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Transcript of MIcrofinance ratios
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PP AA RRTT II CC II PP AA NN TT CC OO UU RRSS EE MM AA TT EE RRII AA LL SS
Financial Analysis for Microfinance
Institutions
CON SU L T AT I V E G ROUP TO AS S I S T THE POOR
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NOTE The participant course materials contain the main technical messages and concepts delivered in this course. It is not
intended to serve as a substitute for the full information and skills delivered through the individual courses Skills forMicrofinance Managers training series. During the actual courses, key concepts are presented with case studies, exchange of
participant experiences and other activities to help transfer skills. Users interested in attending a training course should directly
contact CGAP hubs and partners for course dates and venues. CGAP would like to thank those who were instrumental to the
development and design of the original course that led to this participant summary and to its update in 2008: Janis Sabetta,
Michael Goldberg, Ruth Goodwin-Groen, Lorna Grace, Brigit Helms, Jennifer Isern, Joanna Ledgerwood, Patricia Mwangi, Bridge
Octavio, Ann Wessling, Djibril Mbengue, Tiphaine Crenn and all CGAP training hubs and partners. Copyright 2009, The
Consultative Group to Assist the Poor (CGAP).
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Overview
Overview and Goals of the Course ........................................................................................4
Financial Statements ............................................................................................................ 7
Balance Sheet........................................................................................................................... 7
Income Statement..................................................................................................................... 8
Cash Flow Statement ................................................................................................................. 9
Portfolio Report and Activity Report............................................................................................ 10
Non-Financial Data Report ........................................................................................................ 10
Formatting Financial Statements ........................................................................................ 12
Indicators for Financial Analysis ......................................................................................... 17
Portfolio Quality .................................................................................................................. 20
Rationale for Loan Loss Impairment and Impairment Loss Allowance ............................................. 24
Accounting for Loan Loss Impairment and Write-Offs.................................................................... 25
Analytical Adjustments ....................................................................................................... 27
Asset /Liability Management .............................................................................................31
Efficiency and Productivity .................................................................................................. 36
Sustainability and Profitability ............................................................................................40
Use of Ratios ............................................................................................................................ 44
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Overview and Goals of the Course
Overview
International best practice in microfinance around the world suggests good financial
analysis is the basis for successful and sustainable microfinance operations. Some would
even say that without financial analysis your MFI will never achieve sustainability.
Sustainability means relying on commercially priced and internally generated funds rather
than on donors for growth.
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Sustainability=
Coverage of financial expense (cost of funds + inflation)+
Loan loss +
Operating expenses (personnel +admin expenses) +
Capitalization for growth from financial revenue
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Goals of the Course
To master the tools needed for understanding the financial position and sustainability of
your institution.
To use financial analysis to improve your institutions sustainability, by
1.Identifying the components, purpose, relationships, and importance of the main
financial statement;
2.Learning the formats of income statements and balance sheets to easily separate
the effect of donor funds;
3.Analyzing financial statements to monitor profitability, efficiency, and portfolio
quality;
4.Adjusting costs for inflation, subsidized cost of funds, and in-kind donations; and
5.Identifying critical factors for moving toward financial sustainability.
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Financial Statements
MFIs commonly use four types of financial statements:
1.Balance sheet
2.Income statement
3.Cash flow statement
4.Portfolio report
Balance Sheet
A balance sheet is a summary of the financial position at a specific point in time. Itpresents the economic resources of an organization and the claims against thoseresources.
Assets Liabilities Equity
Represent what is ownedby the
organization or owedto it by
others
Are items in which an
organization has invested its
funds for the purpose of
generating revenue.
Represent what is owedby the
organization to others.
Represents the capitalor net
worth of the organization.
Includes capital contributions of
members, investors or donors,
retained earnings, and the current
year surplus.
Assets = Liabilities + Equity
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Income Statement
An income statement reports the organizations financial performance over a specified
period of time. It summarizes all revenue earned and expenses incurred during a
specified accounting period. An institution prepares an income statement so that it can
determine its net profit or loss (the difference between revenue and expenses).
