Self-Learning Guide in Microfinance

8/7/2019 Self-Learning Guide in Microfinance

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Copyright @ 2007 by PACAP. All rights reserved.

All Rights Reserved 2007Philippines-Australia Community Assistance Program

If any part of this technokit is used, copied or reproduced, in any formor by any means, one should make the proper attribution to thePhilippines-Australia Community Assistance Program (PACAP).

Published by the Philippines-Australia Community Assistance Program

Prestige Building, Ortigas Avenue, Pasig City, Philippines

ISBN __________________

Printed in the Philippines


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Table of Contents

Introduction 1

Key Terms and Concepts 4

General Organizational Performance 36

Microfinance 55

General Instituttional Types and Sectors 75

Financial Service Institutions 83

Types of Stakeholders 93

Five Elements of Effectiveness 95

17 Microfinance Donors 97

Microfinance Institutions 98

Microfinance Statistics 101

Key Principles of Microfinance 106

Microfinance Models 108


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SELF-LEARNING GUIDEIN M ICROFINANCE 1

Introduction

SAMIAH and NAGA MACARANGCAT, along withtheir seven children, decided to leave Mindanao in2004 to escape from the vicious cycle of hostility andin-fighting between Muslims and Christians. Armedwith nothing but the hope of being able to livepeacefully and the resolve to raise their childrenaccording to the teachings of Allah, they arrived in

Capiz in February of that year.

The Macarangcat couple first heard of PACAP/CRIFI(Philippines-Australia Community Assistance Program/Capiz-Roxas Islamic Foundation Inc.) from otherMuslim settlers and the possible financial assistancethey could get from these agencies to help them getstarted. However, failing to meet the minimum

residency, they were denied on their initial loanapplication. To make matters worse, Naga couldhardly find employment in a predominantly Christiancommunity.

They turned to usurers, as a last recourse, to take outa small loan with a huge interest rate to enable themto start their trading business. Not surprisingly, the

decision would later cost them everything they had.There were days they could not even have one decentmeal. Their children had to stop schooling. They werepushed to dire poverty. According to Samiah, herhusband Naga had practically lost all hope.

But Allah soon came to their rescue. It was the timewhen PACAP granted financial assistance to the Datu


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2 SELF-LEARNING GUIDEIN M ICROFINANCE

Bangkaya Traders Multi-Purpose Cooperative for theirrubber sandal and slipper-making project. Naga

applied for work at the cooperative and was hired asa member of the production team. While he becamegainfully employed, his wife Samiah was selected asone of the beneficiaries of the Capiz-Roxas IslamicFoundation, Inc.

A P____ initial loan from CRIFI made it possible fortheir trading business to take off once again, but this

time, on the right footing. Samiah sells the finishedproducts of the Datu Bangkaya Traders MPC as wellas other dry goods to Christian communities in RoxasCity and in the province of Capiz. Her succeedingloans have enabled her to widen her array of productsto offer, including pants and T-shirts.

With all these things going for them, the Macarangcats

have started to count their blessings. They now enjoythree square meals a day. The couple can even affordto send their children back to school. With the helpof PACAP, CRIFI and Datu, Samiah and Naga nowlead their lives with a brighter and more optimisticoutlook.

Millions of poor people have used microcredit to

fund a new tool, a machine, or a shop in themarketplace, with surprising success. Studies in India,Kenya and the Philippines found that the averageannual return on investments by microbusinessesranged from 117 to 847 per cent. If they are solucrative, why didnt these businesses start sooner?Lack of capital. Poor people either have no money toget started, or have to borrow from loan sharks who


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charge usurious rates that wipe out profits. This iswhat microfinance, or banking for the poor, seeks

to address. Ultimately, its vision is to empower poorpeople to pull themselves out of poverty.

The Year of Microcredit, Human News, 29 September2005)


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Purpose, Target, User and How to Use

The purpose of this module is to equip PACAP

personnel wi th a working knowledge on t he key terms

and concepts as wel l as the var ious stakeholders in the

microfinance industry.It also aims to help them get

started for a more informed evaluation of project

proposals seeking t he agencys financial assistance.

This will be a useful tool for the PACAP staff,

part icularl y project offi cers and evaluators, as wel l as

complementary or administ rati ve staff. They wi l l find

easy-to-understand defini t ion of key concepts and terms

used in microfinance. It also contains practical

information on the various stakeholders in the indust ry.

