In the next ten years, society will spend more than $20 billion on microfinance organizations (MFOs). Are MFOs the best way to help the poor? Will donors see MFOs as a good development gamble? Will MFOs reward workers well? Will investors buy MFOs and start new ones from scratch? I suggest a framework to help answer these questions with numbers.
Performance is meeting goals. Sustainability is meeting goals now and in the long term. An MFO has six groups of stakeholders: society, the poor, poor customers, donors, workers, and investors. Each group constrains the rest. Each group has its own goals and thus its own measures of performance.
For society, a good MFO makes more social benefits than social costs.
For the poor, a good MFO is the best use of the funds in the budget earmarked to help the poor. It costs more to measure benefits than to measure costs. Cost-effectiveness analysis can help to judge whether unmeasured benefits could exceed measured costs.
For poor customers, a good MFO gets repeated use.
For donors, a good MFO uses public funds to attract market funds.
For the workers of an MFO, a good MFO means a good job. Such an MFO would not shrink if donors withdrew support.
For investors, good performance means a market return.
I use the framework with two of the best MFOs in the world, BancoSol in Bolivia and Grameen Bank in Bangladesh. I judge both to have been worthwhile. They used public funds to help the poor more than the best other unfunded or underfunded development project. Their customers repeat, and their workers have good jobs. BancoSol attracts market funds, and Grameen does not. Investors may buy the best MFOs once start-up costs are sunk. But investors do not start the best MFOs, and much less the worse MFOs, from scratch.
At least the best MFOs are worthwhile. The rest may still waste public funds meant to help the poor. Cost-effectiveness analysis is a cheap tool to help judge.