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Qualitative Research in Accounting & ManagementEmerald Article: The use of performance measures: case studies from the microfinance sector in KenyaNelson Waweru, Gary Spraakman

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To cite this document: Nelson Waweru, Gary Spraakman, (2012),"The use of performance measures: case studies from the microfinance sector in Kenya", Qualitative Research in Accounting & Management, Vol. 9 Iss: 1 pp. 44 - 65

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The use of performancemeasures: case studies from themicrofinance sector in Kenya

Nelson Waweru and Gary SpraakmanSchool of Administrative Studies, York University, Toronto, Canada

Abstract

Purpose – The intent of microfinance institutes (MFIs) in developing countries is to provide loans tovery poor people in order to help them transform their lives. MFIs tend to receive subsidies;sustainability is being sought to free MFIs from non-market dependencies. Sustainability is expectedto be achieved with “best practices,” of which management with performance measures is acomponent. The purpose of this paper is to examine the use of performance measures by three KenyanMFIs, which are classified as formal and client based, and likely to use rational and explicitperformance measures. Clients in these MFIs are placed into self-help groups with two responsibilities:to provide mutual support and advice to the borrowing client; and to provide the MFI with a guaranteethat loans of group members will be repaid.

Design/methodology/approach – Based on a review of the economics and performancemeasurement systems literatures, research questions were developed along with an interviewguide. Case studies were used to administer an interview guide which was distributed to therespondents prior to the face-to-face interviews.

Findings – The study concludes that MFIs have relatively well-developed performance measuresthat support their particular businesses. There was a good balance between the use of financial andnon-financial performance measures. However, output measures were more commonly used thanprocess measures. The nature of the MFIs suggests the importance of performance measurement. Themanagers of the MFIs are concerned with performance measurement, as expected within abureaucracy, and a top-down demand is present. In addition, group members or clients are interestedin performance measurement as each member guarantees the loans of all fellow group members whohave loans with the MFI. Thus, the customers exert a bottom-up demand for performancemeasurement.

Originality/value – The findings support the view that performance measures are a means formanaging MFIs and are a likely requirement for sustainability. Furthermore, the findings haveidentified performance measures (similar to those at banks) that are appropriate for the three MFIs inKenya. The findings are important since the identified performance measures may be adopted by otherevolving MFIs in this relatively new sector. In addition, the findings contribute to a betterunderstanding of the genesis of the less popular results and determinants performance measurementframework of Fitzgerald et al.

Keywords Kenya, Financial institutions, Performance measures, Microfinance institutions,Non financial measures, Services sector

Paper type Research paper

1. Introduction and motivationIn its short history, microfinance has had a major impact on the lending to the poor of theworld. It received a significant start in 1976 when a Bangladeshi professor, MuhammedYunus, used his own money to make a $27 loan to 42 village women (Courts, 2008, p. 58).Unlike banks, which demanded collateral, he worked on the premise that although thepoor did not have collateral, they were productive, hardworking, and able to repay loans

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Qualitative Research in Accounting& ManagementVol. 9 No. 1, 2012pp. 44-65q Emerald Group Publishing Limited1176-6093DOI 10.1108/11766091211216105

if made at competitive but fair rates. In order to get a loan, Yunus required borrowers tobe part of a solidarity group consisting of at least four others borrowers. This was donebecause of the belief that groups lead to discipline, e.g. people who are known to be lazyor irresponsible are unable to find people to join their group until they change theirbehavior (Courts, 2008, p. 3). Once in groups, borrowers monitored and regulated oneanother. In effect, group lending made the group members co-signers, thus reducing thechance of default.

To pursue his idea of microfinance, Yunus established the Grameen Bank, whichhas expanded to 37 different countries and has made more than $8.7 billion in loanssince 1976 (Bruton et al., 2011, p. 3). Microfinance has expanded beyond Grameen Bankto 154.8 million microfinance clients served by 3,350 microfinance institutions (MFIs)in many parts of the world, including inner-city Los Angeles, Bosnia, Peru, Bolivia,Kenya and others (Ahlin et al., 2011, p. 105). For his financial and humanitarian efforts,Yunus was awarded the 2006 Nobel Prize for Peace[1].

There has been a shift in the “modus operandi” of MFIs. Hamada (2010, pp. 2-8)argues that there has been a paradigm shift in MFIs from a social movement to theintegration of microfinance into the banking sector. In the second half of the 1980s, thefirst occurred as MFIs focused on product-centered lending. There was generally asingle, standard product. The second paradigm occurred in the middle of the first decadeof the 2000s with a shift to client-centered lending. With the latter there was a greatervariety of products, and a definite commercialization of MFIs in an attempt atsustainability.

To understand the impact of commercialization on sustainability, this paper wasmotivated to examine three Kenyan MFIs using a case study methodology to detecttheir use of performance measures (PMs) for managing microfinance loans. Theworking hypothesis was that the use of PMs can assist MFIs to manage the efficiencyand effectiveness of their operations, and thereby lead them to financial sustainability.It was found, briefly, that these MFIs used PMs for understanding their operations andthat the PMs were comprehensive and well thought out. Moreover, all three KenyanMFIs had sets of PMs that were similar in many ways.

Frequently a goal of MFIs, such as the three that were studied in Kenya, is toachieve financial sustainability, which is defined as the ability to cover all expenseswith revenue plus produce a surplus of revenue over expenses to finance future growth(Ayayi and Sene, 2010, p. 304; Prior and Argandona, 2009, p. 353). As an elusiveeconomic condition, sustainability has not been achieved by most MFIs, andconsequently subsidies are still needed. For example, poverty-focused lenders such asthe Grameen Bank would not be able to survive without subsidies (Morduch, 1999,p. 1571). In this regard, Armendariz and Morduch (2010, p. 18) say:

[. . .] the hope [. . .] is that microfinance programs will use the subsidies in their early start-upphases only, and, as scale economies and experience drive costs down, programs willeventually be able to operate without subsidies.

Morduch (2000, pp. 617-18) argues that only MFIs that pursue best practices or“principles of good banking” can both alleviate poverty and attain sustainability. Thosebest practices are still unclear, and consequently efforts are needed to ascertainhow MFIs can provide loans to the poor while achieving financial

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sustainability (Morduch, 2000, p. 627). To understand what constitutes best practices forMFIs it is first necessary to understand the economic underpinnings of MFIs.