Revenue Expenses
Refers to money earned by an organization for
goods sold and services rendered during an
accounting period, including
Interest earned on loans to clients Fees earned on loans to clients
Interest earned on deposits with a bank, etc.
Represent costs incurred for goods and services
used in the process of earning revenue. Direct
expenses for an MFI include
Financial costs Administrative expenses
Provision for loan impairment
An income statement
Relates to a balance sheet through the transfer of cash donations and net profit (loss)
as well as depreciation, and in the relationship between the provision for loanimpairment and the impairment loss allowance.
Uses a portfolioreports historical default rates (and the current impairment loss
allowance) to establish the provision for loan impairment.
Relates to a cash flowstatement through the net profit/loss as a starting point on
the cash flow (indirect method).
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Starts at zero for each period (in contrast to the Balance Sheet which is cumulative
since the beginning of the organizations operation).
Cash Flow Statement
A cash flow statement shows where an institutions cash is coming from and how it isbeing used over a period of time.
A cash flow statement
Classifies the cash flows into operating, investing and financing activities.
oOperating activities: services provided (income-earning activities).
oInvesting activities: expenditures that have been made for resources intended to
generate future income and cash flows.
oFinancing activities: resources obtained from and resources returned to theowners, resources obtained through borrowings (short-term or long-term) as
well as donor funds.
Can use either
oThe direct method, by which major classes of gross cash receipts and gross cash
payments are shown to arrive at net cash flow (recommended by IAS)
oThe indirect method, works back from net profit or loss, adding or deducting
noncash transactions, deferrals or accruals, and items of income or expense
associated with investing and financing cash flows to arrive at net cash flow.
Note: The Balance Sheet and Income Statement are accounting reports. The figures can be influenced by managements choices
regarding accounting policies. A Cash Flow Statement cannot be changed by any accounting policy.
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Portfolio Report and Activity Report
A portfolio report and activity report link the loan portfolio information of the three
previously discussed statementsincome statement, balance sheet, and cash flow. The
purpose of the portfolio report is to represent in detail an MFIs microlending activity,
present the quality of the loan portfolio, and provide detail on how the MFI has
provisioned against potential losses. Unlike other statements, the design of this report
varies from MFI to MFI. The content, however, should be consistent and must include
the following:
Portfolio activity information,
Movement in the Impairment Loss Allowance, and
A Portfolio Aging Schedule.
Non-Financial Data Report
In addition to the information collected in the preceding reports, important operationaland macroeconomic data must be captured to calculate key financial ratios. In order toprovide tools that will give managers and others a complete picture of an MFIs financial
condition, the non-financial data report includes data on products and clients served bythe institution, as well as data on the resources used to serve them.
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Formatting Financial Statements
Most MFIs depend on donor funds but do not realize to what extent and that donor money
is not limitless. We want to create financial statements that will show the impact of donor
funds on the MFIs financial position and its relationship to sustainability.
So whats different ? INCOME STATEMENT
Donor funds are treated below the line.Donor money is recorded after the net income (after taxes before donations).
BALANCE SHEET There are three separate sources of equity from the income statement:Retained earnings/lossescurrent year (minus cash donations)Donationscurrent yearOther equity accounts including net nonoperating income
This is important because it allows one to see over time the proportion of equity that
is from the MFI itself versus the amounts contributed by donors.
