BALANCED SCORECARD APPLICATION IN LENDING/MICROFINANCING INSTITUTIONS: A STRATEGIC MAP IMPLEMENTATION IN THE PHILIPPINES CONTEXT

This paper studies the application of Balanced Scorecard (BSC) as a powerful measurement and assessment system, in lending/micro financing institutions. Adopting the balanced scorecard (BSC) model, this exploratory study investigates the critical performance measures that lending/micro-financing institutions in the Philippines need to emphasize in their performance reporting to drive high performance. The proposed model can assist the lending institutions in assessing organizational performance, making it highly applicable for managers. Reviewing the existing literature, the paper also provides an implementation guide for BSC in the Philippines perspective. Eventually, the performance indicators for measurement purposes of the introduced case study are proposed.

Keywords: Lending/ Micro financing Institutions, MFIs, Financial Services, Balanced Scorecard, BSC, Organizational Performance Assessment, performance reporting, Philippines.

1. Introduction

In many developing countries, microfinance plays a vital role in providing the poor (i.e. micro-entrepreneurs, small farmers, fishermen) with access to credit and helping them improve their lives by encouraging entrepreneurial activity (Arch, 2005; Bhatt & Tang, 2011; Khandker, 1996; Llanto, 2004). It has also proven to be “a potent tool for poverty reduction by helping the poor increase their income, smooth consumption, build assets, and reduce their vulnerabilities in times of contingencies and economic shocks” (Micu, 2010, p.4).

As an industry, microfinance has grown tremendously over the past decades, with players offering financial services to those who were “previously marginalized” (Arch, 2005, p.227). According to (Micu, 2010 p.4), “it now reaches more than 100 million poor people all over the world through a combined portfolio of US$15 billion.” Moreover, a program such as ACCION’s BancoSol in Bolivia, Bank Rakyat Indonesia’s Unit Desa program in Indonesia, and the Grameen Bank in Bangladesh are often cited as evidence that “it is possible for microfinance institutions to make small loans to large numbers of poor people in a sustainable manner” (Bhatt & Tang, 2011, p.319).

The Philippine government has long recognized the critical role of microfinance in its poverty alleviation efforts. A key development is the formulation in 1997 of the National Strategy for Microfinance, which listed the following principles as the foundations of the government’s microfinance policy: (a) an enabling policy environment that facilitates the increased participation of the private sector in microfinance, (b) market-oriented financial and credit policies, (c) non-participation of government line agencies in the implementation of credit/ guarantee programs, and (d) greater role of the private sector/ MFIs in the provision of financial services. These principles served as a guidepost for subsequent policies and regulations that were put in place to help microfinance industry players achieve their twin goals of outreach and financial sustainability.

As a result, the Philippines has been recognized for providing a business environment within which microfinance institutions thrive. For example, the Consultative Group to Assist the Poor (CGAP) declared the country’s microfinance industry as “the best in implementing special event of the United Nations held in New York City (Micu, 2010, p.7). More recently, the Philippines ranked first in the world in terms of policy and regulatory framework for microfinance, and is in the top ten in terms of overall microfinance business environment (The Economist Intelligence Unit Limited, 2012).

In spite of these gains in the microfinance sector, however, the Philippines still has a long way to go in its journey towards financial inclusion, which can be reckoned in terms of the following: (a) access – the supply and availability of financial products and services from formal institutions; (b) usage – the levels and patterns of use of different financial products and services; (c) quality - the experience of the consumer, demonstrated in attitudes and opinions towards those products that are currently available to them; and (d) welfare - the impact of a financial product or service on the lives of consumers, including changes in consumption, business activity and wellness (BSP, 2012).

In terms of access, the Bangko Sentral ng Pilipinas (BSP) reports that 609 out of 1, 634 municipalities (37.3%) in the country still do not have a banking office as of the end of 2011 (BSP 2012). This could be partly due to the archipelagic structure of the country, which poses “spatial obstacles and barriers to access” (Jimenez, 2011). These 609 municipalities are populated by more than 14 million people, which constitute 15.2% of the total population. Out of these 14 million people, almost 7 million (or 7.6% of the total population) have access to off-site ATMs and other financial service providers (FSPs) such as pawnshops, moneychangers, remittance agents and foreign exchange dealers. This leaves more than 7 million people who have no access to banks or any other FSPs.