Crucial MFI economic attributes are derived from group solidarity. Lending to anindividual where a group guarantees repayment creates joint liability. The groupmembers tend to be neighbours and friends who are in good positions to observe thebehavior of the borrower and thereby reduce information asymmetries. Stiglitz (1990,p. 353) described this group lending as “peer monitoring” which is an“incentive-monitoring system in the presence of costly information.” The groupmembers are also responsible for the loan if the borrower defaults, which is furtherincentive for the group to monitor the borrower (Ahlin and Townsend, 2007, p. F43). Ineffect, a joint liability contract reduces moral hazard and adverse selection by using thelocal group to provide information (to reduce information asymmetries) and force theborrower to adhere to scheduled repayments (Cull et al., 2007, pp. F108-9; Kono andTakahashi, 2010, p. 59).

Peer monitoring works at the group level. Members of the group monitor oneanother, etc. and the MFI benefits from this monitoring in terms of improvedrepayment rates (and decreased default rates). Nevertheless, the MFI is not privy to theinformation available to the members in a group. The dire consequences of informationasymmetry are reduced, but not solved for the MFI, creating the need for aperformance measurement system.

Group solidarity has two attributes that affect the repayment rate:

(1) selection of group members; and

(2) monitoring of group members.

Best practices will be revealed by understanding which MFI practices for theseattributes lead to increased repayment rates. The literature provides some evidence onbest practices. We will first consider the selection of group members.

There is empirical evidence that composition of the group affects loan repaymentrates. With experiments using microfinance recipients in Nyanga, South Africa andBerd, Armenia, Cassar et al. (2007, p. F86) found that “personal trust betweenindividuals and social homogeneity within groups has a positive effect on borrowinggroup performance.” However, they found that mere acquaintanceship or trust insociety has no significant effect on group performance. Hermes and Lensink (2007) saythe findings of Cassar et al. (2007) stress the necessity to disentangle different aspectsof the group solidarity when explaining repayment rates.

The association among group members needs to be carefully considered. Sharmaand Zeller (1997) concluded that the tendency to reduce screening, monitoring, andenforcement among relatives reduces the loan repayment rate. The research of Zeller(1998) found that groups with stronger social ties have higher repayment rates and thatrepayment declines as the number of relatives in the group increased. Wydick (1999)found that the distance between group members is negatively correlated to therepayment of loans.

Another finding was that credit rationing of borrowers increases repayment, whichSharma and Zeller (1997) interpreted as an incentive to screen, monitor, and enforce.They also found that self-selection at the screening stage is correlated with improvedrepayment behavior. Zeller (1998) detected that more remote groups with minimalcredit alternatives were more likely to have better repayment records.

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The empirical evidence suggests that repayment rates improve when groups consistof unbiased friends and neighbours who have strong social ties but are unrelated inkinship. Acquaintanceship or trust in society has no significance. These characteristicshave more impact when there is a shortage of credit, because the relationship is moreimportant to all group members.

There is also empirical evidence that monitoring affects loan repayment rates.Wenner (1995) and Zeller (1998) found that repayment improves if groups havewritten/formal rules specifying the expected behavior of members. Although theformal and explicit specification of expectations is not monitoring per se, it does clarifywhat is being monitored and thus enhances monitoring. Wydick (1999) found that thecommunication of weekly sales of members is positively correlated to repayments.Relatedly, Karlan (2007, pp. F78-9) in a data intensive study of FINCO-Peru foundevidence that monitoring improves repayment rates. Social connection, which assistswith monitoring, is defined as knowledge and awareness of each others’ default statusand causes, as well as direct evidence of penalties and relationship deterioration.

An article entitled, “What drives microfinance institution’s financial sustainability”by Ayayi and Sene (2010, pp. 304-8) provides insights into what needs to be monitoredfor sustainability:

. Interest rates need to be high to cover costs, but needlessly high rates woulddrive away clients.

. Classification of loan repayment arrears allows managers to make fullyenlightened decisions.

. Use of information technology facilitates the control of operating and personnelcosts.

. Efficient banking practices need to be adopted, including a corporate structure,marketing department, internal control system, and audit and risk committees.

Ayayi and Sene (2010, pp. 308, 321) conducted their own research on 223 MFIs withaudited financial statements and other verified information. They found that credit riskmanagement was the determining factor for financial sustainability. Interest rates hadto be sufficiently high to cover costs. Expense control was essential. Overall, theyfound that the use of crucial information with good banking practices and informationsystems were indispensible to sustainability.

The literature has suggested that financial sustainability can be facilitated with bestmonitoring practices and systems, i.e. explicit, formal information on crucial attributessuch as interest rates and spreads, arrears, etc. In management accounting terms,information that managers use to effectively monitor an MFI would be called PMs. Themotivation for this paper comes from the possibility of PMs leading MFIs to financialsustainability. A performance measurement system would comprise all PMs used tomanage MFI operations. As performance measurement systems (PMSs) are integral formanagement, they are also crucial for the reduction of risk (Mikes, 2009, p. 21).Specifically, we seek to answer two research questions:

RQ1. What PMs are being used by MFIs in Kenya?

RQ2. How and why do MFIs in Kenya measure their performance?


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The paper will be organized as follows. Section 2 contains the literature review of PMsrelated to MFIs and service businesses. Section 3 describes the research sites, MFIs inKenya. Building on the literature review and the research site, Section 4 describes themethodology for examining the PMs used by Kenyan MFIs. Section 5 summarizes theinformation gathered on the use of PMs at the three MFIs. The discussion andconclusion are in Sections 6 and 7, respectively.

2. Literature review and conceptual frameworkThe main purpose of this paper is to understand the PMs used in the microfinance sector.PMs and PMSs have an established literature, but not in the context of MFIs. However,the PMS literature can suggest the attributes appropriate for MFIs. Let us start withOtley (1991) and Merchant (1987) who say the main purpose of performancemeasurement for organizations is to construct a set of measures, which if achieved, willresult in the organization achieving its desired objectives. PMSs focus attention andcommunicate the ambitions and priorities of the organization to its managers andemployees (Neely and Adams, 2001). More importantly, PMs – in setting out what isimportant – promote goal congruence within the organization, motivate employees, andprovide direction and information for decision making and control purposes (Moon andFitzgerald, 1996).

