IV.1.2- The problem statement
The research aims to find empirical evidence on microfinance
schism (arbitrage between social and financial performance). As we have stated
earlier, the objective of MFIs is to reach the best possible performance, which
can be achieved when people combine two requirements, namely: social
performance (through the reduction of poverty) and financial performance (in
ensuring sustained profitability). However, these two requirements raise a
debate between two opposing schools of thought: the welfarists and
institutionalists approaches
MFIs of Cameroon provide a clear illustration of this
discussion and analysis of their activities can answer the question: is
there a trade-off between the two types of performance? In other words, does
the pursuit of social objectives enable microfinances to eventually expand
their financial performance? At the same time, how does microfinances'
performance affect the development of informal sector?
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Analysis of microfinances' performance and
development of informal institutions in Cameroon
By Djamaman Brice Gaétan
Following the problem statement, the research requires a
selection of variables and indicators to study the financial performance and
social performance of MFIs. In addition, a selection of variables and
indicators for the non-formal sector of MFIs is required.
The selection is made based upon the previously discussed
information and literature, and the existing knowledge and experience of the
rating agencies MicroRate and Inter-American Development Bank Sustainable
Development Department Micro, Small and Medium Enterprise Division.
IV.2- Selection of variables and indicators
IV.2.1- Selection of the financial performance
indicators
The key indicators of financial performance are mainly
measured by return on assets, return on capital and operational
self-sufficiency. The selection of the financial performance indicators
corresponds to the selection of indicators considered by the rating agency
MicroRate in its investment decision-making process.
? Operational self-sufficiency
(OSS): Essentially, the ratio measures how well a MFI is
able to cover the institution's total costs of operating. Morgan Stanley (2007)
and Fitch (2008) implicitly included the OSS ratio in their rating
methodologies to assess the financial sustainability of MFIs. Fitch (2008, p.
10) analysed the OSS ratio «to assess the adequacy of an MFI's cost and
revenue structure»;
? Return on equity: ROE is
calculated by dividing net income (after taxes and excluding any grants or
donations) by period average equity. Return on equity
indicates the profitability of the institution. This ratio is particularly
relevant for a private for-profit entity with real flesh-and-blood owners. For
them, ROE is a measure of paramount importance since it measures the return on
their investment in the institution. However, given that many MFIs are
not-for-profit-organizations, the ROE indicator is most often used as a proxy
for commercial viability.
What could we watch out for?
A single year's ROE can at times misrepresent the
institution's «true» profitability. Extraordinary income or losses,
for example in the form of asset sales, can have a significant impact on the
bottom line. In other circumstances the institution may
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Analysis of microfinances' performance and
development of informal institutions in Cameroon
By Djamaman Brice Gaétan
temporarily record higher net income figures. Another issue to
consider is taxes. Incorporated and supervised MFIs generally pay taxes, while
not-for-profit, non-supervised MFIs do not; reporting and other requirements of
bank regulators also add to the costs of supervised institutions.
Finally, there are still very significant differences in
portfolio yield among MFIs, as is to be expected in a young industry. In
Bolivia, where competition among urban MFIs has become fierce, portfolio yields
have dropped to under 30%, whereas in other less competitive markets portfolio
yields can be more than twice as high. Where yields are low, MFIs are forced to
be highly efficient and to maintain high portfolio quality to remain
profitable, whereas high yields often lead to high returns despite a multitude
of weaknesses.
? Return on assets: ROA is
calculated by dividing net income (after taxes and excluding any grants or
donations) by period average assets. Return on assets is an overall measure of
profitability that reflects both the profit margin and the efficiency of the
institution. Simply put, it measures how well the institution uses all its
assets. The ratio functions as an indicator of financial performance in the
research by Olivares-Polanco (2004) and Cull et al. (2007). Morgan Stanley
(2008, p. 126) reported that, «return on average assets takes into account
taxes and other source of revenues, including income earned on cash in the
bank, thereby providing a more complete measure of profitability».
What could we watch out for?
Return on assets is a fairly straightforward measure. However,
as in the case of ROE, a correct assessment of ROA depends on the analysis of
the components that determine net income, primarily portfolio yield, cost of
funds and operational efficiency. In what seems like a paradox, NGOs generally
achieve a higher Return on Assets than licensed and supervised MFIs. This state
of affairs is explained by the fact that microfinance NGOs, with low
Debt/Equity Ratios and limited possibilities to fund themselves in financial
and capital markets, need to rely heavily on retained earnings to fund future
growth.
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Analysis of microfinances' performance and
development of informal institutions in Cameroon
By Djamaman Brice Gaétan
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