Key Terms and Concepts

Social Performance

Thi s sect ion contains terms that apply generall y to

understanding, assessing, managing and investing in

social per formance.

Accountability

The principle that individuals and organizat ions

are responsible for their actions and may be

required to explain them t o others.


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Blended Value

The idea that the total value created by an

organization consists of three components:

economic value, social value, and environment al

value.

Code of Conduct

A set of pr incip les indicat ing how an

organization expects its members to act. It isfrequently general, and enforcement is left to

the discret ion of the organizati on.

Code of Et hi cs

A general code that art iculates an organizat ions

values or moral standards, focusing on the dut iesand responsibilities of organization members.

Code of Practice

A set of written rules that dictate measurable

and verif iable operating requirements for

specified activities.

Community Economic Development

A process by which communit ies can ini t iate and

generate their own solutions to their common

economic problems and t hereby bui ld long-term

community capacity and foster the integration


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of economic, social, and environmental

objectives.

Compliance

The act or process of fulfi l l ing internal or

external requirements as set forward in pol icies,

regulations, or guidelines.

Consumer Protect ionGovernment or self-regulation to protect the

r ights and int erests of consumers.

Core Values

Values that are formally ident i fied as important

by an organization and which it attempts toreal ize. These are often ref lected in the

organizations vision or mission statement and

cover i ts relationship wi th those stakeholders

cr i t ical to success. Core values endure over the

long term and provide a constant source of

st rength and mot ivation for an organizat ion and

its employees.

Corporate Social Responsibil i ty (CSR)

The pr incip le that corporat ions have a

responsibility to the local community, broader

society, and the envi ronment . I t may involve the


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integrati on of social value dir ect ly i nt o business

operations or it may refer to philanthropic

act iv i t ies ind i rect ly re la ted to bus iness

operations.

Double Bot tom-Line

A framework for measuring and reporting an

organizations performance against financial

and social standards.

Embeddedness

Integrat ion of the social and ethical account ing,

auditing, and reporting processes into an

organizations operations, systems, and policy

making.

Empowerment

The process of i ndividuals equipping themselves

with the knowledge, skills, and resources they

need in order to change and impr ove the quali t y

of their own l ives.

Fair Trade

A t rading relat ionship based on commitment to

social just ice in whi ch employees and producers

are t reated and pa id in a fa i r manner,

susta inable environmental pract ices are


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fol lowed, and long-term t rade relati onships are

fostered.

Fungibility

The quali t y of money that makes one individual

specimen indistinguishable from another.

Anything used as money (gold, shells, bank

notes) must have this quali ty. The fungibil i ty of

money makes it difficult for lenders to ensurethat borrowers use the loan funds in the way

lenders wish; one way they try to get round

misuse of funds is to lend in kind. Often a

person wil l borrow money for one stated purpose,

but the effect of the loan is to finance another

activity.

Governance

Anything related to the activities of governing

the organizat ion, e.g., board of directors, bylaws,

and so on.

Institutionalization

The integration of processes, procedur es, bel iefs,

values, norms, etc., into an organizations

systems, routines, and culture.


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Mission

The core pur pose of an organizat ion t hat defines

why i t exists, and what i t does for whom.

Mission Al ignment

The alignment of an organizations internal

processes, policies, culture, incentives, and

products and services with its mission.

Mission Dr i ft

The divergence of an organizations activities

and out comes from its mission.

Mission Statement

A formal, wr i t ten expression of an organizati onsmission.

Norms

A shared expectation of behaviour that notes

what is considered culturally desirable and

appropriate. They are prescr ipt ive, but lack the

formal status of rules.

Organizat ional Cult ure

An organizat ions bel iefs, knowledge, att i tudes,

norms, values and customs. I t can be suppor t ive

or unsupport ive of an organizat ions mission and


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can affect employees ability or willingness to

adapt or per form well .

Responsiveness

The responsibil i ty of an organization for i ts acts

and omissions, including the processes of

decision making and the results of these

decisions.

Social Account abi l i ty

The responsibil i t y of an organizati on t o provide

evidence to stakeholders that i ts operations and

per formance are in conformance wi th i ts social

mission and obligat ions.

Social Accounting

The process by which an organizat ion moni tors,

evaluates, and accounts for its social

per formance in relation to i ts aims and those of

its stakeholders.

Social and Ethical Accounting,The variety of approaches related to the

assessment and communication Social and

Ethical Accounting, Auditing, and Reporting

(SEAAR).