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Three Ways in Which MFIs Treat Cash Donations
Goals: 1. Grants are separated from operating income
2. Grants are fully disclosed in equity
IAS 20 Recommends Income approach
Considerations: Where to record them
When to record them
Income Statement Balance Sheet
Operating Profit/Loss Liabilities
All Cash Grants/Donations Equity
...for current year
Assets
DonationsCurrent year
Operating Profit/Loss Liabilities
Grants for Operations
Grants for Loan Funds
Grants for Fixed Assets
...for current year
Assets
EquityDonations
Current year
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Sample Income Statement
Financial Revenue Operating Expense
Financial Revenue from Loan Portfolio Personnel ExpenseInterest on Loan Portfolio Administrative Expense
Fees and Commissions on LoanPortfolio
Depreciation and Amortization Expense
Financial Revenue from Investments Other Administrative Expense
Other Operating Revenue Net Operating Income
Financial Expense Net Non-operatingIncome/(Expense)
Financial Expense on Funding
Liabilities
Non-operating Revenue
Interest and Fee Expense on Deposits Non-operating Expense
Interest and Fee Expense on
Borrowings
Net Income (Before Taxes and
Donations)
Other Financial Expense TaxesNet Financial Income Net Income (After Taxes and Before
Donations)
Impairment Losses on Loans Donations
Provision for Loan Impairment Donations for Loan Capital
Value of Loans Recovered Donations for Operating Expense
Net Income (After Taxes and
Donations)
Source: SEEP Framework, 2005
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Sample Balance Sheet
ASSETS Accounts Payable and Other Short-term
LiabilitiesCash and Due from Banks Long-term Time Deposits
Trade Investments Long-term Borrowings
Net Loan Portfolio Other Long-term Liabilities
Gross Loan Portfolio Total Liabilities
Impairment Loss Allowance EQUITY
Interest Receivable on Loan Portfolio Paid-In Capital
Accounts Receivable and Other Assets Donated Equity
Other Investments Prior Years
Net Fixed Assets Current Year
Fixed Assets Retained Earnings
Accumulated Depreciation andAmortization
Prior Years
Total Assets Current Year
LIABILITIES Reserves
Demand Deposits Other Equity Accounts
Short-term Time Deposits Adjustments to Equity
Short-term Borrowings Total Equity
Interest Payable on Funding Liabilities Total Liabilities + Equity
Source; SEEP Framework, 2005
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Financial analysis is required for many financialmanagement decisions:
How to manage the finances to achieve the strategic goals of the institution
How to increase profitability
How to reach self-sufficiency/breakeven point
How to increase efficiency especially reducing the cost per client
What is the optimum level of each different operational expense including the cost of funds
How to manage the costs of human resources as part of overall human resource management
How to deal with the effect of inflation
What is the loan impairment allowance policy
What is the write-off and rescheduling policyWhat interest rate should the MFI charge on products?
How to manage liquidityi.e., how to keep solvent at the same time as disbursing the maximum
number of loans, setting a target level of liquidity
What is the best financing structure, i.e., how much debt including from commercial sources and
how much capital do you need?
What should the asset structure be?
How to manage the fixed assets, i.e., the depreciation policy, how to finance them, are they insured,
are they safe?
What are currency risks and can they be minimized?
How to undertake trend analysis and to compare actual performance against planned performance
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Indicators for Financial Analysis
An MIS is created to generate information for decision making, the best
information for that purpose is in the concise form of a financial or management
indicator.
Waterfield and Ramsing, p. 39.
Indicators generally compare two or more pieces of data, resulting in a ratio that providesmore insight than do individual data points.
Sustainability and Profitability
Operational Self-Sufficiency
Financial Self-Sufficiency
Return on Assets (ROA)
Adjusted Return on Assets (AROA)
Return on Equity (ROE)
Adjusted Return on Equity (AROE)
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Asset/Liability Management
Yield on Gross Portfolio
Portfolio to Assets
Cost of Funds Ratio
Adjusted Cost of Funds Ratio
Debt to Equity
Adjusted Debt to EquityLiquid Ratio
Portfolio Quality
Portfolio at Risk (PAR) Ratio
Adjusted Portfolio at Risk (PAR) Ratio
Write-off Ratio
Adjusted Write-off Ratio
Risk Coverage RatioAdjusted Risk Coverage Ratio
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Efficiency and Productivity
Operating Expense Ratio
Adjusted Operating Expense Ratio
Cost per Active Client
Adjusted Cost per Active Client
Borrowers per Loan Officer
Active Clients per Staff MemberClient Turnover
Average Outstanding Loan Size
Adjusted Average Outstanding Loan Size
Average Loan Disbursed
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Portfolio Quality
Portfolio at Risk (PAR) and the Write-off Ratio are the preferred ratios for analysingportfolio quality. The other ratios are more limited as noted in the measurement columnbelow.