One of the best known PMSs is based on Kaplan and Norton’s (1992, 1996) balancedscorecard (BSC). The BSC’s purpose is to supplement the traditional financial measureswith additional perspectives to measure and to promote the desired behaviors withinthe firm. The BSC’s limited PMs provide an overview of organizational performancegenerally along four key generic dimensions (financial, customer, internal processes,and organizational learning). The dimensions are expected to capture and measureactivities that are critical to the efficient and effective functioning of the organization.In other words, an organization’s mission and strategy are translated by the BSC into acomprehensive set of PMs. The BSC assists in making visible the interrelationshipswithin the organization, defines relationships, and tells employees the contributionthey can make to overall organizational performance.

There are numerous other systems for classifying PMSs. Garengo et al. (2005, p. 37)identified eight PMSs for small- and medium-sized organizations (these are theorganizations that would be comparable to the MFIs studied in Kenya). Garengo et al.(2005) say two of those PMSs are particularly popular with service organizationresearchers: the BSC of Kaplan and Norton (1992, 1996) and the results and determinantsframework (RDF) of Fitzgerald et al. (1991) and Moon and Fitzgerald (1996) (levers ofcontrol by Simons (1995) were not included). The other six systems include: performancemeasurement matrix (Keegan et al., 1989); performance pyramid system (Lynch andCross, 1991); integrated performance measurement system (Bititci et al., 1997);performance prism (Neely et al., 2002); organizational performance measurement(Chennell et al., 2000); and integrated performance measurement (Laitinen, 1996, 2002).

The BSC and the RDF were compared by Garengo et al. (2005). The most popular PMS isthe BSC with its four perspectives. The RDF is much less popular. Each was equallysuccessful with 13 criteria, except that the RDF was deemed to have dynamic adaptability,while the BSC was not. The dynamic adaptability criterion is important toMFIs, i.e. externaland internal monitoring systems exist along with a review system and an internaldeployment system to determine objectives and priorities (Garengo et al., 2005, p. 33).

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Consequently, the RDF was deemed to be more functional for the small- and medium-sizedlending units that comprise Kenyan microfinance. Nevertheless, both the BSC and the RDFare suitable for service (i.e. MFIs) businesses (Garengo et al., 2005, p. 38; Modell, 1996, p. 64).

The BSC limits the assessment to the four perspectives. In general, the RDF is moreopen to multiple perspectives. A better understanding of the genesis of the less popularRDF is needed. It was developed from in-depth interviews with senior and middlemanagers from both financial and operations areas at seven UK service companies.Fitzgerald et al. (1991) recognized that organizations compete on numerous levels inaddition to cost and price. Their research suggested a holistic continuum of sixdimensions of performance, split into two categories: one that measures results of thecompany’s strategy (financial performance and competitiveness) and another thatmeasures the determinants of the non-financial success (quality, flexibility, resourceutilization, and innovation) (Table I).

Fitzgerald et al. (1991) argue that in order to develop this balanced set of measuresacross all six dimensions, three important factors must be considered:

(1) The type of competitive environment in which the organization operatesdetermines the level of interactive information needed for communicatingthreats and uncertainties. Brignall and Ballantine (1995, pp. 18-23) argue thatthe design of a PMS should depend on three interacting contingent variables,which together determine the why, the what, and the how of performancemeasurement. These include the organization’s external environment (whichexplains the “why” of PMs), its chosen mission (which explains the “what” ofPMs) and its internal capabilities (which explains the “how” of PMs).The external environment includes variables such as the state of the macroeconomy, the degree of government regulation and the competitive forces facingthe company (Waweru et al., 2004). A highly complex and uncertain externalenvironment may lead to the need for elaborate administrative and co-ordinationsystems (Brignall and Ballantine, 1995). The internal environment includesfactors such as the size and structure of the organization, its culture and history,and the organization’s process type.

Performancedimension Type of measure

ResultsFinancialperformance

Profitability, liquidity, capital structure, market ratios

Competitiveness Relative market share and position, sales growth, and measures of customerbase

DeterminantsResource utilization Productivity and efficiencyQuality of service Reliability, responsiveness, aesthetics/appearance, cleanliness/tidiness,

comfort, friendliness, communication, courtesy, competence, access,availability, and security

Innovation Performance of innovation process, performance of individual innovationsFlexibility Specification flexibility, volume flexibility, delivery speed flexibility

Source: Fitzgerald et al. (1991, p. 8)

Table I.The performance

dimension


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(2) The intention of the organization needs to be considered. This determines therelative importance of certain PMs. According to Sureshchandar and Leisten(2005), the appropriateness of a performance measurement framework shouldbe assessed using a list of critical success factors. These include topmanagement support, whether there is ownership in the setting of measures(Otley, 1991), and the perceived achievability of the targets (Baron andGreenberg, 2000). There is also a need to ensure that the measures are clear,unambiguous, and that they are communicated to the subjects being measured.Furthermore, the measures should be based on controllable factors and shouldbe linked to compensation and rewards (Baron and Greenberg, 2000).

(3) The service sector in which the organization operates also needs to beconsidered (Brignall and Ballantine, 1995; Fitzgerald et al., 1991). Indifferentiating among service organizations, Fitzgerald et al. (1991) identifiedthree services archetypes, namely professional services, service shops and massshops, using two dimensions, the number of customers processed each day asone dimension and the contact time per customer as the other classificatorymechanism. Professional services are those that have a relatively low number ofcustomers but with high levels of contact time, people focus and processorientation. Mass shops, at the other extreme, have a high volume of customersbut with low levels of contact time, people focus and process orientation. Serviceshops are the intermediate category, processing some hundreds of customersper day and may possess some of the features of the other two categories. Theservice shop model best represents the Kenyan MFIs.

Moon and Fitzgerald (1996, p. 431) say “It is almost an axiom management accountingthought that organizations need to formally measure their performance.” This wouldhold for MFIs. For example, PMs play an important role in translating theorganization’s mission into desired behaviors and results. PMs communicate the firm’sobjectives and goals to employees, monitor their progress and provide feedback ontheir efforts to senior management.

