Determining the self-sufficiency of microfinance institutions

The paper compares and discusses two commonly used methods to evaluate and measure self-sufficiency of microfinance institutions (MFIs), namely subsidy dependence index (SDI) and financial self sufficiency (FSS). Both the SDI and the FSS are used by the microfinance industry as substitutes for a complete cost-benefit analysis, which demands specialised resources and sophisticated financial methods and is therefore rarely applied. In contrast, the SDI and FSS do not provide a complete cost-benefit analysis of the performance of MFIs. However, they attempt to provide sufficiently meaningful performance evaluation measures that allow society and donors, who often bear the cost of subsidising MFIs, to assess performance. In particular the SDI and FSS evaluation methods allow comparisons to be made among MFIs that serve similar target clientele and provide similar services. The paper focuses on the differences between the SDI and the FSS and concludes that the latter often underestimates the subsidy-dependence of the MFI (overestimates self-sufficiency). This deficiency is due to inherent characteristics of the FSS methodology which the paper elaborates on. The paper also suggests the utilization of an outreach index (OI) that should reflect social objectives and priorities in allocating scarce public funds in supporting MFIs. Relying on traditional financial ratios, such as return on assets (ROA) and return on equity (ROE), is a futile practice in assessing the performance of MFIs, unless costs and income are properly adjusted to reflect subsidies. When costs and income are not adjusted to reflect subsidies, relying on traditional financial ratios, could often lead to meaningless or even misleading performance assessment.