Sustainable Microfinance - Balanced Scorecard's added value for ...

A MFI in the survival mode can barely cover its monthly expenses and faces a slow
death when money runs out. A sustainable MFI covers its annual expenses, but
relies heavily on donations, grants or other forms of public of private subsidies
besides its own income. Finally a self-sufficient MFI is able to cover all its expenses
from lending and related operations. Most organizations are in between survival and
sustainable mode (Pollinger et al., 2007). Two specific definitions of sustainability are
widely used, operational and financial. Operational sustainability refers to the ability
of a MFI to cover its expenses by its incomes generated from its core activities. The
two most important incomes are fees and interest generated from its loan portfolio.
Financial sustainability refers to the ability to cover its costs if it had to raise 100% of
its loan portfolio through recapitalization and through borrowing funds at the market
rate (CGAP, 2003; CDFA, 2006).
Reaching financial sustainability is not for every MFI the ultimate strategic goal.
Vinelli (2002) gives five supporting arguments why MFIs should. The first reason is
that it helps to ensure organizational survival and thus continuing (financial) support
that is desired by many micro-entrepreneurs. Once borrowers feel that the MFI itself
has financial problems or that it will not punish them when they do not repay (in time)
the default rate will increase 1 (Schreiner and Morduch, 2002; Gonzalez-Vega, 1998;
Bates, 1995). Second, pricing their products at market levels will enable MFIs to
attract the target of non-bankable (but potentially viable) borrowers who do not have
access to cheaper products. Third, traditional lenders have to compete with
organizations that benefit from large subsidies. Fourth, once sustainable MFIs will be
able to raise funds from variable sources. Finally, focusing on sustainability will
require the management to control its costs. This last argument can cause mission
drift to occur. The reason for this is that it is easier to increase self-sufficiency by
lending to individuals with better credit records. Consequently the real financial
excluded will not be reached. Hence, instead of searching for borrowers that are
cheaper and easier to serve, lenders need to work harder and more efficiently and
even create less expensive products (Schreiner and Morduch, 2002; Vinelli, 2002).
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1 This is one of the reasons why ‘Stichting Microkrediet Nederland’ operates under the name Qredits
Elmar Hoogendoorn 18
Sustainable Microfinance