- For organizations providing loans
- For organizations providing savings
For organizations providing loans
1. Is the organization focused on social impact?
The primary issue we ask microfinance institutions (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). 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:
- What has the MFIs drop out rate been in the past? How is this rate calculated?
- How is the dropout rate used in internal evaluation? Is it used to inform employee compensation or branch-level performance?
- Does the MFI perform in-depth surveys that focus on the reasons why borrowers drop out?
We believe that MFIs that 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.
2. What interest rates does the organization charge?
The way MFIs report interest rates varies. For example, some require clients to set aside part of the loan as savings, in order to effectively create collateral in the event they default, and some add fees on the front of loans which may not be included in the headline interest rates. We ask the MFIs we consider 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.
3. Does the organization have 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 can support continuing operations with revenues and don't require donations to maintain or expand their operations.
4. What is the organization's repayment rate?
We seek evidence that clients are repaying their loans consistently. High repayment rates, together with a focus on social impact, contribute to our confidence that clients are benefiting from an MFI's services.
5. What is the standard of living of the organization's clients?
We seek evidence that an MFI is generally serving people who have low incomes.
For organizations providing savings
1. Are savings services being provided relatively efficiently?
How many clients are served per dollar of operating expenses?
2. Are clients able to access their funds when they need them?
We have heard anecdotal concerns about client dissatisfaction with the difficulty or bureaucracy involved in accessing savings. In addition to the proxies for satisfaction discussed in our earlier post, we'd like to see the “turnover” of client accounts: does money go in and out, or sit stagnant?
3. What are the interest rates/fees on the accounts?
Excessive fees would concern us, but so would extremely generous interest rates, which would make the program less like a savings account than like giving out cash.
4. Who are the customers?
We would like to see evidence that a charity is serving clients with low incomes who lack access to traditional saving services.