In terms of usage of banking services, various studies show that a small segment of the population have savings accounts or have availed of loans, although majority of the population has availed of domestic payment services. Here are some telling statistics (BSP, 2012):

• According to the 2009 Consumer Finance Survey (CFS), 8 in 10 Filipino households did not have a deposit account; roughly, 93-percent of those with no deposit accounts said they did not have enough money for bank deposits.

• According to the 2011 World Bank data, only 10.5-percent of adult Filipinos had a loan from a formal financial institution in the past year.

• According to a 2010 study by Bankable Frontier Associates (BFA), 55-percent of Filipino adults have availed of money transfer, loan, and bill payment services. Moreover, the total size of the domestic payments market is “estimated at the equivalent of $3.2 billion per month by a projected 41 million people” (p.18).

The quality and welfare dimensions, the BSP explained, are “complex topics both conceptually and in terms of measurement, which require demand-side surveys and the use of qualitative indicators.” The BSP acknowledged “adequate demand-side information is lacking and may not be in sufficient depth to measure inclusion” (BSP, 2012, p.3).

It cannot be denied, though, that the Philippines has gained some headway in terms of financial inclusion, especially with the mainstreaming of microfinance in the banking sector (Micu, 2010). The BSP, after all, considers microfinance as a means of developing “an inclusive financial system [that] provides for the evolving needs of a diverse public” (Philippine Development Plan 2011-2016).

However, at the moment, there is very limited knowledge regarding the factors that drive the performance of MFIs in the Philippines. Therefore any contribution toward improving the performance of MFIs will have a significant impact on millions of people receiving assistance from MFIs, and the effective use of hundreds of millions of dollars of aid funds originating from the taxpayers of wealthy countries.

The main objective of this study is to get an understanding of the dimensions of MFIs performance in the Philippines, and to explore the drivers of those performance dimensions by applying the BSC model.

2. THEORY AND RESEARCH QUESTIONS

This section presents a discussion of the balanced scorecard, and research questions.

The Balanced Scorecard

It is argued that both financial and non-financial performance perspectives are important in the performance of Lending/ MFIs. For a Lending/ MFIs to survive, it is important that it performs well financially. Non-financial performance is also important if donors and borrowers are to be served well. For example, the satisfaction of donors or an improvement in living standards of the poor borrowers (e.g. social indicators such as health and children’s education) can be measured only by non-financial indicators. Consequently, this exploratory research uses the BSC framework to study the key dimensions of MFI performance and key performance reporting indicators that drive that performance.

Developed by Robert S Kaplan and David P Norton (1992), the BSC is a structured tool to assist performance measurement and management, consisting of non-financial and financial objective measurements. It evaluates the expectations and demands of relevant stakeholders, and generates strategic possibilities to meet those demands (Bieker 2002). However, it provides neither a universal bottom-line target nor specified recommendations. The BSC’s main purpose is to overcome the sole reliance on financial performance (Horngren et al. 2010). Hence it provides a framework for performance setting in four categories, specifically: financial; customer; internal business process; and learning and growth (see Figure 1 below).

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These perspectives represent the relevant stakeholders that Kaplan and Norton regarded as crucial to any type of organization. The methodology itself evolves from a performance management tool into a strategic tool, as it is found that the BSC affects and benefits managers’ decision making (Birch 2000; Lipe & Salterio 2000). In order to use the BSC for strategic reflection and implementation, an organization must ensure that its perspectives are consistent and align with the organization’s objectives and strategies (Chan 2004; Mooraj, Oyon & Hostettler 1999). As Kaplan and Norton (2004, p. 42) explain “Aligning objectives in these four perspectives is the key to value creation, and, hence, to a focused and internal consistent strategy”.

Substantial research has been performed on the adoption and implementation of the BSC. Findings suggest that the core philosophy of the BSC centers on cause-and-effect relationships (Likierman 2006; Souissi & Itoh 2006; Werner & Xu 2012). Kaplan and Norton (1992) have defined such a relationship as a logical chain in the transformation of intangible assets into tangible value through the integrations of lead and lag indicators. Within different organizations and industrial sectors, these cause-and-effect relationships can become significantly complex, hence it is necessary that each organization adopts a unique BSC and selects relevant measurements (Malmi 2001).