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Social and Ethical Performance

The impact of an organizat ion on i ts

stakeholders, particularly in those dimensions

in which they hold the organization account able.

I t refers to the systems and individual behaviour

wi thin an organizati on, as wel l as to the dir ect

and indirect impact of an organizat ions

activities on stakeholders.

Social Audit

An examination of the records, statements,

internal processes, and procedures of an

organization related to its social performance.

I t is undertaken with a view to providing

assur ance as to the quali ty and meaningful nessof the organizations claimed social per formance.

Social Bot tom L ine

The social outcome measur ement that parall els

the financial bottom line. It is equal to the net

social benefi t fr om operations.

Social Capi tal

Socia l resourcesin part icular, t rust ,

reciproci ty, network s, and the shar ing of values

or norms of behaviour which al low a

community or society to funct ion more

effectively.


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Social Entrepreneur

A person who uses entrepreneurial skills to

address social and environmental problems. It

may involve revenue generati on, alt hough this

is not required.

Social Impact

The change in net social welfare due to an

organizations activities. It includes the widerlocal, national, and global communities.

Social-Impact Causal Chain

A model that explains how i mpact is created. I t

begins with organizational inputs, which are

t ransformed via internal processes into outputs.Outputs in turn produce outcomes, and

outcomes produce impacts.

Social Mission

The core social pur pose of an organi zat ion.

Social Object ives

Object ives related to the social mission and t he

corresponding social performance of an

organization.


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Social Performance

The effective translation of an organizations

social mission int o pract ice. Social per formance

is not just about measuring the outcomes, but

also about the actions and corrective measures

that are being taken to bring about those

outcomes.

Social Performance Assessment (SPA)The process by which an organi zat ion measur es

its social performance relative to its social

mission and objectives and to those of key

stakeholders. Measurement may focus at any

of t he steps in t he social impact causal chain.

Social Performance Management (SPM)

The process of t ranslating mission into pract ice,

including setting social objectives, tracking

social per formance and using this informat ion

to improve practice.

Social Rating

An independent assessment of an organizat ions

social per formance using a standardized rat ing

scale. The social rat ing process and rat ing scale

may parallel those used for financial r ati ng.


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Social Report ing

Public disclosur e by an organizat ion of i t s social

performance.

Social Value Added

The increased social value at each stage of a

production or service delivery process. I t can also

refer to the change in net social impact resul t ing

from an organizati ons act ivi t ies.

Social Welfare

The overall well-being of society in general.

Social welfare is improved when the social

benefits of a program, policy, or action exceed

its social costs and vi ce versa.

Stakeholder

An i ndividual or group of individuals who affect

and/or are affected by an organization and its

activities.

Sustainability

The capabil i t y of an organization to sustain i ts

act ivi t ies over the long term, having taken due

account of i ts envi ronmental, social, and human

impacts.


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Sustainabi l i ty Repor t

A formal , wr i t ten repor t d isc los ing an

organizations performance toward the goal of

sustainable development. I t provides a balanced

and reasonable representat ion of the

sustainability performance of the reporting

organization, including both posit ive and

negati ve cont r ibut ions.

Sustainability Reporting

The pract ice of measur ing, disclosing, and being

accountable for organizational performance

towards the goal of sustainable development .

SustainableRefers to having a neut ral or posit ive impact on

the environments abil i ty to sustain itself

indefinitely into the future, and on the health

and well-being of individuals, society, and

communit ies. It also refers to the state of being

economically viable.

Sustainable Development

Meeting needs of the present without

compromising the ability of future generations

to meet their needs.


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Transparency

The openness and willingness to accept public

scrut iny. Transparency exists when there is open

public access to information produced by the

organizati on, when t he information is suff icient

and reliable, and when there exists sufficient

means of communicat ion between the

organization and i ts stakeholders.

Tr iple Bot tom L ine

A framework for measuring and reporting an

organizations performance against financial,

social, and environmental standards.

ValueThe benefit-per-unit cost.

Value Added

The increased value at each stage of a product ion

or service delivery process.

Value-Added Chain

Those act ivi t ies or steps that add to or change a

product or service as it goes through a product ion

process; these are the activities or steps that

customers view as important and necessary.


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Value Proposition

A statement to stakeholders or potential

stakeholders describing how an organization

differentiates itself in the market and what

par t icular values i t del ivers to i ts target market .