INDICATOR RATIO MEASUREMENT
(R9)
Portfolio at Risk
PARBy Age
Adjusted PAR Ratio
Unpaid Principal Balance of all loans with
payments > 30 Days past due + Value ofRenegotiated Loans
Gross Loan Portfolio
Adjusted Unpaid Principal Balance of all loans
with payments > 30 Days past due + Value of
Renegotiated LoansAdjusted Gross Loan Portfolio
The most acceptedmeasure of portfolio
quality. The mostcommon international
measurements of PAR are> 30 days and > 90 days.
But can vary with termsof loan.
The adjusted PAR reducesthe Gross Loan Portfolio
by the Write-offAdjustment.
Write-Off Ratio
Adjusted write offratio
Value of Loans Written OffAverage Gross Loan Portfolio
Value of Loans Written Off + Write-off
AdjustmentAverage Adjusted Gross Loan Portfolio
Represents the percentageof the MFIs loans that hasbeen removed from the
balance of the gross loanportfolio because they are
unlikely to be repaid. MFIs
write-off policies vary;managers are
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recommended to calculatethis ratio on an adjusted
basis.
Risk Coverage Ratio
Adjusted riskcoverage ratio
Impairment Loss AllowanceUnpaid Principal Balance of all loans with
payments > 30 Days past due
Adjusted Impairment Loss AllowanceAdjusted Unpaid Principal Balance of all loans
with payments > 30 Days past due Write-offAdjustment
Shows how much of theportfolio at risk is covered
by the MFIs ImpairmentLoss Allowance.
The adjusted ratioincorporates theImpairment Loss
Allowance Adjustment andthe Write-off Adjustment.
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Calculating Portfolio at Risk ratios
Ref. DESCRIPTION
R9 Portfolio at Risk
aPAR > 30 Days
b Value of Renegotiated Loans
c a + b
d Gross Loan PortfolioR9 PAR Ratio = c/d
Adj R9 Adjusted Portfolio at Risk Ratio
aAdjusted PAR > 30 Days
b Value of Renegotiatedc a + b
d Adjusted Gross Loan Portfolio
Adj R9 Adjusted PAR Ratio = c/d
R10 Write-off Ratioa
Value of Loans Written-off
b Average Gross Loan Portfolio
R10 Write-off Ratio = a/b
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Adj R10 Adjusted Write-off Ratio
aValue of Loans Written-off + Write-off Adjustment
b Average Adjusted Gross Loan Portfolio
Adj R10 Adjusted Write-off Ratio = a/b
R11 Risk Coverage Ratio
aImpairment Loss Allowance
b Portfolio at Risk > 30 days
R11 Risk Coverage Ratio = a/b
Adj R11 Adjusted Risk Coverage Ratio
aAdjusted Impairment Loss Allowance
b Adj PAR > 30 days - Write-off Adjustment
Adj R11 Adjusted Risk Coverage Ratio = a/b
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Rationale for Loan Loss Impairment and
Impairment Loss AllowanceMaintaining loans on the books that are unlikely to be repaid overstates the value of the
portfolio.
IMPAIRMENT LOSS ALLOWANCE
is an account that represents the amount of outstanding principal that is not expected tobe recovered by a micro-finance organisation
it is a negative asset on the Balance Sheet and reduces the Gross Loan Portfolio. (An
alternative presentation is to show it as a liability.)
PROVISIONFOR LOAN IMPAIRMENT
is the amount expensed on the Income and Expenses Statement.
It increases the Impairment Loss Allowance
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LOAN LOSSES or WRITE-OFFs
occur only as an accounting entry. They do not mean that loan recovery should notcontinue to be pursued.
