMFIN, 2004). Higher productivity and efficiency will make them
more sustainable and be able to serve the poor better. For profit and growth oriented
Savings & loans companies, these indicators are so critical to their very survival
becoming very competitive and less productive and efficient institutions will be out-
The microfinance movement has rightly addressed this concerns and developed
reporting within the industry. These standards are global in nature and afford
(SEEP, 2005).
The evolving and dynamic nature of the microfinance industry means that institutions
must be innovative and adopt new technology in reaching their institutional goal and
broader societal goals. However these goals could not be achieved if the fundamental
1.1 Objectives
This study is aimed at using the performance benchmarks to evaluate the relationship
the GHAMFIN study. The performance indicators that will be used are Productivity and
Efficiency and will be applied to FNGOs and Savings &Loan Companies. This I hope will
bring out nuanced findings that will throw more light on the implications of these two
study
providing micro credit services to the poor and the development of financial services
that improve the choice of financial products. There is an intense debate on whether
MFIs should continue to be donor supported and subsidise their microfinance products
or MF should generate enough revenue to cover their own costs since donors funds are
unpredictable and unsustainable in the long run (Schreiner, 1996). There is one school
of thought which say MF should can be sustainable with donor funds and the others say
the MF should generate enough revenue to cover their own costs as donors funds are
From the early days of the debate on sustainability of MFIs, the debate was couched as a
straight choice between sustainability and outreach (Schreiner, 1996 and Christen,
2001). This choice between reaching the poor and ensuring profitability was seen as a
“mission drift” (Murdoch, 2000; Woller, 2000). Various research works were specifically
programmes and outreach are mutually exclusive. Makama and Murinda (2005)
analysed the sustainability and outreach trade-off using data from 33 MFIs in East
Africa and find a strong relationship between outreach and sustainability in contrast to
the expected results of a dichotomy between the two. Also a review of data from 2600
MFIs in South East Asia in 2004 revealed that there seemed to be no conflict between
It has been argued that the intrinsic nature of the population served by MFIs makes is
costly to extend financial services to the poor. This has made it difficult for MFIs to be
providers grew in the face of the fast moving evolution of the sector. At the same time
MFIs developed stronger monitoring techniques for their programmes as more varied
institutions like Savings and Loans companies which where purely for profit institutions
This variability in MFIs size, type, number, and complexity has accounted for more
recognized this deficiency and agreed that developing standard definitions of financial
terms and the most common indicators was an important next step in its development.
Different MFI types have different structures, agency problems, and expectation from
expected to have different fundamental bottom lines while commercial MFI institutions
typified by Savings and Loans Companies are expected to have objectives dichotomous
their primary aim is to make profits and returns for their shareholders. Commercial
MFIS are characterized by shareholders who have rights of ownership and privileges
that can be transferred. The owners are responsible for the control of management
decisions. Profitability and sustainability are the main concerns of these institutions and
are therefore expected to score well on the measures of sustainability (Woller, 2000,
Tchakoute-Tchuigoua,2010).
FNGOs are normally institutions which have poverty reduction and livelihood
tools for achieving their core goals. One of the main objectives of FNGOs is to seek
different outcomes which can be evaluated in terms of quality of service provided by the
organizations and thus adopt different operational approaches. They are therefore
microfinance institution when the operating income from its activities is sufficient to
cover all the operating costs of microfinance programmes. (Woller, 2001). Financial
sustainability means that the MFI is able to cover all its present costs and the costs
incurred in growth, if it expands operations. It would mean that the MFI is able to meet
its operating costs and financial costs without relying on subsidies (CGAP,2000)
developed by a coalition of efforts among many institutions such as CGAP and SEEP, MIX
and MBB. The ratios have been categorised into four main categories. These standard
ratios are useful for measuring performance across different MFI institutions and across
countries.