Values

Deeply held beliefs within organizations that

may be stated or unstated and which aredemonstrated through the day-to-day

behavi our s of i ts empl oyees.

Vision

Long-term goal of strategy. It answers the

quest ion, H ow would society be different i f ourmission were realized.

Social Investing

Ethical I nvestment

Investment that at tempts to ensure thatinvested funds are not used to violate the

investor s most basic moral values or ethi cal

codes. There is a wide var iety of means to ensure

that invested funds are used ethically, and a

wide range of interpretations of what ethics

mean relative to invest ing.


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Return on I nvestment (ROI)

A return ratio that compares the net benefits

(financial and/or social) of an organizations

activities versus its total costs. As such, ROI

represents the re lat ive value of the

organizat ions cumulat ive net benefi ts (benefi ts

less costs) over the analysis period, divided by

its cumulative total costs, expressed as a

percentage.

Screening

The inclusion or exclusion of clients into an

organizati on using select ion cri ter ia.

Social I nvestmentInvestment that aligns an individuals or an

organizations investment policies with i ts social

values, that is made pr incipal ly for the purpose

of earning a social return.

Social Investor

A person or organization that engages in social

investing.

Socially Responsible Investment (SRI)

Investment that aligns an individuals or an

organizations investment policies with i ts social


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values, that is made principally for the purpose

of earning a financial r eturn.

Social Retur n

The net impact on society resulting from an

organizations operations.

Social Return on Investment (SROI )

Monetary summary of an organizations socialreturn from a capital investment. A term

originating from return on investment (ROI)

used by t radi t ional i nvestors.

Social Screen

The inclusion or exclusion of securities in aninvestment portfolio using social selection

criteria.

Social Vent ur e Capit al

Equi ty investment wi th the goal of social as wel l

as financial return on investments. It is typically

longer term t han a loan, wi th r isk being shared

more equally between the investor and the

organizat ion invested in. Social-vent ur e-capit al

financial r ates of r eturn are oft en not as high as

for convent ional venture capital.


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Strategic Giving

Engaging in phi lanthropy in a st rategic manner

to make a major social impact through maki ng

better choices surrounding how much one

spends, invests, and gives back to society.

Total Return on I nvestment (TROI )

A measur e of t he social impact of double bot tom

line ventures. It is a blend of the social andfinancial return on investment .

User

A non- or for-profit entity that receives a

program-related investment directly from a

funder for use in its programs or ventures.Source: Renz and Massarsky

Venture Philanthropy

Philanthropy that borrows some of the best

pract ices of the ventur e capi tal wor ld to invest

in non-prof i t organizat ions to bui ld their

capacity. Venture phi lanthropists typically value

their donor dol lars in terms of the social r eturn

on i nvestment .


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Social Institutions

Civi l Society

Refers to the totali ty of voluntary civic and social

organizat ions that form the basis of a

functioning society, as opposed to the force-

backed structur es of a state (regardless of that

states pol i t ical system). Civi l society

organizations include non-profit and non-government al organizat ions, organized groups,

clubs, universit ies, tr ade unions, envi ronmental

movements, and indigenous peoples

associations. Civil society can be organized at

the local, national and international level.

Double Bottom-Line Business

Entrepreneurial ventures or investments that

st r ive to achieve measur able social and financial

outcomes. See Social Enterprise.

Mission-Based For-profit Business

See Social Enterprise.

Non-profi t Business Venture



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Social Business

A socially or iented business that seeks to balance

the emphasis between its social and business

int erests. Unl ike a social enterpr ise, it does not

necessari ly al low the social mission t o primari ly

drive operations; however, managers will

conduct business in such a way as to not conf l ict

wi th i t s social object ives.

Social Enterprise

An organizat ion that uses business solut ions to

accompl ish social goals. Social object ives are it s

primary dr iver, rather than being dri ven by the

need to maximize profit for shareholders and

owners. See Double Bottom-Line Business,Social-Pur pose Enterpr ise, Non-profi t Business

Venture, Mission-Based For-profit Business.

Social Organizat ion

An organization with the primary purpose of

pursuing and achieving social object ives.

Social Vent ur e

An earned income strategy that has both

financial and social goals int egral to i ts purpose.

This term is generally used as a synonym for


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social business, although it is sometimes used

to refer specifically to the revenue-generating

arm of a non-profi t organization.

Social Purpose Enterprise


Socially Responsible Business

A for-profi t business that operates in an ethicalmanner and demonstrates concern and action

for the public good.