They decrease the Impairment Loss Allowance and the Gross LoanPortfolio
Accounting for Loan Loss Impairment and Write-OffsAn impairment loss allowance indicates the possibility that an asset in the Balance Sheet is not 100%
realizable. The loss of value of assets may arise through wear and tear such as the depreciation of
physical assets, loss of stocks, or unrecoverable debts.
The provision for loan impairment expenses the anticipated loss of value in the portfolio gradually over
the appropriate periods in which that asset generates income, instead of waiting until the actual loss of
the asset is realized.
Provisions are only accounting estimates and entries, and they do not involve a movement of cash, like
saving for a rainy day.
A provision for loan impairment charged to a period is expensed in the Income Statement. The
corresponding credit accumulates over time in the Balance Sheet as an allowance shown as a negative
asset:
The accounting transaction is:
Dr Provision for loan impairment
Cr Impairment loss allowance
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Loan losses or write-offs occur when it is determined that loans are unrecoverable. Because the
possibility that some loans would be unrecoverable has been provided for in the accounting books through
allowances, loan losses are written off against the impairrment loss allowance and are also removed from
the gross loan portfolio.
The accounting transaction is:
Dr Impairment loss allowance
Cr Gross loan portfolio
Write-offs do not affect the net portfolio outstanding unless an increase in the impairment loss allowance
is made. When write-offs are recovered, they are booked in the Income Statement as Value of Loans
Recovered which reduces the Provision amount.
Adapted from: Joanna Ledgerwood. Financial Management Training for Microfinance Organizations, Calmeadow, 1996.
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Analytical Adjustments
Adjustments are additional, or hidden, costs incurred by the MFI that we need to recognize
for internal management purposes, for example, when calculating and analyzing efficiency
and profitability ratios. They are not to be included in the audited financial statements;
they are internal adjustments.
Which costs does an MFI incur that are not reflected in the expenses?
SubsidiesInflationPortfolio at risk
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REF. ACCOUNTNAME
EXPLANATION FORMULA
1. Subsidies
A1Subsidized
Cost of Funds
Examines the difference between
an MFIs financial expense and thefinancial expense it would pay if all
its funding liabilities were priced atmarket rate.
{(Average Short-term
Borrowings + Average Long-termBorrowings) x Market Rate for
Borrowing} Interest and FeeExpense on Borrowings
A2 In-kind Subsidy
The difference between what the
MFI is actually paying for adonated or subsidized good or
service and what it would haveto pay for the same good or
service on the open market..Common examples of these in-kind subsidies are computers,
consulting services, free officespace, and free services of a
manager.
Period Estimated Market Cost of
[Accounts] Period Actual Costof [Accounts]
2. Inflation
A3 Inflation
The rationale behind the inflationadjustment is that an MFI should,
at a minimum, preserve the value
of its equity (and shareholdersinvestments) against erosion due
to inflation. In addition, thisadjustment is important to
consider when benchmarkinginstitutions in different countriesand economic environments.
Unlike subsidy adjustment,recording an inflation adjustment
(Equity, Beginning pg Period x
Inflation Rate) (Net FixedAssets, Beginning pf Period x
Inflation Rate)
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is common in many parts of theworld and is mandated by Section
29 of the International AccountingStandards (IAS) in high inflationeconomies.
3. Portfolio at Risk
A4Impairment
Loss Allowance
Intended to bring as MFIsImpairment Loss Allowance in line
with the quality of its Gross LoanPortfolio.
Gross Loan Portfolio x [Allowance
Rated] (Impairment LossAllowance)
A5 Write-off
Intended to identify loans on anMFIs books that by any
reasonable standard should bewritten-off. This adjustment can
significantly reduce the value ofan MFIs assets if persistent
delinquent loans are not counted
as part of the gross loanportfolio.
