A Systemic: Fuzzy Model to Evaluate the Social Impact of Microcredits

Introduction

The microfinance industry has undergone a significant development and growth in the last years, which has meant a larger concern on the part of investors, donors and regulators, that maximum transparency is achieved in the judgement of rating agencies in charge of gathering and spreading such companies’ work and performance, while at the same time openly showing perspectives and risks that may be faced.

Microfinance Industry Rating began at the end of the last decade and it has experienced its own evolution. Many have been the debates, studies and opinions trying to find the best assessment indicators of financial situation, risk and yield of rated companies. The task is not simple, if one keeps in mind the wide variety of tasks carried out by such companies, of task contexts, size differences and differences in accounting practices, which make it difficult to establish comparisons between companies and may distort the net worth view. All this has motivated the absence of universal indicators particularly in microfinancial companies.

In 2003 MicroRate (rating agency specialized in microfinance), the Interamerican Development Bank (IDB), the Consultative Group to Assist the Poor (CGAP), the United States Agency for International Development (USAID) and rating agencies MCRIL and PlaNet Rating, concluded after a round table in the publication of a list of twenty performance indicators, their definitions, applications and weaknesses. The purpose of this technical guide is relatively narrow. It highlights 14 of the most commonly used definitions published by the Roundtable Group and illustrates how they are used. It provides some explanation and analysis of the indicators for those who are interested in understanding their application as well as weaknesses. For each indicator, the Guide presents the proposed definition, interprets its meaning, identifies potential pitfalls in its use, and provides benchmark values for 29 Latin American microfinance institutions compiled by MicroRate (the “MicroRate 29”). It should be noted, however, that these added sections are the work of MicroRate and the IDB, and do not necessarily or automatically reflect the opinion or position of the other entities participating in the Roundtable discussions.

These indicators basically referred to four main categories: quality of the portfolio, efficiency and productivity, financial management and profitability. Their aim is to offer an image of the risk and financial situation of the microfinance companies analysed.

One of the analysis areas that has suffered from the lack of indicators (due to its difficult quantification) involves the qualitative aspects that consider and influence the strength of microfinance companies. Management quality, market opportunities, research and development of new products, knowledge about the market, measurements of organizational performance, clients' satisfaction… would be some of them. All analysts agree that these aspects should be treated as a complement to reports involving more quantifiable aspects. Interviews through on-site visits to companies by rating agents could be a way of summarizing information, although no method is able to handle such information and incorporate it in reports with the importance that it should be given. Let us keep in mind that a microfinance company may be carrying out important work in a depressed area with a high index of poverty and low capital ratios, infrastructure or turnover, and however receive a bad rating that makes it difficult to find financing for its objectives.

The only result indicators commonly used to evaluate microcredit programs’ effectiveness assess the profitability of a credit institution and the quality of its portfolio, but they neither tell us anything about social impact (improvements relating to the individual and to his family unit), nor about the economic influence that these programs generate. Such information may indeed be included in reports of performance evaluation of some of these institutions, through surveys which are mostly treated with scarce statistical rigor (small samples, slanted by absence of comparisons to control groups, dubious choice of variables…etc).

A very frequent error made when performance impact is being evaluated, is that only isolated parts of the problem are generally kept in mind, and just the symptom of the problem rather than its cause is treated. Under this reasoning, decisions offer symptomatic solutions that temporarily improve the system, without eliminating the root of the problem, since only the parts but not the whole have been considered. Systemic thinking approaches entireties and structures underlying complex situations, and therefore supports decision taking that aims at significant and durable improvements.