Portfolio Quality
This study will be concentrating on the productivity and efficiency ratios of FNGOs and
Savings & Loans. All the ratios are derived from the financial statements of the various
Conceptual Framework
Performance of MFI
Financial Performance
measured by the
following Social performance
Portfolio Quality measures by
Asset and Liability indicators such as:
Management, Outreach
Efficiency and
Depth of outreach
Productivity
Service Quality
Profitability and
Sustainability Average size of
loans
institutions based on the managerial cultures of these institutions and shows how well
MFIs uses its resources (CGAP, 2001). Productivity and efficiency are important drivers
of performance and profitability and are solely dependent on the internal organisational
mechanism. FNGOs are governed differently and the managerial practices are different
from commercial MFIs. Based on the assumption that FNGOs reach lower income clients
than Savings and Loans they will be expected to perform less well in these ratios. MFI
that perform well on these indicators can be sustainable and will be able to lower
interest rates. This is especially important for FNGO which desires to serve the very
poor.
from their loan portfolio. Efficiency points to how much MFI spends to serve active
clients and points to how much it must earn from active clients to be viable. Table 1
Productivity measure the work and productivity of personnel especially loan officers. It
shows the caseload of individual loan officers. Higher caseloads for loan officers are
desirable only up to their maximum at which point the number must be limited. This
optimum level of caseloads is crucial since it could affect the quality of service if officers
its peers. The reliability of benchmarking depends on the availability and quality of
comparative data (CGAP, 2001). The GHAMFIN report gives comprehensive data on
performance and this can be compared to data on peers from the West African and
African region (MIX, 2009). The comparative data on MFI performance by charter type
calculating the selected indicators and indicators leading to standard (MIX, 2009).
2.4 Hypothesis
From the literature, it is clear that sustainability is dependant on performance
indicators which include productivity and efficiency. However because of the higher
cost associated with the operation of FNGOs they are expected to perform less than
commercial MFIs because of the different bottom lines and profile of clients they
predominantly serve
Hypothesis 1
With profitability as their prime bottom line Savings and Loans Companies will perform
MFIs that perform better operationally (Efficiency and Productivity) are financially self
3.1 Methodology
The framework used to analyse the performance of FNGO and Savings and loans consist
industry in Ghana. GHAMFIM in 2004 conducted a research into the three bottom lines
3.2 Data
To explore the performance of microfinance programmes, data was drawn from the
GHAMFIN study conducted in 2004. The data is a cross sectional data capturing the
(GHAMFIN,2004). For this study relevant data on performance of MFIs which was
derived from the audited financial statements of sampled financial institutions was
used. I made use of the MIX datasets reported in Micro Banking Bulletin for the
while Profitability and Sustainability are co-opted to help test the hypothesis.
3.4 Sampling
From the GHAMFIN reports data the MFIs were categorised into five peer groups from
which samples were taken across the country divided into three ecological zones. In all
25 institutions were sampled fro the study in the first and second phases. For this study
the Savings and Loans and FNGO peer groups were selected as the unit of analysis.
microfinance sector and an attempt to understand its impact on poverty the depth of
outreach and how the microfinance institutions’ performance can sustain the
programmes.
As an empirical research this work is really strong on data and analysis with various
Quality covered in details. The result throws a lot of light on how sustainable various
microfinance programmes across the three zones are based on the five peer categories
Further research areas that could benefit from such a study of such nature include the
programmes especially in the areas of productivity and efficiency. Also and assessment
The division of the country into Coastal Zone, Middle Zone and Northern Zone seems
arbitrary and not based on any criteria and there is no explanation in the paper to
It appears that the financial data of the institutions sampled are not adjusted for
3.6 Limitations
There are several limitations to this study. Some them include the following
The reliance on reported table for the a analysis leaves little room for more varied
analysis
The use of simple descriptive statistics does not adequately help answer the research
performance indicators considers namely productivity and Efficiency. Also the analysis
will attempt to use the results to test the two hypothesis using statistical tools while
3.8 Productivity
For this study two ratios are used to assess the productivity of the institutions namely:
number of clients per loan officer and proportion of staff devoted to servicing loans as
From FNGOs appear to be more productive than savings and loans contrary to the
literature and hypothesis 1. While FNGOs have loan officer caseload of 494, Savings and
loans have a very low caseload of 80. This means that for every loan officer on the
payroll of an FNGO, they are responsible for about six times the clients handled by
Savings and loans. The implication is that FNGOs are more likely to be sustainable based
on this indicator.