Portfolio at Risk > 180 days
Calculating Adjustments
DESCRIPTION
A1Adjustment for SubsidizedCost of Funds
a. Average Short-term Borrowings
b. Average Long-term Borrowings
c. Average Loang and Short Term Borrowings
d. Market Rate, End of Period
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e. Market Cost of Funds = c x d
f. Interest and Fee Expense on Borrowings
g. Adjustment for Subsidized Cost of Funds =e - f
A2Adjustment for In-kindSubsidies
a. Personnel Expense
b. Administrative Expense
c. Adjustment for In-kind Subsidies = a + b
A3 Inflation Adjustment
a. Equity, Beginning of Periodb. Inflation Rate
c. Inflation Adjustment to Equity = (a x b)
d. Net Fixed Assets, Beginning of Period
e. Inflation Adjustment to Fixed Assets = (d x b)
f. Net Adjustment for Inflation = c - e
A4Adjustment for ImpairmentLoss Allowance
a. Adjusted Impairment Loss Allowance
b. Actual Impairment Loss Allowance
c. Adjustment to Impairment Loss Allowance = a - b >0
A5 Adjustment for Write-off
PAR > 180 days Past Due
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Asset /Liability Management
Asset/ Liability Management is the ongoing process of planning, monitoring andcontrolling the volumes, maturities, rates and yields of assets and liabilities. The basis offinancial intermediation is the ability to manage assets (the use of funds) and liabilities(the source of funds). Asset/liability management is required on the following levels:
Interest Rate Management: The MFI must make sure that the use of funds generates
more revenue than the cost of funds.Asset Management: Funds should be used to create assets that produce the most
revenue (are most productive).
Leverage: The MFI seeks to borrow funds to increase assets and thereby increase
revenue and net profit. The term leverage indicates the degree to which an MFI is usingborrowed funds. At the same time, the MFI must manage the cost and use of itsborrowings so that it generates more revenue than it pays in Interest and Fee Expenseon those borrowings.
Liquidity Management: The MFI must also make sure that it has sufficient fundsavailable (liquid) to meet any short-term obligations.
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Asset/Liability Management Ratios
Interest rate management
Yield on gross
Portfolio
Cash Received from Interest, Fees and
Commissions on Loan PortfolioAverage Gross Loan Portfolio
Yield gap
100% - Cash Revenue from Loan Portfolio
Net Loan Portfolio x Expected Annual Yield
Cost of Funds
Financial Expense on Funding Liabilities(Average Deposit + Average Borrowing)
Adjusted Cost of
Funds
Adjusted Financial Expense on FundingLiabilities
(Average Deposit + Average Borrowing)
Asset Management
Portfolio toAssets
Gross Loan PortfolioAssets
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Leverage
Debt/Equity
Adjusteddebt/Equity
Liabilities
Equity
LiabilitiesAdjusted Equity
Liquidity Management
Current Ratio
Cash + Trade InvestmentsDemand Deposit + Short-term TimeDeposit + Short-term Borrowing +
Interest Payable on Funding Liabilities +Accounts Payable and Other Short-term
Liabilities)
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Calculating Asset/Liability Management Ratios
Ref. DESCRIPTION
R4 Yield on Gross Portfolio Ratio = a/ba Cash Received from Interest, Fees,and Commissions on Loan Portfolio
b Average Gross Loan Portfolio
R4 Yield on Gross Portfolio Ratio = a/b
R5 Portfolio to Assets Ratio
a Gross Loan Portfolio
b Assets
R5 Portfolio to Assets Ratio = a/b
R6 Cost of Fund Ratio
a Financial Expenses on Funding Liabilities
b Average Deposits
c Average Borrowings
d b + cR6 Cost of Fund Ratio = a/d
Adj
R6 Adjusted Cost of Fund Ratio
a Adjusted Financial Expenses on Funding Liabilities
b Average Deposits
c Average Borrowingsd b + c
Adj
R6 Adjusted Cost of Fund Ratio = a/d
R7 Debt to Equity Ratio
a Liabilities
b Equity
R7 Debt to Equity Ratio = a/b
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Adj
R7 Adjusted Debt to Equity Ratio
a Liabilities
b Adjusted Equity
AdjR7 Adjusted Debt to Equity Ratio = a/b
R8 Liquid Ratio Ratio
a Cash
b Trade Investments
c a + b
d Demand Depositse Short-term Deposits
f Short-term Borrowings
g Interest Payable on Funding Liabilities
h Account Payable and Other Short-term Liabilities
i d + e + f + g + h
R8 Liquid Ratio Ratio = c/i
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Efficiency and Productivity
Efficiency is related to Productivity in terms of serving clients and keeping costs low.
