Tracking Financial Performance Standards of ... - Sa-Dhan

Introduction to Microfinance StandardsChapter1INTRODUCTION TO MICROFINANCE STANDARDS1.1 BACKGROUNDAfter more than a decade of experimentation, the Microfinance sector in India has graduated to take-offstage and has begun to scale up rapidly, attracting substantial attention and resources. In the context ofsustained growth of Microfinance in India and given the twin imperatives of enhanced sustainability andexpanded outreach, there is growing emphasis on professional growth of the sector. ‘Standards setting’ is one ofthe tested means to achieve professionalism. Several global initiatives have been undertaken to promotedevelopment of reliable financial standards (including performance, accounting and governance standards) tocompare Microfinance Institutions (MFIs) operating in different environments and across the world. Inaddition, MFIs themselves have together attempted (especially, on a regional and/or national basis) to define aconceptual framework for assessment – using commonly agreed indicators and standards.1.2 WHY IS THERE SO MUCH TALK ABOUT STANDARDS?In the recent few years, micro-finance has experienced a significant shift from being an “intervention” made upof short-term development programmes to being a full-fledged “industry” composed of permanent institutions.This push, by donors, bankers and practitioners alike, towards organisational sustainability has led toprofessionalisation of the sector, wherein micro-finance institutions strive to apply commercial principles totheir context and uniqueness of operations in order to become sustainable and self-sufficient.Earlier impact and outreach (i.e. disbursing credit to large numbers of poor) used to be the main goals for aMicrofinance programme, but now-a-days portfolio quality and institutional viability have also gained dueimportance as indicators of success. Microfinance is now being seen as an industry whose objective is toprovide a wide range of financial services to poor households, the informal sector, micro-enterprises, andothers with no or little access to the formal banking system.Consequently, wholesale bank/donor-funded projects are increasingly geared towards strengthening thefoundation and infrastructure of the overall industry, in addition to the traditional provision of one-on-onetechnical assistance to the Microfinance institution itself. These “industry-wide” initiatives usually have twoend goals:1. To increase transparency in the system through information sharing and reporting mechanisms includingdevelopment of standards and their use by MFIs; and2. To integrate Microfinance institutions into the overall financial system.The second reason for the importance of standards comes from the institutional level. Despite the fact thatmicro-finance has evolved to a greater level of sophistication and experienced constant growth, a simple factremains—there still exists a wide gap between the number of clients served by MFIs and the potential marketof poor people lacking access to credit, savings and other financial services. To start bridging this gap, MFIswould need to do two things:• Make better (optimal) use of the resources at hand (i.e. become more efficient and reach more people withthe same amount of resources/funding);• Attract other (eclectic) sources of funding besides traditional donor funds in order to be able to growfurther and expand outreach.11