Social Assessment Methods

Account abi l i ty 1000An evaluation f ramework developed by Uni ted

Kingdom-based AccountAbility to address the

need for organizat ions to int egrate stakeholder

engagement processes int o dail y act ivi t ies. The

framework provides a systemat ic, inclusive, and

credible approach to improving social and ethical

accountability and overall performance. It

provides guidance to users on how to establish

a systematic stakeholder engagement process

that generates the indicators, targets, and

report ing systems needed to ensure i ts


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effectiveness in impacting on decisions,

act iv i t ies, and overal l organizat ional

performance.

Assessment

Evaluat ion act ivi t ies under taken t o determine

how well an organization performs financially,

operationally, and manageriall y. See Evaluat ion.

Assurance

An evaluat ion method that uses a speci fi c set of

principles and standards to assess the quality

of a repor t ing organizat ions subject mat ter, such

as reports, and the organizations underlying

system, processes, and competencies thatunderpin its performance. Assurance includes

the communicat ion of the results of this

evaluation to provide credibility to the subject

mat ter of i ts users.

Balanced Scorecard

A strategic management system that aligns

business act ivi t ies wi th organizational st rategy

and monitors the per formance of strategic goals

over t ime. It proposes that organizations

measure operational performance in terms of

financial, customer, business-process, and


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learning-and-growth outcomes, rather than

exclusively by fi nancial measures, to arr ive at a

more powerful view of near-term and future

performance. It advocates integration of these

outcomes into the organizations strategic

planning processes.

CGAP Pover ty Assessment Tool

An assessment tool designed by theInternational Food Policy Research Institute

(IFPRI) and the Consultative Group to Assist

the Poor (CGAP) to measure the relative poverty

status of microfinance clients.

EvaluationSee Assessment.

Global Repor t ing Ini t iati ve (GRI)

An independent inst i tut ion whose mission is to

develop and disseminate globally applicable,

sustainability reporting guidelines, comprising

158 indicators. These are for voluntary use by

companies and governmental and non-

governmental organizations to report on the

economic, environmental, and social dimensions

of t heir act ivi t ies, products, and services. Started

in 1997 by the Coalition for Environmentally


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Responsible Economies (CERES) and t he Uni ted

Nations Environment Program (UNEP), the

GRI uses a mult i-stakeholder process

incorporat ing the act ive part ic ipat ion of

representatives from business, accountancy,

investment, environmental, human rights,

research, and labour organizations from around

the wor ld.

Impact Assessment

A research act iv i ty under taken wi th the

objective of attributing observed outcomes to

organizat ional act ivi ty. Impact is determined by

the counter factua l . Determin ing the

counterfactual in turn requires comparing at reatment group to a val id cont rol group.

Impact Monitoring

The per iodic or rout ine tr acking of selected client

outcomes. In contrast to impact assessment,

impact moni tor ing does not at tempt to att r ibute

observed impacts to organizational activity.

Impact Moni tor ing System

The integration of impact monitoring into an

organizat ions int ernal processes, rout ines, and

management information systems.


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Par t icipatory Rapid Appraisal (PRA)

A label given to a family of part icipatory

assessment approaches and methods that

emphasize local knowledge and enable local

people to make their own appraisals, analyses,

and plans. PRA uses group animation and

exercises to facilitate information sharing,

analysis, and action among stakeholders.

Although originally developed for use in ruralareas, PRA has been employed successful ly in a

variety of set t ings.

Qualitati ve In-Depth Individual Impact Assessment

Protocol (QUI P)

An assessment method that uses in-depthinterviews of microfinance clients to help MFI

managers bet ter understand them. Designed to

be conducted simply and inexpensively over a

short period of t ime to produce detai led

information about how particular clients feel

about financial services and the impact they

have on t heir l ives.

SEEP-AIMS Tools

A set of pract i t ioner-or iented c l ient-

assessment tools developed joint ly by t he U.S.

Agency for Internat ional Development and the


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SEEP Network. I t includes two quanti tat ive

tools an impact survey and a client exit

surveyand three qualitative toolsclient

satisfaction focus group discussions, client-

empowerment interviews, and loan and

savings use st rategies over t ime int erviews.

Poverty and Outreach

Absolut e Pover ty

The state of subsist ing without a set of minimum

necessi t ies for l iving.

