Although there has been a growing effort to improve the transparency of microfinance institutions (MFIs) over the course of the past decade, there is still much work to be done. Lack of transparency continues to be a significant barrier for microfinance investing – how can investors make the leap when they lack the information they need to understand risk? Less information means less certainty for investors, and less certainty means fewer investors are willing to take the plunge into microfinance.
Financial transparency encompasses the production, testing, and dissemination of financial performance data (p.1). The dual objectives of transparency are improved MFI performance and the commercialization of microfinance (p.1). Microfinance is currently positioned to evolve from a tool for battling poverty to a legitimate industry to beat poverty, yet this growth is hindered by a lack of accurate, standardized, publicly-available financial performance data. Transparency pays, according to Robert Eccles, author of "Building Public Trust – The Value Reporting Revolution". Eccles finds that since disclosure decreases investor risk, companies that share key metrics and performance standards are considered more valuable by investors than those companies that keep information to themselves.
Despite general agreement regarding the need for transparency, change has been slow in the microfinance world, begging some to wonder – what’s the problem? While transparency is impacted by macroeconomic, legal and accounting environments, ownership structures, size, growth rate, capital need and profitability of the firm, transparency continues to be specifically problematic in the microfinance sector due to multiple factors:
- MFIs are frequently small, donor-funded institutions which lack a clear ownership/ governance structure;
- MFIs are spread across remote areas, many of which lack the technologically- advanced infrastructure necessary for maintaining up-to-date data collection and communication both internally and externally;
- Due to budget constraints, many MFIs cannot afford externally auditing. Therefore, very few MFIs conduct external audits which hinders both the reliability of financial information and the ability to create performance standards;
- Management information systems geared specifically for microfinance are still in early stages of development and most MFIs lack a sound communication infrastructure;
- Non-profit microfinance organizations, which receive “free money,” are less motivated to analyze and improve their performance and therefore are less likely to collect information.
The bottom line is a simple one: although the landscape is evolving, microfinance is dominated by small, non-profit, donor-dependent players who frequently lack the staff, funding, and investor pressure necessary to get good information out there where it belongs.
Additional Resources:
1. Consultative Group to Assist the Poor (CGAP): “Focus on Transparency: Building the Infrastructure for a Microfinance Industry”
2. Consultative Group to Assist the Poor (CGAP): “Financial Transparency: A Glossary of Terms”
3. Brau, James C. and Gary M. Woller “Microfinance: A Comprehensive Review of the Existing Literature and an Outline for Future Financial Research.” http://marriottschool.byu.edu/emp/brau/JEFBV%20Microfinance%20Review%20-%20Brau%20and%20Woller.pdf. 2004
4. Pouliot, R. “Governance, Transparency, and Accountability.” 12 Nov. 2004. Kreditanstalt fur Wiederaufbau (KfW). http://marriottschool.byu.edu/emp/brau/JEFBV%20Microfinance%20Review%20-%20Brau%20and%20Woller.pdf
5. Franjul, F., Promoting Financial Transparency, Dec 2004
6. Unitus Global Accelerator. 2005. “What is Microfinance?” 1 October. 2005. http://www.unitus.com/wwd_whatismf.asp
7. “The Place of Assessment on the Financial Transparency Sequence.” November. 2001. Microfinance Gateway
8.Microfinance Information eXchange. Updated Daily. The Mixmarket. 10 October. 2005. www.mixmarket.org
9. Rating Fund. 2005. Rating Fund. 11 October 2005. www.ratingfund.org
10. Pouliot, R. “Governance, Transparency, and Accountability.” 12 Nov. 2004. Kreditanstalt fur Wiederaufbau (KfW). http://marriottschool.byu.edu/emp/brau/JEFBV%20Microfinance%20Review%20-%20Brau%20and%20Woller.pdf
11. Michael Tucker and Gerard Miles. “Financial Performance of Microfinance Institutions A Comparison to Performance of Regional Commercial Banks by Geographic Regions.” Journal of Microfinance. 6.1 2004: 45
