A comprehensive framework for understanding microfinance performance evaluation methods

The microfinance sector has seen rapid growth and diversification, with a wide range of institutions offering various financial and non-financial services for financial inclusion. This heterogeneity complicates the evaluation of financial service providers (FSPs), making it difficult for stakeholders to identify suitable approaches. Initially focused on microcredit, microfinance now encompasses diverse products and services in both developing and developed countries, addressing issues like gender equality, minority integration, and entrepreneurship. The concept of 'mission drift,' where institutions prioritize financial targets over social missions, emerged, highlighting the importance of evaluating both financial and social performance. While traditional banking sector evaluation methods are useful for financial performance, evaluating social performance and impact has proved challenging. This research addresses this gap by providing a comprehensive framework for understanding and comparing existing microfinance performance evaluation methods.

The literature lacks guidance on the usefulness of existing quantitative and qualitative methods for assessing different performance dimensions of microfinance. This study aims to fill this gap by systematically classifying existing approaches and offering a framework for their application. The paper focuses on addressing the research questions: What are the existing approaches for the evaluation of microfinance performance? What are the differences between them?

This study conducted a comprehensive review of existing approaches for evaluating the financial and social performance of microfinance. The methodology involved a systematic and comprehensive classification of microfinance performance evaluation methods, followed by a detailed explanation of each method and its techniques. A theoretical framework was developed to guide the application of these methods, considering different dimensions of microfinance performance and the communication of evaluation results to stakeholders. The study categorized methods into standard-based and customized approaches. Standard-based approaches rely on existing standards like the Universal Standards for Social and Environmental Performance Management (USPM), Client Protection Standards (CPS), and Social Outcome Indicators (SOI). These are assessed and certified by various firms such as Micro-Finanza Rating (MFR), MicroRate (MR), M-CRIL, and Inclusion [Social Ratings] (ISR). The study explored various tools and standards under these approaches, including microfinance assessment and certification, social audits (using tools like SPI4 and ALINUS), client protection assessment, poverty scorecards, loan portfolio audits, Truelift Pro-Poor Seal of Excellence, Codes of Conduct, outcomes management, and various rating systems (institutional, social, credit, and MIV rating). Customized approaches include case studies, process evaluation, efficiency studies (using Stochastic Frontier Approach and Data Envelopment Analysis), and impact evaluation (using experimental and quasi-experimental methods). The study then integrates all methods within a two-pronged theoretical framework defined by the theory of change (TOC) and the nature of the reference framework used for analysis (standard-based vs. customized). The TOC framework outlines five stages: inputs, activities, outputs, outcomes, and impact. The study uses this framework to map out the application of each evaluation method, along with considerations for cost, time, and generalizability.

The study identified a wide range of standard-based and customized methods for evaluating microfinance performance. Standard-based methods, typically offered by MFR, MR, M-CRIL, and ISR, include assessment and certification processes based on established standards (USPM, CPS, SOI). These firms provide various services: social audits (SPI4, ALINUS, SBS), client protection assessments (CP SAT, CPP), poverty scorecards (PPI, SPS, MPAT), loan portfolio audits, Truelift certifications, Code of Conduct assessments, outcomes management evaluations, and several types of ratings (institutional, social, credit, MIV). The study detailed the rating scales and coverage areas for each type of rating. Customized approaches include qualitative methods like case studies and process evaluations, quantitative efficiency studies (Stochastic Frontier Approach, Data Envelopment Analysis), and impact evaluations (experimental and quasi-experimental). The study's theoretical framework maps these methods onto a Theory of Change model, differentiating them based on their focus on inputs, activities, outputs, outcomes, or impact. It also highlights the cost, time requirements, and generalizability potential for each method. Analysis of data from Microfinanza, MicroRate, and ISR websites shows Institutional Rating as the most frequently used method (602 evaluations), followed by social rating (480), client protection (186), credit rating (141), and institutional diagnostic (112). Microfinanza Rating performed the highest number of evaluations (1205). The framework illustrates how different methods contribute to different stages within the Theory of Change, allowing for a more nuanced comparison and selection of methods based on stakeholder needs and objectives. The study's figure visually represents the interaction between the evaluation methods and their position within the Theory of Change framework.

The framework developed in this study addresses the complexity and heterogeneity of the microfinance sector by providing a clear and structured approach to understanding and selecting appropriate evaluation methods. By mapping existing methods onto the Theory of Change model, the study clarifies the purpose and applicability of each approach, promoting more effective and informed decision-making by stakeholders. The consideration of cost, time, and generalizability enhances the practical value of the framework for practitioners and policymakers. The findings highlight the dominance of standard-based methods, but also underscore the importance of customized approaches for addressing specific contexts and research questions. The comprehensive nature of the framework allows for a more informed comparison of methods, enabling stakeholders to align their evaluation strategies with their specific goals and resource constraints.

This study presents a novel framework for understanding and comparing microfinance performance evaluation methods, addressing a significant gap in the literature. The framework, based on the Theory of Change and classification into standard-based and customized approaches, enhances the ability of stakeholders to select appropriate methods based on their needs and resources. Future research should focus on enriching data on the use of evaluation methods, analyzing the relationships between method selection and microfinance outcomes, and adapting the framework to emerging methods in the rapidly evolving field of digital microfinance.

The study's limitations include the inability to conduct an in-depth analysis of all categories and methods due to space constraints, preventing a critical review of each technique. Information on the precise cost and implementation time of each method was limited, hindering a full assessment of cost-effectiveness. The analysis relies on available data from rating agency websites, which might not fully capture the complete landscape of evaluation activities. Generalizability of findings might be limited by the reliance on specific examples and case studies.