Bankable

People deemed eligible to obtain financialservices that can lead to income generation,

repayment of loans, savings, and the building

of assets.

Breadth of Outreach

The number of persons reached with financial

services.

Client s below pover ty l ine (%)

Percentage cl ient s below poverty l ine (where the

poverty line is defined as population living on

less than US$2/day). Sour ce: The MIX M arket


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Cost of Out reach

The sum of costs to the consumer for financial

services, including financial costs, transaction

costs, and opportunity costs.

Depth of Out reach

The degree to which an organization reaches

poor people wi th fi nancial services.

Ext reme Pover ty

The state of living below an absolute extreme

poverty line. Common extreme poverty lines

include (1) persons in the bottom 50 percent of

those living below the poverty line established

by the nat ional government , or (2) persons li vingon less than US $1.00 per day in daily per-capita

expendi tur esequal to $1.08 per day per capita

in purchasing power par i t ies at 1993 pr ices.

Ext reme Pover ty L ine

The level of annual income below which a person

is defined to be l iving in ext reme pover ty.

Ext remely Poor

Persons fall ing under an ext reme pover ty l ine.


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Gini Index

An index that measures the extent to which the

distribution of income (or in some cases,

consumpt ion expendi ture) among individuals or

households within an economy deviates from a

perfect ly equal distr ibution. A Lorenz curve plots

the cumulative percentages of total income

received against the cumulative number of

recipients, start ing wit h t he poorest indivi dualor household. The Gini index measur es the area

between the Lorenz curve and a hypothet ical l ine

of absolute equality, expressed as a percentage

of the maximum area under the line. Thus, a

Gini index of zero represents perfect equality,

whi le an index of 100 implies per fect inequali ty.

Length of Outreach

The sustainabi l i ty of the supply of microfinance

services.

Low Income

Persons below or just above the poverty line.

Moderately Poor

Persons in the top 50 percent of those living

below the relevant absolute poverty line.


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Non-poor

Persons living above the relevant absolute

poverty line. It may also refer to persons who

are non-poor by relat ive standards.

Outreach

Act ive att empt to target , at t ract , serve, retain

or otherwise interact wi th a cl ientele in selected

populations, geographic areas, or targetedinitiatives.

Poor

Persons who live below the relevant absolute

poverty line. It may also refer to persons who

are poor by relative standards.Poorest of the Poor

Persons who are among the very poorest of all

members of a given society.

Poverty

The state of one who lacks a usual or socially

acceptable amount of money, material

possessions, standard of l iving, or access to basic

needs and/or services. I t may also be defined or

character ized by persons who suffer fr om social,

economic, or polit ical exclusion, marginali zation,

or powerlessness. Two common measures of


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poverty include (1) persons living below the

poverty l ine establ ished by the nat ional

government, or (2) persons living on less than

US $2.00 per day in dai ly per-capi ta

expendi tur esequal to $2.15 per day per capita

in purchasing power parities at 1993 prices.

Pover ty Al leviation

The amelioration of the effects, symptoms, orcauses of poverty on persons, households, or

broader society. I t is oft en used as synonym for

poverty reduction although it may or may not

imply an actual r educt ion in pover ty.

Poverty AssessmentA process whereby the poverty status of an

individual or group is determined. It typically

involves the use of quantitative methods, but

may also use quali tative methods.

Pover ty Gap

The mean shortfal l f rom the poverty l ine

(count ing the non-poor as having zero shor t fal l ),

expressed as a percentage of the poverty line.

This measure reflects the depth of poverty as

well as i ts incidence.


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Poverty Headcount

The total number of rural population living

below the nat ional pover ty l ine.

Pover ty Line

The level of annual income below which a person

is defined to be living in poverty. It is often

calculated as the minimum level of income

needed to secure the necessit ies of l i fe.

Poverty Reduction

The reduction in the number of persons or

households l iving in r elative or absolute pover ty.

It is alternatively defined as an improvement

in t he relati ve income dist r ibuti on between t hepoor and non-poor.

Poverty Lending

Lending in which the focus is on poverty

alleviation and empowerment of vulnerable

groups.

Purchasing Power Par i t ies (PPP)

Currency conversion r ates that both conver t to

a common currency and equalize the pur chasing

power of different currencies. They operate by

eliminating the differences in price levels

between countr ies in the process of conversion.


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Relative Poverty

The state of being poor in comparison to other

members of society.

Scope of Outreach

The number of dist inct types of f inancial

products and services offered.

