Determining the Self Sufficiency of Microfinance Institutions

This paper examines the use and differences between two evaluation methods, namely Subsidy Dependence Index (SDI) and Financial Self Sufficiency (FSS). The paper states that relying on traditional financial ratios, such as return on assets and return on equity, for assessing MFI performance would be futile, and could even lead to misleading performance assessment. Findings indicate that MFIs use both, SDI and FSS, as substitutes for a complete cost-benefit analysis. While these methods do not provide a complete cost benefit analysis of the performance of MFIs, they do provide sufficiently meaningful evaluation measures to allow society and donors to assess performance. The paper concludes that FSS often underestimates the subsidy-dependence of the MFI.The paper recommends the utilization of an outreach index (OI) alongside SDI. OI measures the extent to which the MFI was able to deliver its products to its target clientele, and indicates the social desirability of supporting MFIs. The SDI-OI framework can be used to:

• Highlight cost of each product delivered to target clientele;
• Review and analyze past performance;
• Plan and budget future operations;
• Allocate scarce public funds to support MFIs.