By Scott Gaul, Product Development Manager, published by the MixMarket Microbanking Bulletin, Issue 18, Spring 2009, pages 15-19, available at:
http://www.themix.org/sites/default/files/MBB%2018%20Spring%202009.pdf
According to the report in the Spring 2009 MixMarket Microbanking Bulletin, microfinance practitioners have sought a single simple way to evaluate the performance of microfinance institutions (MFIs). The report notes that the most commonly used (yet incomplete) indicator to model an MFI’s performance to date has been Financial Self-Sufficiency (FSS). On the other hand, the Subsidy Dependence Index (SDI) has been viewed as an alternative measure that more accurately reflects and MFIs reliance on subsidies (relative to its peers). The MixMarket attempts to investigate some of the similarities and differences between the Subsidy Dependence Index (SDI) and the Financial Self-Sufficiency (FSS) and compare these two indictors by utilizing data obtained from the microbanking bulletin (MBB) during 2003-2007.
The report explores when to use SDI or FSS and the distinction between the two models boils down to ‘where is your bottom line?’ While this may be a simple accounting treatment the report notes that the ‘bottom line’ may differ for policy-makers and MFI management and staff.
The author notes that the SDI model has been fleshed out by pervious scholars such as J. Yaron and others in a series of papers. The comparison of total subsidy and income from loans (in the forms of the SDI) yields two results: 1) The indication of the percentage by which the average yield obtained on the MFIs loan portfolio would have to increase in order to make it subsidy dependent. 2) The cost of society of subsidizing the MFI, relative to the interest plus fees paid by the target clientele to the MFI.
SDI = (Adjustment + Expense)/Revenue + Donation/Revenue – Revenue/Revenue
Further breakdowns:
SDI = (1/FSS – 1) + Donations/Revenue
The report also notes that the most commonly used indicator for evaluation the performance of MFIs has been the FSS; however, it is an incomplete model of an institution’s performance, since SDI more accurately reflects and MFI’s reliance on subsidies relative to its peers.
The formula for FSS can be stated as the following:
FSS = Revenue/(Adjustment + Expenses)
While the author notes that similarities between SDI and FSS are technical in nature, the differences in the formulas reveal some underlying differences between the models. Donation income is treated as ‘below the line’ revenue item in MBB and is not included in the main ratios for self-sufficiency or returns since donation income is not the result of the institution’s core operations. The author explains that an MFI could operate in a country where the government subsidizes microfinance provider or in a country that prohibits foreign donors and investors. FSS, attempts to isolate subsidies that can be most directly influenced by and MFIs operations.
On the other hand, SDI includes types of ‘exogenous’ factors such as donations. SDI views donations as having a social costs (including donation in evaluating MFI performance); money that could be reallocated elsewhere. According to the report, SDI may be more appropriate model of MFI performance when donations are viewed as ‘endogenous’ variable – where the level of donations is determined by other variables in the model.
The report continues to provide a breakdown by testing SDI and FSS utilizing real MFI data. The author has calculated FSS and SDI on the entire MBB sample from 2003 to 2007 covering more than 2800 distinct observations. The report concludes the following in helping an analyst to consider which of the following factors are most relevant (when selecting models and comparing indicators):
• A ‘before donations’ view (as used in FSS), may be more appropriate for MFI staff (if it is restricted to the core business of providing financial services).
• An ‘after donations’ view (as used in SDI) may more accurately reflect the perspectives of regulators or other policy-makers.
• The FSS formula tells it to increase revenues or decrease expenses if an institution would like to raise its FSS level.
• If an institution would like to raise its SDI level, the SDI formula tells it to increase (loan) revenues or decrease donations.
In conclusion, the core difference (one of perspective) between the models is the difference in treatment of the financial ‘bottom line’.
By Zoran Stanisljevic
Similar Posts:
- MICROFINANCE PAPER WRAP-UP: “The Relationship Between Financial and Social Performances in Microfinance: Insights from the Provision of Agricultural Loans in Cambodia,” by Tristan Caballero-Montes
- MICROCAPITAL BRIEF: Tokyo Offering $900k to Asset Managers, Fintechs to Open “Green Finance” Office in Japan
- SPECIAL REPORT: Leveraging Financial Inclusion to Get Food Security Back on the Increase #EMW2023
- MICROFINANCE PAPER WRAP-UP: “The Impact of Microfinance Institutions on Poverty Alleviation,” by Collin Chikwira et al, Published by Journal of Risk and Financial Management
- MICROCAPITAL BRIEF: Publish What You Fund Releases DFI Transparency Index Ranking Disclosure Record of 30 Development Finance Institutions
