Assessing the viability of a rural microfinance network: the case of FONGS Finrural

CHAPTER TWO: REVIEW OF LITERATURE, RESEARCH QUESTIONS AND METHODOLOGY

2.1 Review of literature

Throughout this section, we provide conceptual explanation of key terms used for a better apprehension of the thesis. The section is divided in two parts: the foremost focuses on the main dimensions of viability, the second focuses on social viability and governance.

2.1.1 Main dimensions of viability: financial and social performance

2.1.1.1 Financial performance

Financial performance is commonly defined as the measure of efficient utilization of assets by a company to create revenue. It can be also viewed as a general appraisal of a company's financial statement over time, and accordingly can help analyze identical companies inside the same industry or compare aggregated industries or sectors^5(*). Though there are many financial indicators in finance sector many practitioners and scholars (Mersland, Randoy & Strom, 2010; Kumar, 2011) usually focus on Return on Assets and Return on Equity.

Mersland, Randøy & Strøm (2010) used indicators such as Return on Assets (ROA), Operational Self-Sufficiency (OSS) and Financial Self-Sufficiency (FSS) to assess the financial performance of microbanks. They found that most of the microbanks in their survey were not financially self sufficient even though they could meet their obligations.

Nevertheless, while in bank sector the financial performance is usually measured through the ratios above mentioned, the trend in microfinance is to include on top of them others indicators enabling a better understanding of the specificities in this industry. These indicators include the interest rate, the arrears or the repayment rate, the level of activities, the aptitude to collect savings, the financial and operational costs, the level of client oriented priority, the expansion costs etc (ACDI, 1999 quoted by Diao, 2006).

Moreover, BRS^6(*) and ADA^7(*) used the financial performance indicators proposed by von Stauffenberg, Janson, Kenyon & Barluenga-Badiola (2003) and Barres et al. (2006) to elaborate a factsheet helping at assessing MFIs' financial performance. The latter seems relevant for out study.

2.1.1.2 Social performance

Social performance is widely perceived as the effects of an organization on the social life of its clients. It refers to the internal relations between an institution, its employees and others stakeholders with whom it interacts (Lapenu, Zeller, Grelley, Chao-Béroff & Verhagen, 2004). On the other hand, social performance refers to the effective application of the social mission of an organization (Dewez & Neisa, 2009; IFAD^8(*), 2006). In microfinance, social objectives usually include the bread and the depth of outreach, the adequacy of the services to the needs of clients as well as the quality of those services, the outcome for the clients and their social networks, the commitment of the MFI vis-à-vis its staff, its clients and its environment (IFAD, 2006).

Mersland, Randøy & Strøm (2010) used the outreach with three criteria as a proxy to social performance or mission: the outreach to the poorest, the outreach to women, and the outreach to rural areas.

However, for IFAD (2006), social performance is not only limited to the measurement of objectives and outcome. Social performance is also concerned with actions and measures used by an MFI to obtain those results. Basically, social performance is about how well MFIs give themselves the means for their social mission. The aim is to determine whether the MFI gives itself the means to reach its social goals by tracking improvement towards the latter and understanding how to use the information to make improvements in its operations.

Many tools exist in the industry for a better understanding of social impact among which the Social action developed by Accion International, the ECHOS(c) designed by Incofin, The Social scoring tools presented by specialised microfinance institution, and the Social Performance Indicator developed by Cerise (Dewez & Neisa, 2009).

Nevertheless, regardless the tool, there is a widespread understanding on the main dimensions a social performance analysis should tackle while assessing a MFI. These dimensions are: target and outreach, adequacy of products delivering and services, client participation and the social responsibility of the MFI. We will focus on those dimensions in our study.

* ⁵ http://www.investopedia.com/terms/f/financialperformance.asp#ixzz1qy3HGaL3

* ⁶ Belgian Raiffeisen Foundation

* ⁷ Appui au Développement Autonome

* ⁸ International Fund for Agricultural Development