3. MFIs in KenyaKenya is a small country located in East Africa with a growing population of 41 millionand a density of 72 persons per square kilometer. Kenyan economic activities are largelydivided into three sectors: agriculture, industry, and services. Agriculture is the mostsignificant sector with 75 percent of the entire labour force. This is not too surprisingconsidering that the Kenyan Highlands provide favorable growing conditions for tea,coffee, corn, wheat, sugarcane, fruit, vegetables, dairy products, beef, pork, poultry, andeggs. The industrial sector produces small-scale consumer goods such as plastic,furniture, batteries, textiles, clothing, soap, cigarettes, and flour. The service sectorincludes oil refining, commercial ship repairs, and tourism.

Poverty is prevalent. GDP per capita was only $1,600 in 2010, placing Kenya atnumber 200 in the world ranking of countries from richest to poorest. Relatedly, theunemployment rate in Kenya was an astonishing 40 percent as recently as 2008.This unhealthy economy results in the inability of business to finance operations,further hindering national economic growth.

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Extreme poverty makes Kenya a candidate for microfinance small loans. Themicrofinance industry started in Kenya about 20 years ago, but it only gained thestatus of an industry in the past ten years, where it is generally categorized along twolines (Hospes et al., 2002, pp. 23-5). First and most common is the formal versusinformal. Formal providers are registered by Kenyan law. Informal providers aresubject to self-regulation or group-based rules. Second, microfinance in Kenya can becategorized as client- or member-based. In member-based organizations, membersprovide the resources as well as constituting the main target group for the loans. Theseare cooperatives. In client-based organizations, the customers are distinct from theowners. Customers are not involved with the management of the organization.

Of this two-by-two matrix, our interest is with the formal-client-based quadrant,which contains most Kenyan MFIs. The attributes of formal- and client-based suggestto us that the respective MFIs would select rational and explicit PMs. Whenconsidering PMs, it must be remembered that MFIs tend to use groups to reduceinformation asymmetry. Nevertheless, with limited resources, Kenyan MFIs wouldwant to ensure efficient and effective operations, and thus, we would expect carefullythought-out PMs.

All borrowers of the selected MFIs become members of groups; the groups have twoimportant responsibilities:

(1) mutual support and advice to one another; and

(2) guaranteeing that loans are repaid.

Sometimes the borrower provides other collateral. Nevertheless, each member of thegroup guarantees the loans of other members. Group members often deposit savingswith the MFI (or lender) as additional security. If a member defaults on a loan withoutsufficient collateral, the MFI will take the outstanding balances paid by groupmembers including from their deposited funds. The fear of losing deposits to coveranother group member’s loan creates cautious behavior among the group members inapproving loans and in monitoring the businesses of one another.

Groups are generally formed as part of community information sessions sponsoredby the MFI. Prospective clients, particularly entrepreneurs showing interest, areinvited to a series of follow-up meetings, and later invited to become a member in aself-organized group. Membership is heterogeneous regarding gender, affluence, andethnicity. Members understand each other’s businesses, and they become close friendsthrough weekly meetings. The duration of these meetings varies. New groups tend totake longer to conduct their transactions, whereas established and cohesive groupsmay take as little as 20 minutes. Payments from group members to the MFI areaggregated prior to the bi-weekly group meeting. The group mechanism reducestransactions costs for the MFI and its clients. Each MFI aggregates the loans intovarious portfolios for management purposes. Each portfolio is the responsibility of acredit manager, who monitors the performance of each loan.

It is necessary for these MFIs to receive subsidies from various sources. Furthermore,consistent with the findings of Ayayi and Sene (2010), the interest rates charged by MFIsin Kenya (averaging between 25 and 35 percent in 2008) exceed the rates charged bycommercial banks (averaging between 13 and 18 percent in 2008).

In summary, little documented evidence exists on how MFIs in Kenya measureperformance. This study seeks to determine the PMs used by Kenyan MFIs. We are


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seeking to understand the PMs, rather than the PMSs. The latter would require anunderstanding of how the PMs are used as a system such as the BSC, which would takemore involvement by the three Kenyan MFIs than their chief executive officers (CEOs)would allow.

4. Research methodA case study is an empirical enquiry that investigates a contemporary phenomenonwithin its real life context, especially when the boundaries between the phenomena andcontext are not clearly evident (Yin, 2003). Case studies were important in this researchin order to allow an in-depth understanding of how and why PMs were used in thesubject organizations.

A good case study should use as many sources of evidence as possible. In thisresearch, three sources of evidence suggested by Yin (2003) were used. These were:

(1) documentation;

(2) interviews; and

(3) archival records from the three MFIs.

During the first stage of data collection, the researchers reviewed publicly availableinformation relating to the MFIs under study and the MFIs in general from public andsome of their private records.

The second stage required visiting the selected institutions, which involved detaileddiscussions with the chief finance officer (CFO) and the CEO at their head offices. Eachorganizational interview took between two and three hours. A total of six interviewswere carried out as shown in Table II.

With the permission of those in charge of each MFI, the researchers reviewed themain reports prepared by the credit/finance departments. Arrangements were thenmade to visit the MFI’s branches and customers so that the researchers could ascertainexactly how the MFI measured the performance of the loans and projects financed, andtherefore assess how PMs were used. As suggested by Lillis (1999), an interview guidewas used to minimize interviewer bias (the Appendix). All participating MFIs requiredtheir information to be kept completely confidential. Consequently, the actual names ofthe MFIs are disguised as ABC, DEF, and GHI.

This study sought a sample of formal-client-based MFIs. At the end of 2006, therewere 14 of them in Kenya. Most of these were registered as non-governmentalorganizations while others were registered as non-banking financial organizations.Clients or customers were generally members of financial self-help groups, which varied

Firm Interviewee Time taken (hours)

ABC CEO 2.5CFO 3

DEF CEO 2CFO 3

GHI CEO 3CFO 2.5

Total 6 16Table II.Interview schedule

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in size from five to 50 members. These groups were registered with the Kenyan Ministryof Social Services. Group members tend to be trained by the MFI before obtaining aninitial loan.

