Overview of our process and key questions
In brief, our take on microfinance is that offering credit and other financial services is likely an effective way to improve people’s lives in the developing world. At the same time, providing credit carries with it the risk of causing harm to clients. Donors therefore should carefully choose the microfinance institutions (MFIs) they choose to support, focusing in particular on an MFI’s demonstrated focus on (a) effectively providing credit while (b) assessing clients’ well-being and avoiding causing harm.
When we contact an MFI, we ask them a set of questions to evaluate them on these criteria. In particular, we assess:
- Focus on social impact. The primary issue we ask MFIs about is whether and to what degree they track clients who drop out of the program (i.e., complete a loan cycle and choose not to take out subsequent loans). As we’ve written before, high dropout rates may be a sign that clients are having bad experiences and/or finding that the benefits of loans don’t compensate for the (often high) interest rates. We try to determine an organization’s degree of focus on dropouts by asking about (a) the dropout rate and how it’s calculated, (b) how the dropout rate is used in internal evaluation (e.g., is it used to inform employee compensation? branch-level performance?), and (c) whether the organization performs in-depth surveys that focus on the reasons why borrowers drop out. We believe that MFIs who thoroughly track those who choose to leave the program are most likely to identify and address problems clients have with the MFI’s services.
We don’t only ask about the dropout rate. Some MFIs take other measures to determine whether they’re causing clients problems – for example, MFIs may attempt to ascertain whether clients are borrowing from multiple MFIs (e.g., taking on too much debt), or they may conduct regular surveys of clients’ satisfaction.
- Interest rates. Borrowers at MFIs pay interest rates that most of us would consider unthinkably high. “Normal” rates tend to be in the 40-100% range (that’s the annualized equivalent in the terms used in the U.S.); and we’ve seen rates as high as 150% annualized. Because the way MFIs report interest rates varies — some require clients to save to effectively create collateral in the event they default; others add fees on the front of loans which may not be included in the headline rates — we’ve asked all the MFIs we’ve considered to provide us with enough detail to calculate their APR and EIR so that we can provide donors with information about the rates borrowers are paying at each institution.
- Room for more funding. As with any organization we look at, we assess whether the institution can effectively utilize additional funds and how those funds will be used. In many cases, we’ve found MFIs that can support continuing operations with revenues and don’t require donations to maintain or expand their operations.
- Repayment rate and clients’ standard of living. We seek evidence that clients are repaying their loans consistently and that MFIs are generally serving people who have low incomes. Most of the MFIs we’ve contacted can provide reasonable evidence that the people they’re serving are poor and that those who borrow generally repay their loans (note, however, that one of our major criteria for contacting MFIs was that they report collecting evidence on clients’ standards of living, so it isn’t necessarily the case that most MFIs in general meet this criterion).
We chose to contact MFIs listed on Mix Market that we thought would have a good chance of answering our questions well. For more detail on how we chose MFIs to contact and which MFIs we contacted and spoke to, see the page explaining our process for finding microfinance charities. In all, we’ve contacted 43 MFIs; we were able to speak with 18, and 11 provided us with enough information to complete an in-depth review.
The first table below shows each MFI’s answers to our key questions. The asterisks represent the quality of the information we received: *** = high quality information; ** = medium quality; * = low quality. The table also links to our review pages for each MFI in cases where the review is complete and we have permission to publish it. We haven’t yet completed our review of AMK.
|Organization||Focus on dropout||Interest rates (monthly/APR/EIR)||Repayment rate (Collection rate/PAR>30/Write-off)||Clients’ standard of living||Room for more funds|
|Small Enterprise Foundation||Excellent||7% / 84% / 126%***||99%*** / 1% / 1%||Very poor**||$1.1m for lending programs|
|Chamroeun||Above average||4-5% / 51-61% / 65-81%***||99%*** / <1% / <1%||Poor***||$564k for lending and non-lending|
|CUMO||Above average||13% / 156% / 354%***||N/A / 3% / 0%||Poor*||Possible for lending programs|
|MicroLoan Foundation||Moderate||12% / 144-149% / 304-326%**||98%*** / <1% / 1%||Very poor*||$600k for lending programs|
|ID-Ghana||Limited||Not asked (see note below)||N/A / 4% / 27%||Very poor**||For lending programs|
|AMK||Strong||3% / 30-37% / 34-45%***||97%* / 3% / 0%||Poor**||Likely does not need additional donations|
|DAMEN||Moderate||3% / 35% / 41%**||N/A / 5% / 2%||Less poor*||$520k for lending programs|
|FMFB||Limited||Insufficient information||N/A / 1% / 1%||Less poor*||$1m for lending and non-lending|
|FINCA Peru||Moderate||69-80% “effective” annual interest*||N/A / 2% / 1%||Less poor*||Possible for non-lending programs|
|Fundación Paraguaya||Moderate||Insufficient information||N/A / 6% / 3%||Less poor*||Not for lending programs|
|Progresar||Unknown||10-13% / 128-151% / 237-341%*||N/A / 5% / 2%||We have not seen information on this||$101,000 for lending programs|
- PAR>30 and write-off ratios are not given quality ratings because they are all taken directly from Mix Market, and thus we are not aware of any variation in quality. They are for the most recent year for which data is available (2008 or 2009). They do not describe the current portfolio of any MFI.
- For more information on what we mean by a “collection rate,” see our blog post, “More on the microfinance repayment rate.”
- For more information on different methods for calculating interest rates, see our post, “Microfinance interest rates.”
- For more information on the standard of living information we used for each MFI, see this excel file.
- We didn’t ask ID-Ghana for information on their interest rates. At the time we reviewed them (late-2009), interest rates were not a key step in our process.
Based on this information, there are certain MFIs that we think stand out for the purposes of an individual donor seeking a group with a strong focus on social impact.
|Organization||Country||Summary||Rating for microfinance|
|Small Enterprise Foundation||South Africa||Strong answers to all questions||Recommended|
|Chamroeun||Cambodia||Strong answers to all questions||Recommended|
|MicroLoan Foundation||Malawi||Strong answers to most questions||Notable|
|ID-Ghana||Ghana||Notable for transparency regarding repayment rate||Notable|
|CUMO||Malawi||Strong answers to most questions||Notable|
Note: AMK appears strong on all factors we investigated (to the extent we investigated them), but informed us that it was recently sold to an equity fund, and it is therefore unclear to us what role donations will play in AMK’s operations in the future. Note that AMK is listed as one of Kiva’s largest partners, and likely “effectively” receives donations through that vehicle (since it charges substantial interest while not paying interest in Kiva loans).