Schreiner (1997) defines performance as meeting a goal. The goal of many development institutions and MFOs has been to help the poor, reduce poverty and induce development by lifting the binding capital constraint experienced by many low-income individuals (Gonzalez- Vega, 1993; Yarron etal." 1998). Evaluating the effects of microfinance credit programmes on incomes and poverty alleviation is difficult because it is not always evident what individuals would have done and what their poverty levels would have been in the absence of these credit programmes (Yaron etal." 1998). The ensuing demise of many targeted credit
programmes, because of weak institutions, has resulted in serving very few individuals in the target market and recovering low amounts little of the debt. Such programmes were also heavily dependent on subsidies in one form or another, resulting in reviewing the functions of these institutions as vehicles of poverty alleviation.
Rather than focus on the impact that development and microfinance programmes had on the target clientele, micro-finance practitioners have developed a framework for assessing the performance of such programmes based on outreach and fmancial self-sustainability. This methodology, formalized by Yarron (1992), is based on the premise that providing a broad range of fmancial services to targeted clientele in an efficient manner is likely to achieve the desired impact of expanding incomes and reducing poverty. Schreiner (1997) and Navajas et al., (2000) expand on this framework by more explicitly defining the performance measures in the context of further exploring the critical issue of whether development funds have been put to their best alternative use in fmancing MFOs with the objective of poverty alleviation.
Schreiner (1997) highlights six groups of stakeholders that are affected by performance of MFOs namely: society, poor customers, the poor in general, donors, workers and investors. A measure based on cost-effectiveness analysis for assessing the performance of MFOs is developed for each of the stakeholders. The cost effectiveness analysis focuses on the cost versus the output of micro finance institutions where the output can be broadly defined as outreach and where the cost effectiveness is a function of the fmancial technology used and fmancial sustainability.
t 2.
4.2.1 The Outreach Concept
Navajas et al., (2000) defme outreach as the social value of the output of a MFO and identify six dimensions along which outreach is measured: depth, worth to users, cost to users, breadth, length and scope. This defmition builds on that originally used by Yarron (1992) who defined outreach by the number and type of clientele served and the variety of financial services offered. Christenet aI., (1994) defined outreach along three dimensions: quality of service, level of poverty and scale, with high outreach requiring some level of success along all three dimensions.
4.2.1.1 Depth of Outreach
Depth of outreach is the value that society attaches to the net gain from the use of micro- financial services by the poor. Navajas et al., (2000) argue that since society places more weight on improving the welfare 0 the poor than on the rich, the poverty of clients serviced by MFOs is a good measure of depth. The definition of poverty can, however, be subjective and can thus positively or negatively influence this measure (ChristenetaI., 1994).
4.2.1.2 Worth to User
The worth of access to fmancial servIces is measured by the cost that a low-income individual is willing to incurinorder to get access to fmancial services. Worth to the user can be proxied by repeated use of fmancial services by both borrowers and savers, since if the gain from borrowing or saving is greater than the cost, repeat use is more likely (Schreiner, 1997).
4.2.1.3 Cost to Users
The cost to a user is defined as the cost of a loan to a borrower, or the cost of saving to a saver (Navajas et al., 2000). These costs do not only explicitly focus on interest and transaction charges, but also on non-price transaction costs incurred by users accessing fmancial services. Important transaction costs are the time and expense incurred in getting to the offices of the MFO, and in compiling relevant information for the lender.
4.2.1.4 Breadth of Outreach
Breadth of outreach is the number of individuals that use the financial services. Christen et aI., (1994) refer to this concept as the scale of outreach represented by the number of low- income individuals having access to financial services. Schreiner (1997) and Navajas et al., (2000) argue that breadth matters, since there are many poor individuals but limited aid funds to service all of these poor people.
4.2.1.5 Length of Outreach
This refers to the time frame in which the MFOs can supply loans. This aspect important since access to fmancial services by the poor matters both now and in the future (Navajas et aI., 2000). This dimension of outreach is arguably closely linked to the sustainability of the MFO.