A total of five Kenyan client-based MFIs were selected for this study. All of theseMFIs were the largest and most established, with both urban and rural branches. Datawere collected between June 2007 and August 2008. Letters requesting the CEOs toparticipate in face-to-face interviews were sent to the five MFIs in April of 2007. TwoMFIs refused to participate in the study citing confidentiality of the information soughtand lack of time. Three MFIs agreed to participate and a copy of the interview guide(the Appendix) was sent to the respective CEO one month before the date of theinterview. This allowed them time to prepare.

Yin (2003) suggests four tests to establish the quality of a field study:

(1) construct validity, using the appropriate operational measures for the conceptsbeing studied;

(2) internal validity, demonstrating causal relations among conditions;

(3) external validity, establishing the domain whereby the results can begeneralized; and

(4) reliability, showing that if the data collection were repeated, then the sameresults would occur.

In this study, construct validity was addressed by investigating the same questionsthrough multiple sources of evidence that included face-to-face interviews, archivalsources, MFI web sites, financial statements, etc. The data from different sources werecompared, inconsistencies were resolved by contacting multiple sources, and draftfindings at each MFI were reviewed with the respective CEO and CFO. Internalvalidity was addressed through pattern matching, which concentrated on how andwhy the pattern of observation about each case was consistent or inconsistent with theexpectations that the measures would be used to increase the repayment rates,decrease default rates, and contribute to financial sustainability.

External validity was addressed through replication logic. This analysis focused oncross case analysis and comparison of the results. Results from each case wereconsidered to be findings that were subject to replication by other individual cases. If thefindings obtained in subsequent cases were also consistent with the expectations, weconcluded that the validity of the findings had been strengthened. If the pattern obtainedin the second case was similar to the pattern in the first case, we interpreted this as areplication. We also tried to understand and explain any deviations of the patterns fromthe expectations. Finally, reliability was addressed through the use of face-to-faceinterviews, the use of a pre-established questions (the Appendix), and the use ofextensive documentation.

A qualitative analytical procedure was used to analyze and interpret the data.According to Lillis (1999), the analysis of any qualitative data involves the process ofreduction, classification, and interpretation. Data collected were coded or matched andlinked to the themes that were being investigated. Coding enhanced completeness ofthe data at the same time leaving out what may have been repeated or deemed unrelatedto the matters being investigated. This method minimized potential bias and provided anaudit trail, thus enabling the reader to track back to the source of the conclusions drawn.


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After the data were classified and summarized, sections of the transcript wereselected to identify patterns among the constructs. Information was then derived sothat conclusions could be drawn on how and why MFIs in Kenya used PMs for theirown operations and their customer’s projects.

5. Case study findingsFirst MFI: ABCRegistered as a limited company, ABC was established more than ten years ago as anon-bank financial institution. At the time of this study, it operated more than20 branches in Kenya, employed over 300 people, and had about 50,000 activeborrowers. This MFI was also a deposit-taking organization with over20,000 depositors. More than 70 percent of its clients were urban-based.

Individual-based measures dominated the PMs. This was inconsistent to thefindings of Waweru et al. (2004), who reported that team-based PMs were the mostwidely used in developing countries. However, this MFI used both financial as well asnon-financial measures to evaluate the performance of its managers and branches(divisions). Some of the notable individual measures included number of clients perofficer, number of new clients per month, total loans disbursed per month, number ofclient meetings attended per month, and the ratio of loans at risk to total loans in theportfolio. Divisional PMs included quality of the portfolio, number of new clients,capacity (i.e. percentage of clients with loan facilities), total loans disbursed, profitmargin, total interest revenue, and percentage of operating expenses to total loans.

Organizational PMs at ABC were mainly financial and were classified into threegroups:

(1) quality measures;

(2) efficiency and productivity measures; and

(3) financial measures.

Quality measures included portfolio at risk/gross loan portfolio, loan loss provisionexpense/average gross loan portfolio, loan loss reserves/profitability at risk, and writeoff/average gross portfolio. The efficiency and productivity measures includedoperating expenses/average gross loan portfolio, cost per borrower, averageoutstanding loan size, number of borrowers per credit officer, and number ofborrowers per staff. The financial measures included cash flow, revenue growth, profitmargin, return on assets, and return on equity.

Three years earlier ABC introduced a BSC. According to the CFO, “the aim was tocommunicate the organization’s strategy to all employees and to link the PMs to thestrategy.” The staff bonus system, for example, was based on the BSC. The CFOmentioned that the “company has an information system to monitor loan repayments,”which was helpful in reporting weekly on overdue payments.

The researchers asked the respondents to explain the purpose of ABC’s PMs.Achievement of the organization’s mission was cited as the most important factorfollowed by communication of goals to the employees. The respondents also perceivedthat competition in the sector had intensified during the last five years, mainly fromcommercial banks making unsecured personal loans. Therefore, there was a need toremain competitive by comparing the MFI’s results with others in the microfinance sector.

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Other factors mentioned included motivating staff, training staff and providinginformation for control.

In regard to performance measurements of financed projects, ABC’s respondentsadvised that their credit officers held bi-weekly meetings with their borrowing groups.Groups were able to make loan repayments during such meetings and deposits were alsocollected from individual clients. After such meetings, the credit officers were requiredto complete credit reports. The researchers viewed several reports to find that theycontained information such as number of customers in the group, total amount of theloans outstanding, amounts repaid, loans in portfolio at risk and loans overdue for morethan 30 days. Officers of the MFI also paid monthly visits to clients whose loansexceeded Ksh. 100,000. Such clients were also required to submit quarterly cash flowstatements. Some other notable PMs included the loan repayment rates, deposits permonth and requests for more funds (usually after the repayment of the existingfacilities).

The ABC CFO said that “divisional and organizational performance measurementassessment was a continuous process, but individual performance measurement wascarried out at the end of the financial year.” Table III shows a summary of the MFI’sPMs, re-arranged in the six dimensions suggested by Fitzgerald et al. (1991).

Second MFI: DEFDEF has existed for more than ten years as a non-government organization. At thetime of this study, it operated about 15 branches in Eastern and Central Kenya, directlyemploying over 100 people to serve more than 10,000 active borrowers. This MFI tookdeposits, and served both rural (60 percent) and urban (40 percent) clients. This MFIgenerally extended credit facilities to registered (organized) groups.

