An Exploratory Study of the Performance of Microfinancing Institutions Using the Balanced Scorecard Approach

Abstract

More than 3,000 microfinancing institutions (MFIs) in developing countries provide financial assistance to the needy poor who are denied access to institutional credit from other sources. This study's motivation comes from the importance of MFIs and the lack of knowledge about them. Adopting the balanced scorecard (BSC) model, this exploratory study investigates the critical performance measures that MFIs need to emphasize in their performance reporting to drive high performance. The study first argues that four dimensions (sustainability, increasing the outreach, depth of outreach, and portfolio at risk) are needed to measure the performance of MFIs, and then analyzes the impact of eight performance-reporting measures on these dimensions using multipleregression analysis. Of the eight measures selected, the emphasis on "net cash flow" has a significant impact on improving two dimensions of performance: sustainability, and increasing the outreach. The latter is also affected by the emphasis placed on the "ratio of zero security loans to total loans" in performance reporting. The study also finds that the depth of outreach performance dimension is predicted by the emphasis placed on the two performance reporting measures: "ratio of operating expenses to number of loans" and "the average time to process a loan application."

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