September, 2003

Alternative Measures of the Effectiveness of Micro Finance Organizations

  • Stephen Daley

Key materials
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The current microfinance industry measurement standards rely on three benchmarks for assessing the effectiveness of microfinance organizations. While the limits of these benchmarks are acknowledged in the micro finance literature, there has been no consensus regarding alternative approaches. They are generally accepted in practice both by donors to, and operators of, microfinance organizations. They are: Repayment rate, outreach, and loan portfolio. The following tool offers an improved set of measures to more effectively assess the effectiveness of these organizations. It should be applied before decisions regarding intervention in the micro finance sector are undertaken. Without meaningful information about the effectiveness of current organizations it will be impossible to determine where, if at all, intervention would be useful. Encouraging the use of meaningful measures will also have implications for the behavior of micro finance organizations. The current standards arrange incentives such that micro finance organizations direct their behavior to satisfy the goals set out therein. By improving the standards by which micro finance organizations are evaluated, one would expect to improve the behavior and therefore the effectiveness of micro finance organizations as they adjust to meet these new challenges.