DEF used both individual and team-based PMs. The CEO said, “team-basedmeasures are considered more important than individual measures.” Some of thenotable measures included number of new clients, number of loans approved,

Competitiveposition

Financialperformance Service quality

Resourceflexibility

Resourceutilization Innovation

PMs BenchmarkingTotal loansdisbursedNumber ofborrowersNumber ofsavers

OperatingexpensesAveragegross loanportfolioCost perborrowerAverageoutstandingloan sizeNumber ofborrowers percredit officerNumber ofborrowers perstaff

CustomercomplaintsRepeat borrowersCustomersatisfaction ratingPortfolio at risk/gross loanportfolioLoan lossprovision expense/average gross loanportfolioLoan loss reserves/profitability at risk

OperatingexpensesAveragegross loanportfolioCost perborrowerAverageoutstandingloan sizeNumber ofborrowers percredit officerNumber ofborrowers perstaff

CapacityratioYield onportfolioRepaymentrate

Number ofnewproductsdevelopedNumber ofnew servicesdevelopedNumber ofstaff trainedNumber ofnewprocesses

Table III.PMs at ABC


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the amount of new loans granted, and the quality of the loan portfolio. The mostcommon measures of divisional performance included profits (computed after theallocation of head office costs), revenue growth, quality of customer service, quality ofportfolio, and ratio of operating expenses to revenue.

DEF’s organizational PMs were also classified as financial, efficiency, andproductivity. The financial measures included return on assets, return on equity, profitmargin, and operating expenses ratio. The efficiency and productivity measuresincluded operating expense/loan portfolio (percent), cost per borrower, and borrowersper staff member. There were also risk measures, which included portfolio at risk(loans overdue for more than 30 days), loan loss reserve ratio, and loan write off ratio.

This MFI did not have a BSC. However, the DEF respondents advised that the qualityof customer service was measured annually with a survey. It had a staff incentivescheme that was based on the achievement of certain specified targets (both financialand non-financial). Commercial banks and the local cooperative societies were the majorcompetitors. The DEF respondents perceived that competition had increased in recentyears and changes were occurring quickly, hence the need to improve their quality ofcustomer service was foremost. To this end, the CEO had introduced suggestion boxes,both at head office and at the branches “where customers placed complaint letters, whichwere sent to head office every two weeks.”

The researchers asked the DEF respondents the purpose of their PMS. The mainfactor mentioned by the CFO was to “align the goals of their employees with those ofthe organization.” For example, the CEO commented, “What gets measured gets done.”The CFO advised that PMs were expected to motivate and train employees. DEF hadan information processing system that helped in monitoring loans. However, loanreports were only produced once a month.

To monitor the performance of financed projects, DEF’s officers visited clientbusinesses and at times required them to furnish business records such as stock cardsand profit reports (only for borrowings in excess of Ksh. 50,000). Loans were oftenreleased to clients in stages dependent on business inspections. Group members werealso encouraged to provide DEF with information regarding their fellow members’businesses. The respondents advised that this was possible since individual loans wereusually guaranteed by all group members. This MFI also kept a record of thepercentage of its clients whose income was below the poverty line (households earningless than US$1 per day). It was, therefore, able to monitor the impact of financing onpoverty alleviation.

Organizational and divisional performance measurement was done throughout theyear, but individual performance evaluation conducted only at the end of the financialperiod. A summary of the measures used by DEF, re-arranged in the six dimensionssuggested by Fitzgerald et al. (1991), is shown in Table IV.

Third MFI: GHIAt the time of this study, GHI operated over 20 branches in Kenya, with about100 employees to service more than 5,000 active borrowers and 10,000 depositors. GHIwas founded over ten years earlier as a registered non-government institution. It servedboth rural (70 percent) and urban (30 percent) areas.

Although according to the CEO this MFI “uses both individual as well as teammeasures,” the emphasis was “on team-based [PMs].” GHI was consistent with the

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findings of Waweru et al. (2004) and Anderson and Lanen (1999) who reported thatteam-based PMs are expected in developing countries since the cultures tend to becollective and risk avoiding. Some of its most notable team/individual PMs includedlead time (time taken to process a loan with a head office benchmark of four days), newclients per month, amount of loans disbursed per month, and number of groupmeetings held during the month. GHI branches were evaluated mainly on the basis ofprofit margin, number of new clients, revenue growth, proportion of loans at risk,quality of customer service, and operation self sufficiency.

GHI’s organizational PMs also included financial, efficiency and productivity, riskand customer measures. The financial measures included return on assets, return onequity, profit margin, operating expenses ratio, and gross loan portfolio to total assets.Efficiency and productivity measures included operating expenses or loan portfolio,cost per borrower, borrowers per staff member, staff productivity, and loan officerproductivity. The risk measures included loans overdue for more than 30 days ratio,loan loss reserve ratio, and repayment rate (a benchmark of 95 percent had been set).The customer measures included customer satisfaction, customer complaints, cost ofcustomer to access products, and lead time (time taken to process loans; a four daybenchmark).

GHI’s CFO said the above measures “were arranged in form of a BSC and linked tothe MFI’s strategy.” What was more interesting was that the MFI had identifiedseveral initiatives that had measures linked to the MFI’s mission. With the help of aconsultant, this MFI, according to the CEO, introduced an information processingsystem that was used to monitor loan repayments.

The researchers asked GHI’s CEO and CFO the purpose of the PMs. They answered,“The achievement of the organization’s mission was the most important factor.” Otherfactors included communicating the organization’s goals to employees, managingcompetition, motivating employees, decision-making information, and control of theMFI’s costs.

To evaluate the performance of customer projects, GHI’s credit officers heldbi-weekly meetings with the borrowing groups; they also visited these projectsparticularly where the amounts advanced were greater that Ksh. 50,000. The customersof large projects were also required to submit quarterly cash flow statements (both actualand projected). The GHI used variance analyses to assess whether the projects were

Competitiveposition

Financialperformance

Servicequality

Resourceflexibility


PMs Total loansdisbursedNumber ofborrowersNumber ofsavers

Return onassetsReturn onequityProfit margin/operatingexpenses ratio

Portfolio atrisk greaterthan 30 days

Operatingexpense/loanportfolio (%)

Yield onportfolioRepaymentrate

Number ofnew productsdeveloped

Loans lossreserve ratioLoans writeoff ratio

Cost perborrowerNumber ofborrowers perstaff member

Recoveries onnon-performingdebts

Number ofnew servicesdevelopedNumber ofstaff trainedNumber ofcustomerstrained

Table IV.PMs at DEF


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proceeding as agreed. Groups were encouraged to monitor the projects of members andto report deviations from expectations to GHI credit officers. Borrower groups wereexpected to aggregate their loan repayments prior to the bi-weekly meeting and depositsuch repayments during the bi-weekly meetings.

