the microbanking bulletin - Microfinance Information Exchange

TALKING ABOUT PERFORMANCE RATIOSTALKING ABOUT PERFORMANCE RATIOSMeasuring Client RetentionRichard RosenbergMost microfinance practitioners are coming torealize that client dropout has a surprisingly heavyeffect in depressing profitability. 28 As a result, thereis an increasing amount of discussion about how tomeasure client desertion (or retention).Defining TermsA retention rate (RR) answers the question: “Whenclients had a chance this period to take out a repeatloan, what percent actually took the loan?” Correspondingly,a desertion—or dropout—rate (DR)answers the question: “When clients had a chancethis period to take out a follow-on loan, whatpercent failed to take the loan?” Defined this way,these two rates are simple complements of eachother: Both rates are period specific.“Resting” ClientsAny RR or DR needs to take into account the factthat a client who has paid off a loan without taking arepeat loan may be leaving the program for good,or simply waiting a while before taking out anotherloan. No formula can tell us what the client willeventually do. However, a good formula shouldgive the program “credit” when an inactive clientbecomes an active borrower again. At times whenthe number of clients returning to the fold is verylarge, such a formula will produce negative desertionrates and, correspondingly, retention ratesabove 100 percent, especially when the measurementperiod is short. Over time, this phenomenonwill smooth out.The FormulasThe choice of an appropriate formula presentscomplex issues. As of yet there is no consensus.The discussion below represents my tentativeconclusions.Waterfield/CGAP Formula. The formula thatChuck Waterfield used in the CGAP MIS Handbookseems simpler and less problematic than otherformulas. 29 This formula focuses on the client’smain decision point—that is the point at which shehas repaid her prior loan and has the option to takeout a new one (a “follow-on” loan). At the pointwhere the client chooses to take the follow-on loan,she is counted as retained, whether or not therewas a resting period before the follow-on loan.(1) RR = FLLPWhere:FL = the number of follow-on loans madeduring the periodLP = the number of loans paid off during theperiod, andRR = retention rateNote that this formula produces the retention rateper loan cycle. To estimate how many clients theorganization is losing (or keeping) per year, it isnecessary to factor in average loan term. 30 Supposethat the RR calculated by this formula is 80percent. If we run 4 loan cycles per year, then onlyabout (0.80) 4 = 41 percent of the clients active atthe beginning of the year are still active at the endof the year.If the MIS doesn’t directly produce FL or LP, theformula can be restated in a way that is morecomplex but uses information that may be easier toproduce (see Formula 2).Mr. Waterfield modestly wrings his hands over thefact that his formula can occasionally produce aretention rate over 100 percent. It’s hard to seewhy this bothers him: as noted above, the only wayto keep a retention rate from ever exceeding 100percent is to ignore resting borrowers.28This article, originally prepared for the 1999 MicroFinanceNetwork conference in Bangladesh, draws liberally fromDevelopment Finance Network (DFN) postings by ChuckWaterfield and Mark Schreiner. So any mistakes here must betheir fault.29 The formula in the CGAP MIS handbook is a desertion rate. Itis presented here as a retention rate because it is simpler.30For more than you wanted to know about estimating averageloan term, see CGAP’s Occasional Paper No. 3, MeasuringMicrofinance Delinquency: How Ratios Can Be Harmful to YourHealth.26 MICROBANKING BULLETIN, APRIL 2001