Overall FNGOs are more productive than savings and loans as shown by the significantly
lower proportion of the staff allocated to burrowing clients. Since loan portfolio is the
primary source of incomes for MFIs, FNGOs are more likely to be profitable and
Savings and Loans MFIs devote more of their staff to savings mobilization thus
according to MIX to ensure optimal caseload. From the table it is clear that FNGO loan
officers handle 70% more clients than is optimal. This could lead to lower quality of
3.8 Efficiency
Efficiency measures the ability of microfinance institutions to generate incomes from its
portfolio by using the least cost methods. Efficiency is determined by ratios such as Operating
Expense/ Loan Portfolio, Cost per Borrower, Cost per Loan, and Cost per Borrower.
From table FNGOs perform better in this indicator than Savings and loans companies.
Efficiency score for FNGOs is 34% while Savings and loans scored 55%. The benchmark
20-40%. This result again contradict hypothesis 1 and follows the trend of the
productivity indicator.
Efficiency is influenced methodology and size of loans and this may explain the fact that
Savings and Loans are inefficient compared to Savings and Loans. FNGOs are more
the other hand refers to MFIs that are able to cover their cost of loanable funds without
donor support and subsidies. The benchmark for sustainability is fixed around 100%
meaning that institutions that perform below the benchmark are not sustainable.
Both FNGOs and Savings and Loans companies are sustainable, however savings and
loans companies perform better with a score of 122% with FNGOs scoring 101%.
This result conforms to the assumption that profit driven commercial MFIs are more
profitable than FNGOs with different bottom lines. However the peculiar point is that
sustainability does not correspond to productivity and efficiency scores as set out in
hypothesis 2. From the results above FNGOs are more efficient and productive than
Savings and Loans companies. This means that sustainability of the MFIs surveyed are
It is possible that FNGOs high burrower per loan officer actually leads to delinquency
and default. Also it is possible FNGOs charge lower interest rates and do not earn many
non-interest incomes such as fees. On the other hand Savings and Loans may earn
others incomes and charge higher interest rates. Also their lower loan officer caseload
4.0 Conclusions
excluded from the formal financial system to gain access to sources of finance. However
the peculiar nature of this industry makes it difficult to negotiate the tight tradeoff
objective of this article. The main indicators considered were productivity and
efficiency for two types of institutions (Savings and Loans and FNGOs) using data from
The results contradicts the first hypothesis which asserts that privately owned
commercial MFIs will perform better than FNGOs base on the charter bottom lines .On
the contrary reported data indicated that FNGOs are more productive and efficient than
Even though savings and loans are less efficient and productive than FNGOs they are
These results show that other measures of performance of MFIs may be more significant
in explaining the sustainability of MFIs than productivity and efficiency. These indicators
include the other categories of performance measures Portfolio Quality, Asset and
The main limitation of the article is the use of descriptive statistical tools to test the
hypothesis.
References
Acharya, Yogendra Prasad and Acharya, Uma (2006) ,Sustainability of Microfinance Institution
from small farmers’ perspective: a case of rural Nepal. International Review of Business
Research Papers Vol. 2 No. 2 , Pp. 117-126
Makame, A.H. and V. Murinde, Empirical findings on cognitive dissonance around Microfinance
outreach and sustainability, Birmingham: University of Birmingham, 2006.
Mark Schreiner (1996). Thinking about the Performance and Sustainability of Microfinance
Organizations
Murdoch, Jonathan (2000). The Microfinance Schism. World Development Vol. 28, No. 4, pp.
617-629.
SEEP Network (2010), Guide to the Microfinance Financial Reporting Standards Measuring
Financial Performance of Microfinance Institutions
8. Steel, W.F and D. O. Andah (2003), Rural and Microfinance Regulation in Ghana: Implications
for Development and Performance of the industry, World Bank, Washington DC
Woller, Gary (2000), Poverty lending, financial self-sufficiency, and the six aspects of outreach.
The SEEP Network, Washington DC.