RATIO FORMULA EXPLANATION
Operating Expense
Ratio
Adjusted OperatingExpense Ratio
Operating Expense
Average Gross Loan Portfolio
Adjusted operating Expense
Average Adjusted Gross Loan Portfolio
Highlight personnel and
administrative expenses relative to
the loan portfolio the mostcommonly used efficiency indicator.
The adjusted ratio usually increasesthis ratio when the affect of
subsidies are included.
Cost per ActiveClient
Adjusted Cost perActive Client
Operating ExpenseAverage Number of Active Clients
Adjusted Operating ExpenseAverage Number of Active Clients
Provides a meaningful measure ofefficiency for an MFI, allowing it to
determine the average cost ofmaintaining an active client.
The adjusted ratio usually increase
this ratio when the affect ofsubsidies are included.
Borrowers per LoanOfficer
Number of Active BorrowersNumber of Loan Officers
Measures the average caseload of
(average number of borrowersmanaged by) each loan officer.
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Active Clients per
Staff Member
Number of Active Clients
Total Number of Personnel
The overall productivity of the MFIs
personnel in terms of managingclients, including borrowers,
voluntary savers, and other clients.
Client Turnover
Number of Active Clients, beginning ofperiod + Number of New Clients during
period Number of Active Clients, end of
period
Average Number of Active Clients
Measures the net number of clients
continuing to access services duringthe period; used as one
measurement of client satisfaction.
AverageOutstanding Loan
Size
Adjusted Average
Outstanding Loan
Size
Gross Loan PortfolioNumber of Loans Outstanding
Adjusted Gross Loan Portfolio
Adjusted Number of Loans Outstanding
Measures the average outstandingloan balance per borrower. Thisration is a profitability driver and a
measure of how much of each loanis available to clients.
The adjusted ratio incorporates the
Write-off Adjustment.
Average Loan
Disbursed
Value of Loan DisbursedNumber of Loans Disbursed
Measures the average value of each
loan disbursed. This ratio isfrequently used to project
disbursements. This ratio or R17
can be compared to (N12) GNI per
capita.
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Calculating Efficiency and Productivity Ratios
Ref. DESCRIPTION
R12 Operating Expense Ratioa Operating Expense
b Average Gross Loan Portfolio
R12 Operating Expense Ratio = a/b
Adj R12 Adjusted Operating Expense Ratio
a Adjusted Operating Expense
b Average Adjusted Gross Loan PortfolioAdj R12 Adjusted Operating Expense Ratio = a/b
R13 Cost per Active Client Ratio
a Operating Expense
b Average Number of Active Clients
R13 Cost per Active Client Ratio = a/b
Adj R13 Adjusted Cost per Active Client Ratio
a Adjusted Operating Expense
b Average Number of Active Clients
Adj R13 Adjusted Cost per Active Client Ratio = a/b
R14 Borrowers per Loan Officer Ratio
a Number of Active Borrowersb Number of Loan Officers
R14 Borrowers per Loan Officer Ratio = a/b
R15 Active Clients per Staff Member Ratio
a Number of Active Clients
b Total Number of Personnel
R15 Active Clients per Staff Member Ratio = a/b
6 Cli i
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R16 Client Turnover Ratio
a Number of Active Clients, beginning of period
b Number of New Clients during period
c Number of Active Clients, end of period
d Average Number of Active Clients
R16 Client Turnover Ratio = (a+b-c)/d
R17 Average Outstanding Loan Size Ratio
a Gross Loan Portfolio
b Number of LoanOutstanding
R17 Average Outstanding Loan Size Ratio = a/b
Adj R17 Adj Average Outstanding Loan Size Ratio
a Adjusted Gross Loan Portfolio
b Number of LoanOutstanding - Write-off Adjustment
Adj R17 Adj Average Outstanding Loan Size Ratio = a/b
R18 Average Loan Disbursed Ratio
a Value of Loans Disbursedb Number of Loan Disbursed *)
R18 Average Loan Disbursed Ratio = a/b
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Sustainability and Profitability
Profitability and sustainability ratios reflect the MFIs ability to continue operating andgrow in the future.