Standard of L ivingThe level of individual, household, or group well-

being. It is measured by the ability of the

individual, household, or group to acquire goods

and services.

Very PoorSee Ext remely Poor.

Vulnerable Non-poor

Persons living near the absolute poverty line,

but who are vulnerable to falling below the

poverty line.

Worth of Out reach

The value of financial products and services

consumed and the clients willingness to pay.

Value and willingness to pay are a function of

the benefi ts der ived from consumpt ion.


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General Organizational Performance

This sect ion contains terms that apply generall y to

understanding, assessing, managing organizational

performance.

General Assessment

Accounting

The systematic generation, tracking, andanalysis of informat ion about the financial and

social performance of an organization for the

benefi t of i ts stakeholders.

Audit

An examination of the records, statements,

systems, and procedures of an organization

together wi th i t s stated claims for per formance.

This is typically undertaken with a view to

verifying the quality, meaningfulness (e.g.,

accuracy, validity, compliance, inclusiveness,

completeness), and other aspects of t he claimed

performance of t he organizat ion.

Audit Report

A t est imony produced by an audi tor regarding

the qual i ty and meaningfulness of an

organizat ions records, statements, systems, and


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procedures, as well as stated claims for

performance. May also include an opinion on

areas for improvement and predicted future

progress.

Auditor

Person who conducts an audit , oft en cer t i fied by

a professional body or licensed under statute.

The auditor may be internal (employed by theorganization) or external (unconnected to the

organization).

Baseline

A star t ing point against which future changes

are compared. Used for benchmarking.

Benchmark

A measurable variable used as a relative

basel ine or reference in evaluat ing the

performance of an organization. Benchmarks

may be drawn from internal experience, the

experience of other organi zat ions, or fr om legal

requirements.

Benchmarking

The process of putt ing performance

measurements in context by comparing an

organization with similar organizations based

on a common factor, such as region, size or


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methodology. A benchmark can also refer to the

relative standard against which all similar

inst i tut ions are compared.

Best Practice

A technique or methodology that through

experience and research has proven to lead

rel iably to the desired resul t .

Br eak-even point

The point at which the volume of sales or

revenues exactly equals total expensesthe

point at which there is neither a profi t nor loss

under varying levels of act ivi ty. The breakeven

point tel ls the manager what level of output oractivity is required before the firm can make a

profit; reflects the relationship between costs,

volume, and profi ts.

CAMEL

A U.S. Federal Reserve-developed diagnost ic tool

that measures the Capital adequacy, Asset

quality, Management, Earnings and Liquidity

of financial institutions. ACCION adapted the

CAMEL ins t rument to the micro f inance

industry as a quantitative and qualitative

assessment of MFI financial performance.

Source: ACCION


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Causal Model

A model or portrayal of the theorized causal

relationships between concepts or variables.

Conceptual Framework

A systematic structure for classifying and

organizing complex informati on.

Cont rol Group(See Comparison Group)

External Audit

A formal, independent review of an

organizations financial statements, records,

transactions, and operations. External auditsare usual ly performed by professional

accountants in order to lend credibility to

f inancia l statements, to ensure external

accountability and to identify key internal

weaknesses in an organization. The external

audit process is vi tal t o t ransparency.

External Audit or

An audi tor who is independent of the

organization being audited and does not share

any mater ial interest wi th the organizat ion.


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Feedback Loop

A continuous cycle by which information is

processed wi thin an organizat ion. I t start s wi th

the col lect ion of informat ion, passes thr ough to

data consol idation and analysis, and next uses

the data to make, communicate, and implement

decisions.

Fund BalanceNet worth in a nonprofit organization; total

assets minus total l iabi l i t ies. Source: Renz and

Massarsky

Indicator

A piece of qualitative or quant itative informationthat provides meaningful insight into the

performance of organizat ions or their

beneficiaries.

Internal Audit

An independent appraisal of operat ions,

conducted under the direct ion of organizat ional

management, to assess the effectiveness of

internal administ rati ve and account ing cont rols

and help ensure conformance with managerial

policies.


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I nternal Auditor

A person employed wi thin an organization who

conducts an int ernal audit . The internal auditor

is generally independent of management and

repor ts direct ly t o the board of di rectors.

Key Per formance Indicators

A short list of indicators that an organization

has ident i fied as the most impor tant measur esof organizat ional per formance.