The GHI respondents advised the researchers that divisional performance wasmonitored on a continuous basis in response to the changing nature of the operatingenvironment. However, individual performance evaluations were monitored at the endof the financial year. This coincided with a reward/compensation review period. SeeTable V for a summary of the PMs.

6. DiscussionUsing the findings for Kenyan MFIs reported in the prior section, we now conduct across case analysis. This is to present how well the evidence matches the patternsuggested by the theoretical framework and the extent to which the findings arereplicated over the cases. The discussion is structured along the two research questionsidentified in Section 3.

“What PMs are being used by MFIs in Kenya?” All three MFIs operated with formalPMs. Performance was evaluated at individual, division or branch, and organizationallevels. Consistent with expectations (Brignall and Ballantine, 1995; Ittner and Larcker,1998; Said et al., 2003), all three MFIs had introduced both financial as well asnon-financial measures of performance. DEF and GHI emphasized team PMs whereasABC emphasized individual PMs. Waweru et al. (2004), Anderson and Lanen (1999)and Chow et al. (1999) argue that team-based measures would be expected indeveloping countries where cultures are said to be more collective with high levels ofrisk avoidance.

In all three MFIs, the number of new customers recruited, total number of loansdisbursed, and the quality of loans in the portfolio were considered the most importantmeasures of individual performance. This may be interpreted as though the MFIsrecognized the need to increase their competitive position by increasing their relativemarket share, while also understanding the need to mitigate credit risk (Waweru et al.,2009). In GHI the number of days taken to approve a loan was considered an importantfactor in the evaluation of the individual performance, while in ABC the number

Competitiveposition

Financialperformance

Servicequality

Resourceflexibility


PMs MarketshareNumber ofborrowersNumber ofsavers

Return onassetsReturn onequityProfit margin/operatingexpenses ratioGross loanportfolio tototal assets

CustomersatisfactionCustomercomplaintsCost ofcustomer toaccessproductsLead time(time toprocess loans)

Operatingexpenses/loanportfolioCost perborrowerNumber ofborrowers perstaff memberStaffproductivityLoan officerproductivity

Yield onportfolioRepaymentrateNumber ofgroupmeetingsCompliancewith internalaudit reports

Number ofnew productsdevelopedNumber ofnew servicesdevelopedNumber ofstaff trainedNumber ofnewprocessesTable V.

PMs at GHI

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of group meetings was considered an important factor. The need to improve customerservice to retain existing customers and attract new ones had therefore beenrecognized. This was prompted by the perceived increase in competition faced by theMFIs, particularly with the entry of the local banks into the microfinance market.

All three MFIs indicated that divisional performance was monitored on acontinuous basis. Both financial and non-financial measures were used to evaluateperformance at the branch level. Profit margin was considered the most importantmeasure of divisional performance followed by quality of the loan portfolio. However,in DEF, profits were arrived at after the allocation of all head office costs, which isinconsistent with expectations (Baron and Greenberg, 2000). ABC and GHI introduceda BSC that linked the PMs to the MFIs’ mission and strategy. However, the BSC wasonly used at corporate level and had not cascaded down to the branches. It wastherefore unlikely that the MFI was enjoying the full benefits of the BSC.

Furthermore, the findings indicate that the participating organizations measuredthe success of their customers’ projects. This was consistent with the MFI mission ofimproving the welfare of their clients. Monthly visits to customer businesses were themost commonly used method. This was mainly used where customer borrowings wereconsidered large (above Khs. 50,000). ABC and GHI required large customers to submitquarterly cash flow statements to the MFI. When such statements were received, actualcash flows were compared with projections and significant variances queried. In ABCand GHI the credit officers held bi-weekly meetings with the customer groups wherethe progress of each financed project was discussed and loan repayments collectedfrom the groups. The officers later filed their reports with the MFI. This project focuswas also a means of reducing risk (Mikes, 2009, p. 21). As noted previously, loanrepayments from group members were aggregated prior to the bi-weekly meetings andrepayments made during the meetings. This reduced transaction costs and thusincreased the chances of attaining financial sustainability (Hamada, 2010).

DEF and GHI encouraged group members to report on their fellow members,particularly when it was felt that the member projects had not progressed as expected.MFI staff would then follow up with the customer to authenticate the information andoffer advice on remedial action. It was noted during the interviews that most of thecustomers were members of registered groups and that group members were requiredto guarantee borrowings of their members. It was therefore possible for the members toreport on their peers. Other notable measures included loan repayments deposits madeduring the month and returning customers.

“How and why do MFIs in Kenya measure their performance?” All participatingMFIs advised that performance was evaluated at individual, divisional andorganizational levels, which was consistent with the findings of Neely et al. (2005).Whereas individual performance evaluation was mainly done at the end of thefinancial year, mainly for the review of their compensation, both divisional andorganizational performance was carried out continuously throughout the year. Forexample, in all three MFIs the management information systems enabled managementto monitor the quality of the portfolio on a weekly basis. ABC and GHI noted that theconstantly changing business environment required punctual reporting systems.

Moreover, all participating MFIs reported that the main aim of their PMs was toassist with mission achievement. For example, GHI had (with the help of a consultant)introduced the BSC to link the measures to the mission. ABC and GHI used their PMs


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to manage competition. ABC and DEF used their PMs to motivate, train staff and tocommunicate goals to employees. DEF and GHI reported that PMs were also used tocontrol costs. For example, a ratio of operating expenses to total loans had beenintroduced. Cost control was an important part of the management control system,particularly when MFIs are faced with perceived high levels of competition.