RATIO FORMULA EXPLANATION
Operational Self-
Sufficiency
_Financial Revenue_
(Financial Expense + Impairment Losses on Loans +
Operating Expense)
Measures how well
a MFI can cover itscosts throughoperating
revenues.
Financial Self-
Sufficiency
_Adjusted Financial Revenue_
(Adjusted Financial Expense + Adjusted Impairment
Losses on Loans + Adjusted Operating Expense)
Measures how wella MFI can cover itscosts taking into
accountadjustments to
operating revenues
and expenses.
Return on Assets
(ROA)
_Net Operating Income - Taxes_
Average Assets
Measures how well
the MFI uses itsassets to generatereturns. This ratio
is net of taxes and
excludes non-operating items
Adj t d R t Adj t d N t O ti I T and donations
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Adjusted Return on
Assets (AROA)
_Adjusted Net Operating Income - Taxes_
Average Adjusted Assets
and donations.
Return on Equity
(ROE)
Adjusted Return onEquity (AROE)
_Net Operating Income - Taxes_
Average Equity
_Adjusted Net Operating Income - Taxes_
Average Adjusted Equity
Calculates the rateof return on theaverage Equity for
the period.
Because the
numerator does notinclude non-operating items or
donations and isnet of taxes, theratio is frequently
used as a proxy for
commercialviability.
C l l ti S t i bilit d P fit bilit R ti
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Calculating Sustainability and Profitability Ratios
Ref. DESCRIPTION
R1 Operational Self-Sufficiency Ratioa Financial Revenue
b Financial Expense
c Impairment Losses on Loans
d Operating Expense
e b + c + d
R1 Operational Self-Sufficiency Ratio = a/e
Adj
R1 Financial Self-Sufficiency Ratio
a Financial Revenue
b Adjusted Financial Expense
c Adjusted Impairment Losses on Loans
d Adjusted Operating Expense
e b + c + dAdjR1 Financial Self-Sufficiency Ratio = a/e
R2 Return on Assets (ROA)
a Net Operating Income
b Taxes
c a - bd Average Assets
R2 Return on Assets (ROA) = c/d
AdjR2 Adjusted Return on Assets (AROA)
a Adjusted Net Operating Income
b Taxesc a - b
d Adjusted Average Assets
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d Adjusted Average Assets
Adj
R2 Adjusted Return on Assets (AROA) = c/d
R3 Return on Equity (ROE) = c/da Net Operating Income
b Taxes
c a - b
d Average Equity
R3 Return on Equity (ROE) = c/d
AdjR3 Adjusted Return on Equity (AROE) = c/d
a Adjusted Net Operating Income
b Taxes
c a - b
d Adjusted Average Equity
Adj
R3 Adjusted Return on Equity (AROE) = c/d
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Use of Ratios
Ratio analysis is a financial management tool that enables managers ofmicrofinance institutions to assess their progress in achieving sustainability.
They can help answer two primary questions that every institution involved inmicrofinance needs to ask.
Is this institution either achieving or progressing towards profitability?
How efficient is it in achieving its given objectives?
Taken together, the ratios in the framework provide a perspective on thefinancial health of the lending/savings, and other operations of the institution.
No one ratio tells it all. There are no values for any specific ratio that is necessarilycorrect. It is the trend in these ratios which is critically important.
Ratios must be analyzed together, and ratios tell you more when consistentlytracked over a period of time.