4.2.1.6 Scope of Outreach
This dimension refers to the number of types of financial contracts offered, and has particular reference to whether both savings and loan facilities are offered since not all poor individuals are creditworthy and thus may not all qualify to borrow, but most poor individuals are deposit-worthy (Navajas et al., 2000).
tiE
The above six dimensions of outreach are closely inter-related and also depend on the sustainability and objectives and goals of the MFOs and the donors that support these organizations (Schmidt and Winkler, 1999). Since direct measures of social value are expensive to obtain as these require detailed cost-benefit analyses, these indirect measures are particularly useful. Navajas et al., (2000) sum up outreach as being the worth minus cost, weighted by depth, summed across breadth of users and scope of contracts, and discounted by length.
4.2.2 Sustainability of Performance
Schreiner (1997) defined performance as meeting goals. Sustainability is being able to meet these goals in the long-term, and it matters since an unsustainable MFO often has negative connotations both for mobilizing savings and providing loan facilities. Without sustainability, borrowers may be more loath to repay debt, while potential savers may be averse to depositing money (Gonzalez-Vega, 1993; Schreiner, 1997; Navajasetai., 2000). In addition, sustainability is important if MFOs want to survive fluctuating support levels from donors and governments that are often driven by political agendas. Sustainability, however must be seen in the context of the specific performance criteria of financial institutions and the social goals it is trying to achieve. A MFO may be unsustainable yet still be the best way and means of fund utilization to help the poor. Experience has, however, proven to some degree that sustainable MFOs can help to improve the welfare oflow-income individuals (Navajas etai., 2000). Sustainability requires profitability, but profitability alone is not sufficient to ensure sustainability.
Long-term sustainability is strongly linked to a broader set of structures and meta rules that govern the management of costs and risks, the positioning of the institution in the market place and the ability to respond to changing market conditions (Zander, 1997). The microfinance literature defmes several levels of sustainability. Firstly, a distinction is made between sustainability and self-sustainability. Sustainable MFOs are able to meet long-term objectives but cannot do so without the support of donor money (Schreiner, 1997). Within this context, Christenet al., (1994) define MFOs as having reached some level of operational sustainability such that operational expenses can be covered from lending and savings activities. A self-sustainable MFO is able to meet long-term objectives without a subsidy.
This is the point where the return on equity net of any subsidy exceeds the opportunity cost of funds, and hence revenues cover both non-financial and financial costs (Yaron, 1994;
Schreiner, 1997; Christen et al., 1994). Dependence on subsidies is the inverse of financial self-sustainability. Of importance is whether the MFO can achieve self-sustainability without having to abandon its target clientele. True fmancial self-sustainability means that the MFO becomes self-sustainable while keeping its mission (Gonzalez-Vegaet al., 1997).
Obtaining some degree of sustainability is important for several reasons: First, it provides some indication of the cost to society in the form of subsidies to keep the MFO sustainable.
This is an important component in the equation, together with outreach, to weigh up the benefits of the organisation to society, the poor, the clientele, the donors and investors. Given this information, a decision can be made as to whether the funds can be better utilized in an alternative programme (Schreiner, 1997). Second, permanence in the financial market is an important condition to encourage responsible and greater use of the financial services offered by a MFO.
A greater incentive exists to repay debt if the MFO is deemed permanent. Similarly, the rural poor may have a greater incentive to save if they know the funds are going to be secure and available in the future. Third, sustainability, and particularly self-sustainability, is important if the MFO wants to attract investors and deposits. This, in turn, positively enhances the ability of the MFO to leverage more funds to broaden its outreach (Christen et al." 1994;
Navajas et al., 2000). Fourth, sustainability affects outreach since permanency leads to structures of incentives and constraints that prompt all stakeholders in MFO to increase the difference between social value and social cost.
The above definitions of outreach and sustainability necessarily imply a complex set of measures to assess the extent of an MFO's outreach and sustainability. However, the intention of the assessment framework is to obtain measures for outreach and sustainability at minimal cost while still being able to accurately reflect MFO performance. Section 4.3 will review some of the proxies used to estimate the outreach and sustainability ofMFOs.