Economic Book Value of MFIs as a basis of comparison

The equity values of MFIs in the past have most often been compared against their book values. The book value of an MFI (or the net-worth) is the difference between the total assets and the total liabilities and represents the accumulated profits or losses within the MFI, over and above its initial capital during its operational history.

The book value is high for those MFIs that have strictly followed a profit maximization objective as against an MFI that, while focusing on charging sustainable interest rates, has chosen to keep its interest rates at low levels in order to pass on maximum benefits to its clients. The latter would have generated a lower book value and consequently its equity is likely to get a poorer valuation, if it is viewed only in terms of a multiple of the book value. In the absence of an objective method, whether or not this MFI gets a premium for the social value it has created would be left to the discretion of the investors.

There is a need to establish a measure of the “economic book value” of an MFI which would account for the benefits that an MFI could have passed on to its clients. The use of “opportunity cost shadow prices” for clients and the MFI can provide us with such a measure. This would involve an analysis of what is the cost the client would have to incur in order to avail of the facilities that the MFI provides, if the MFI did not exist. The difference between the opportunity cost and the real cost that the client incurs may give us an idea of the “economic book value” of the MFI-client eco-system.