The BSC emerged as a solution to the weakness in traditional performance measurement systems that relied heavily on financial indicators and reports such as the income statement and balance sheet. These latter financial reports indicate the financial performance or the outcomes at the end of the reporting period. What is also important for managers in the understanding of the root causes that really drive the financial performance or the desired outcomes? For example, what factors help Lending institutions to become a long-term sustainably? What processes must Lending institutions excel at in order to achieve this? What lead indicators must Lending institutions emphasize in their performance reporting? It must be noted that some of these lead indicators can be non-financial (e.g. time to process a loan application and security cover on the loans).

Of the four key performance perspectives of the balanced scorecard, only one involves standard financial performance indicators (Richard & Gareth, 1995), whereas the other three involve non-financial performance measurement perspectives, customer satisfaction, internal business processes, and learning and growth capacities. These four perspectives constitute the framework of the balanced scorecard (Figure 1).

However, the BSC goes beyond just identifying non-financial lead indicators that drive performance. It looks at the “cause and effect” relationship or links between these indicators and how they relate to achieving the corresponding strategic goals or objectives.

The link between these four perspectives can be explained as follows. An investment in training and information systems (learning and growth perspective) in an organization will result in improved innovation and other internal processes in the organization (internal process perspective). This will in turn increase customer satisfaction (customer perspective), which will lead to an increase in revenue, and profits that improve financial perspective.

In the literature, the use of BSC in for-profit organizations is very well documented [see Kaplan and Norton, 1992, 1996, 2001, 2004, 2006, 2008; Iselin et al., 2008, 2010; Ittner et al., 2003; Libby et al., 2004]. Further, (Malina and Selto 200, Eldenburg and Wolcott 2005), and (Atkinson et al. 2012) refer to surveys of senior executives in which more than 60% of their organizations were using the BSC.

It must be noted that it is not known whether MFIS are emphasizing profitability or not. Although some may operate as not-for-profit, others may see profits as another source of funds to help more poor people. Therefore, this study will not classify MFIs as purely not for profit organizations. Instead, it assumes that MFIs may have different levels of emphasis on profitability.

Research Questions

The fundamental research questions to be investigated in this study relate to applying the BSC concept to Micro-financing institutions, and can be stated as:

Q1. When reporting their performance, do Lending/ MFIs give emphasis to financial measures that come under the financial perspective of the balanced scorecard (BSC)?

Q2. Do Lending/MFIs give an approximately equal level of emphasis to performance-reporting measures across all the four perspectives of the balanced scorecard (BSC) or does it differ significantly among the four perspectives?

Q3. What are the key performance-reporting indicators that need to be emphasized by Lending/ MFIs to improve their performance?

a) Customer perspective – how do customers see us?

b) Internal perspective – what must we excel at?

c) Innovation and learning perspective – can we continue to improve and create value?

d) Financial perspective – how do we look to stakeholders?

Literature Review

To find answers to the research questions stated above, what is meant by “performance” in relation to Lending institutions/MFI is discussed in this literature review. A definition of performance and three dimensions to measure performance are suggested. Then, based on the Balanced scorecard model, a number of performance-reporting indicators are selected to assess their impact on these three performance dimensions.

Performance of Lending/MFIs

Measuring performance in our modern is a challenging problem. In the old economy-where the central feature was mass production and consumption of commodities-“output” or “quantity” measures were adequate indicators of performance. Modern economies are based on production and consumption of increasingly differentiated goods and services.

In this environment, traditional productivity measures are not only extremely difficult to compute, but they also tell us less than they used to; Fornell (1995) and Fornell et al. (1996) discuss these issues at the national and firm level.

A manager may not rest, however, once he or she understands what is performance and finds ways to measure it. The next challenge is to discover what drives performance so that appropriate managerial actions can be taken. Once more, this is not a simple issue. The drivers of performance are many and are tightly intertwined as their relationships can be quite complex and non-linear. The complex interactions of various factors that affect performance are exemplified in the study by Roth and Van der Velde (1991, 1992), and steps in disentangling and better understanding the relationships are made in Roth and Jackson (1995) and Soteriou and Zenious (1998).

There no studies that have defined the performance of MFIs or any instruments developed to measure the performance of MFIs. For example, (Lashley, 2004, p. 86) “Microfinance is a term that appears to mean lending small amounts of money for enterprise development, with the ultimate aim of achieving a sustainable rise in incomes above the poverty line. However, these stakeholders need to understand what poverty truly means. Poverty is more than just lack of funds, it also relates to vulnerability, defenselessness, and dependency (Bhatt & Tang, 2001).

