Association for Public Policy Analysis & Management

The global growth of the not-for-profit sector has been phenomenal in the past couple of decades. An industry that has appreciable visibility within this sector is the Microfinance industry. While the industry has recorded some success in providing financial services to the poor and the unbanked, it has attracted a decent amount of criticism and complaints with regards to the quality of services and menu of financial options offered to the poor. More importantly, there was a backlash against the industry as a result of aggressive debt collection practices and the 2011 crisis that saw a number of big microfinance banks go under. One of the reasons given for this development is the weak or non-existent risk framework of most microfinance entities. This has generated calls for greater transparency and stricter risk management frameworks.

Using data over a period of a decade (2006-2016), our study addresses this need by reflecting not only the financial ratios that are relevant to conventional banking entities but also the non-financial ratios that have direct relevance to the performance of a typical nonprofit firm. This is done using a multiple criteria decision analysis that explicitly takes into consideration the mission of the organization and financial ratios that are needed in relaying information to stakeholders and the general public. Our model addresses management objectives as well as operational constraints with a view towards ensuring an adequate level of liquidity, mitigating exposure to risks and furthering the bank’s socio-economic objectives. The research provides management with a menu of measures of risk-return tuples that maintain fidelity to the non-financial constraints. We enumerate this approach using Grameen Bank as a case study.