Within the three MFIs, most services were standardized to reduce costs while thetime spent with each client was limited. Consequently, measures tended to reflect thoseof service shops, i.e. output measures that tend to measure results rather thanprocesses. However, the subject MFIs were faced with intensive competition mainlyfrom the commercial banks, hence the need to become more focused on clients. Themeasures reflected the low level of contact time, lower levels of discretion andstandardized services (mainly short-term loans, training, and business advice).

The environments of ABC and GHI were well reflected in the use of both internal andexternal measures. For example, by comparing the performance of the MFI with that ofcompetitors (benchmarking) and the use of the relative market share metrics, ABC andGHI were able to understand both the external environment and their competitors. Thiswas not said of DEF, which relied solely on internal measures. However, DEF alsomeasured client satisfaction, which reflected the competitive nature of the industry.

All three MFIs were small and operated in an industry that did not require advancedinformation technology. They had in place management information systems thatenabled them to monitor their loan portfolios and deposits on a weekly basis. Althoughthis was considered adequate, the fast changing environment may have required moretimely information and therefore a need to introduce more advanced systems.

Our findings indicated that measures had been developed across Fitzgerald et al.’s(1991) six dimensions in all three MFIs visited. We also observed a balance between thefinancial and the non-financial measures of performance across the MFIs studied. Forthese MFIs, the subjects of the PMs had some say with respect to the setting of targets.For example, divisional manager’s performance was evaluated on the basis of newbusiness, profits, and control of expenses. We, however, noted that in DEF divisionalprofits were computed after the allocation of head office costs, but divisional managershad little control over such costs (Baron and Greenberg, 2000). The policy at the threeMFIs was to set targets that were not too high. We considered this good for motivation.In all three cases, PMs were well communicated to the employees and feedback wasconsidered good and timely.

In addition, for all three MFIs we observed that most of the objectives of the PMshad been achieved. Branch managers and employees appeared knowledgeable andcontent with the PMs, which was an indication of successful training and motivation.

7. ConclusionThis paper studied the PMs in three selected MFIs in Kenya. It adopted a multiple casestudy approach based on a detailed open ended questionnaire. The study revealed anumber of interesting findings.

The findings have identified that the three MFIs in Kenya are using PMs that areconsidered best practices in term of the requirements for sustainability (Ayayi andSene, 2010; Karlan, 2007; Wydick, 1999; Zeller, 1998). Since this is a relatively newsector, the findings are important since the identified PMs may be adopted by otherevolving MFIs. The commercial or bank-like nature of the MFIs suggests the

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importance of performance measurement, such as loans overdue by more than 30 days.The management of each MFI is concerned with performance measurement asexpected with a formal organization, i.e. a top-down demand for performancemeasurement. In addition, groups and group members at the “bottom” were interestedin performance measurement as each had guaranteed the loans of all group memberswith the MFI. The customers appear to support performance measurement.

The use of PMs by the Kenyan MFIs can be explained by the BSC framework (Kaplanand Norton, 1992, 1996). For example, we found that both financial and non-financialPMs were used for assisting managers to monitor the progress of employees, units, andorganizations in achieving strategic goals. This study concludes that MFIs haverelatively well developed PMs that support their particular businesses, hence an attemptto adopt best practices so as to achieve sustainability. There was a good balance betweenthe use of financial and non-financial PMs. However, output measures were morecommonly used than process measures. The nature of the MFIs especially the need forprofitability suggests the importance of performance measurement. Furthermore, wefound briefly that the subject firms used PMs for understanding their businesses andthat the PMs were comprehensive and well thought out.

Future research may be designed to compare the findings in this study with findingsthat relate to other MFIs, and to examine how PMs function individually and as PMSs inthese MFIs. Most important in this future research will be to understand which PMs andwhich PMSs are the best practices in contributing most to sustainability. Such futureresearch will show how PMS are developed from PMs. Furthermore, such futureresearch may rely on a different framework, such as Simons’ (1995) levers of control, soas to understand how and why these organizations develop PMS.

As for limitations, the study is constrained to Kenya and to the services shop sectorof the service industry. MFIs in other developing countries may differ from theirKenyan counterparts. This may be due to the legal and regulatory constraints andeconomic policies or structures that differ among countries.

Note

1. Recently, Yunus has been in open conflict with the Government of Bangladesh (Tharoor,2011, p. A21).

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Appendix. Interview guide

1. Name of the institution…………………………………

2. Your position in the institution

3. a) Number of years in business…………………………... b) What are your main sources of funds? Describe the relationship between your company andthe fund provider’s. Do you provide any reports to the donors? If yes, please advise the type ofinformation that you normally include in these reports

4. Please indicate the types of products and services offered to your clients: a)…………………………….. b)……………………………..

c)………………………………d)…………………………… e)…………………………………………………………………

5. Which segments of the society does you organization mainly serve: a) Urban small family business b) Urban marginalized people c) Rural stable operations d) Remote rural areas e) Other

6. How do you get your clients (most common)? Please rank in ascending order from mostpopular to least popular approaches.

Advertise…….. Referral…….. Walk in…… Other ……Probe for details

(continued)

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12. Do you evaluate the performance of your customer’s projects? If yes, what factors do you consider?

1) Financial……….2) Non-Financial……..3) Subjective4) Other ……………….

13. Please describe your current performance measurement system.

14. Does your organization have an M & E framework for monitoring performance of the client’s projects?

15. If yes, explain whether the indicators are adequate and how regularly monitoring is done.

16. Does your institution undertake post projects impact assessment?

17. Does your company visit the customer’s projects after the funds are disbursed? If yes, how often are the visits? What data is collected?

7. Kindly indicate the factors that you consider when evaluating the success of your Divisions/Branches:

1) Financial…………………………………………….. 2) Non-Financial…………………………………….. 3) Subjective…………………………………………

4) Other ……………………………………………..

8. Identify the factors that you consider while evaluating the success of your Managers/Officers.

1) Financial………………………………………………….. 2) Non-Financial………………………………………………

3) Subjective………………………………………………….4) Other ………………………………………………………..

9. Please describe the performance measurement system currently in use in your organization.

10. Have you heard of the Balanced Scorecard? Has it been adopted in your organization? If yes,

what measures are used?

11. a) What guidelines do you use to select your clients? b) Do you offer training to your customers? If yes, what types of training do you offer to your customers? How do you select the participants?

Corresponding authorNelson Waweru can be contacted at: [email protected]

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