As argued by (Lashley, 2004) above, the issue of performance is not straightforward since MFIs are quite different from other financial organizations such as banks. For example, financial performance measures such as profitability, return on investment, and share price are not appropriate to assess the performance of MFIs, which have fundamentally different objectives that conflict with commercial interests.

Although there is no standard definition for performance in relation to MFIs in the literature, a number of studies have implied various aspects of MFIs to be important in their performance. Studies that looked at the impact of micro financing on the poor imply that the level of impact on the poverty level of the borrowers as the performance of MFIs. These impacts were measured by a number of different methods. For example, (Hulme and Mosley, 1996) studied the average annual change in family income of the borrowers. (Khandker et al. 1995, 1996) assessed the family income. Case studies undertaken by the Consultative Group to Assist the Poor (CGAP 2002) analyzed the improvement in various social indicators such as children's education (Uganda), level of immunization of children (Bolivia), reduction in malnutrition (Bangladesh), and reduction in food deficit period (Vietnam). Similar studies conducted by the Foundation for Development Corporation [1992] have adopted increase in employment and income (India, Bangladesh, and Philippines) and increase in savings and expenditure on nutritional food (Malaysia). (Dunford, 2001) assessed the increase in net non-farm income levels in Ghana.

These studies clearly imply the performance of MFIs as poverty alleviation. However, there are other studies that have focused on the effective utilization of resources by the MFIs. These studies were critical about the inefficiencies of MFIs and implied the operational efficiency as performance of MFIs (Adams, 1998; Yaron, 1992; Mudenda, 2002). However, none of these studies have suggested a common yardstick to measure efficiency and effectiveness.

A number of studies have selected various factors to measure performance of Micro financing institutions. The most common factors are:

1. The outreach or the number of customers assisted by the MFI [Kereta 2007; Lapenu and Zeller, 2001; Lafourcade et al., 2005; Mersland and Storm, 2009; Hartarska, 2005; Mersland and Storm, 2008; Kyereboah- Coleman, 2007]

2. Profitability [Kereta 2007; Lafourcade et al., 2005; Mersland and Storm, 2009; Hartarska, 2005; Kyereboah-Coleman, 2007; Ahlin et al., 2011]

3. Quality of the loan portfolio [Lapenu and Zeller, 2001; Ahlin et al., 2011; Field and Pande , 2008]

4. Cost to clients and number of products offered to clients [Mersland and Storm, 2008]

5. Staff productivity [Lapenu and Zeller, 2001]

All the factors in the studies mentioned above can be considered as some aspect or dimension of the performance of micro financing institutions. However, none of the studies specify the justification for using the particular indicator or the reason for not using other indicators. Hence, there is no common yardstick or accepted dimensions agreed upon to measure the performance of MFIs. In other words, the question remains: What is the minimum number of dimensions/ areas that we should consider to measure the overall performance of an MFI using the financial perspective? In this study, we will first look at the main objective of Micro financing organizations, then develop a framework to develop/ select the dimensions of performance by defining the performance as the extent to which an MFI achieves its main objective.

It is argued that all MFIs are basically helping the poor to improve their income and create wealth to reduce their poverty levels. Therefore, it is assumed that the mission of most MFIs is geared toward the objective of “alleviating poverty.” This is considered a reasonable assumption if we look at the underlying root cause for setting up MFIs in most developing countries.

Adopting this principle of defining performance in terms of “the extent of achieving the desired objectives,” we can define the performance of an MFI as follows:

“Performance of an MFI is defined as the extent to which it alleviates the poverty levels of its existing and potential customers.”

This study proposes four critical factors that can be used to operationalize an MFI's “performance.” They can also be considered as four dimensions of performance in line with the above definition. Although the terminology used below to outline these performance dimensions is commonly used in micro financing literature, a brief description is provided in the following discussion. The four dimensions are:

1. Sustainability

2. Increasing the outreach

3. Depth of outreach

4. Portfolio at risk

"Sustainability" refers to the ability of an MFI to maintain continuity in its operation. Importantly, if an MFI is not sustainable, it will fail in achieving its objective of alleviating poverty. Although sustainability and profitability are directly related in commercial organizations, this is not the case for MFIs. In order to be sustainable, profitability may remain a major factor for some MFI's, whereas for others it may depend on external grants and concessional funds from donors. Obtainment of external funding relies heavily on the transparency and efficiency of the MFI's internal operations to successfully help the poor in a pragmatic way. It is evident that both profitability and the acquisition of external funds play a major role in an MFI's long-term sustainability. As mentioned before, in the absence of sustainability, it is impossible for an MFI to alleviate poverty. Therefore, we argue that sustainability is a key dimension of the MFI's performance.

The next dimension, termed “increasing the outreach,” refers to growth of the customer base. If we accept that MFIs’ customers are poor (which is discussed below under the next dimension), it can be argued that, as the number of customers increases, so too does the elimination of poverty, because more people are offered financial assistance to improve their income. Hence, increasing the outreach (customer base) is considered a critical dimension to measure performance or the extent to which an MFI is achieving its main objective of reducing poverty.

The poverty level of the borrowers is captured by the next dimension – “depth of outreach.” It is argued that an MFI that serves “the poorest of the poor” (higher depth of outreach) is doing more to alleviate poverty than an MFI with a customer base of “not so poor” (lower depth of outreach) borrowers. In other words, the deeper the poverty level of the borrowers, the higher the contribution made by that MFI to reduce poverty. Notably, in the absence of this criterion, it is extremely difficult to estimate the level of poverty that is alleviated. Therefore, this dimension is crucial to assess the performance of an MFI.

Although the criteria above analyze the efforts of the MFI attempting to alleviate poverty, they do not directly measure the outcome of these efforts. A still pertinent question is whether the assistance offered by the MFI resulted in borrowers improving their income and reducing poverty levels. If not, the MFI has evidently failed in its objective to alleviate poverty. This study relates this dimension to the "portfolio at risk," or the repayment level of loans. It is assumed that the borrowers who are prompt in their repayments are on their way to get past (if not already above) the poverty line. Conversely, the overdue or default loans indicate unsuccessful borrowers who have regressed into more debt and remain trapped in poverty.

Many causes may underlie an unsuccessful repayment, including the inability of the MFI to restructure or reschedule the loan. In fact, overdue payments reflect more on the MFI in terms of its failure in successfully assessing a loan. Unlike commercial loans, MFIs do not approve loans concentrating predominantly on the security cover. In most situations, there is no security offered. Loan appraisal in MFIs rests mainly on applicant credibility and the repayment potential of the proposed venture. Some MFIs have special branches tasked with advising borrowers on prospective ventures for their loan.

A high “portfolio at risk" value indicates that a large number of borrowers are still buried in poverty despite the MFI's assistance. It also indicates a waste of scarce resources that could have otherwise reduced poverty elsewhere (opportunity cost). Based on the above argument the “portfolio at risk” is included as the fourth dimension to assess the contribution made by the MFI to alleviate poverty.

Importantly, success in one of the four dimensions may compromise performance in another. Therefore, it is important to appraise all four dimensions together to assess the performance of MFIs. For example, an MFI may achieve sustainability via high profitability. However, this may have been achieved by catering largely to those above the poverty line who may have even provided collateral for their loans (very similar to commercial banks). Such MFIs will score poorly when measured along the "depth of outreach" dimension. In some instances, an MFI may increase its outreach (customer base) at a rapid rate at the expense of having a higher proportion of bad loans because the loans may not have been carefully assessed prior to being granted. This is a highly probable scenario since the demand for micro financing is very high (large number of poor borrowers in developing countries), and the availability of funds for further disbursement may not be affected by the poor repayment of bad loans because of the continuous inflow of donor funds. Such MFIs will score higher in the dimension of “increasing the outreach,” but will have a lower rating in relation to the “portfolio at risk” dimension.

In essence, this study will use the above four dimensions to evaluate MFI performance as:

1. Individually, they are each essential components of the performance of an MFI in achieving its primary objective of alleviating poverty.

2. Some of these dimensions can also be achieved at the expense of others. Therefore, it is important to include all four in order to paint a complete portrait of the MFI's performance. It would be difficult to argue that an MFI exceeding in all these four dimensions is not achieving its primary objective of reducing poverty.

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• Research design

• Population/ Respondents (description, why they are the best people to ask question

• Instrumentation (Treatment of data), questionnaire,

• Data Analysis

Pure research

Research problem – Hypothesis – questionnaire should always answer the research problem

Variables constructs

indicators

questionnaire