Logical Fr amework (logframe)

A matrix articulating what a project aims to

achieve and how, what its main assumptions are,

and what the means of verifying objectivelyver i fiable indicators are.

Metric

A measur ement used for comparison pur poses.

Net Loan Por t fol io

Gross Loan Port foli o less the Loan L oss Reserve.

Sour ce: The MIX M arket

Net Working Capital

Current assets minus cur rent l iabi l i t ies. Sour ce:

Renz and Massarsky


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Net Worth (Fund Balance in non-prof i t

organizations)

Total assets minus total liabilities. Aggregate

net value of the organization. Source: Renz and

Massarsky

Opportuni ty Cost

The potent ial benefi t that is foregone from not

fo l lowing the best ( f inancia l ly opt imal)alternat ive cour se of act ion.

Standard

A widely agreed set of procedures, practices, or

performance outcomes. Standards vary across

a number of dimensions, including process andsubstant ive standards, mandatory and

voluntary standards, and theoretical and best

practice standards.

Taxes

Include all taxes paid on net income or other

measure of profits as defined by local tax

authorities. This item may also include any

revenue tax. It excludes taxes related to

employment of personnel, financial t ransact ions,

fixed-assets purchase or other value-added

taxes. Sour ce: The MIX Market


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Theoret ical Fr amework

A basic conceptual st ructur e organized around

a theory. It often defines the kinds of variables

used to make the theory operat ional .

Total Assets

Total of al l net asset accounts. Sour ce: The MIX

Market

Total Equit y

Total of al l equity accounts, less any

distributions. Sour ce: The MIX Market

Total L iabil it ies and Equit y

The sum of total liabilities and total equity.Sour ce: The MIX M arket

Total L iabi li t ies

Total of all liability accounts. Source: The MIX

Market

Treatment Group

A group of i ndividuals receiving organizati onal

services that is being evaluated or studied. I t is

used to assess the impact of organizational

activities on participants and is necessary to

establ ish att r ibut ion.


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Methods of General Assessment

Benefi t -Cost Analysis

See Cost-Benefit Analysis.

Client Assessment

The process of gathering and assessing

information about clients. Ideally, information

includes clients perspectives and experiences.I t inc ludes quant i ta t ive and qua l i ta t ive

methodologies.

Cli ent Monit or ing

The routine process of tracking changes in

cl ients status or of provid ing important

descr ipt ive informati on about cl ients. It may be

quanti tat ive or qual it at ive in natur e.

Cost -Benefi t Analysis

A type of economic analysis in which the costs

and benefi ts, both tangible and intangible, of an

investment , pol icy, program, or organization areexpressed in monetary terms and assessed

according to one or more of three measures: (1)

net present value, (2) cost -benefi t ratio, and (3)

internal rate of return. See Benefi t-Cost

Analysis.


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Cost-Benefi t Rat io

The discounted value of benefi ts divided by the

discounted value of costs.

Internal Rate of Return

The discount or interest rate at which the net

present value of a cash-flow stream is equal to

zero.

Monetization

An approach to measurement that converts

input s, outputs, outcomes, or impacts into dol lar

values.

Net Present ValueThe future stream of benefi ts and costs

converted into equivalent values today. This is

done by assigning monetary values to benefits

and costs, discount ing fut ur e benefi ts and costs

using an appropr iate d iscount rate, and

subtracting the sum total of discounted costs

fr om the sum total of discounted benefi ts.

Sensit ivit y Analysis

Analysis of how sensitive analytical outcomes

are to changes in under lying assumpt ions. The

assumptions that deserve the most attention


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depend largely on the dominant benefi t and cost

element s and the areas of greatest uncer tainty

of t he organi zat ion or process being analyzed.

General Organizational Performance

Act ive Clients

The number of clients with loans outstandingon any given date. An institutions official

statist ics on act ive cl ient s are usuall y recorded

as the number of cl ient s wi th loans out standing

on the date its financial statements are filed.

Source: ACCION

Active Loan Portfolio

The total amount loaned out less the total

amount of repaid loans; i.e., all money that is

on t he st reet or owed to the inst i tut ion in t he

form of loans on the date the report is filed.

Source: ACCION

Bad Debt

A debt that is not collectible and is therefore

worthless to the creditor. Source: Renz and

Massarsky


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Borrowers per Staff Member

Number of Active Borrowers / Number of

Personnel. Sour ce: The MIX M arket

Client Dropout

The share of an organizat ions cl ient s that ceases

to purchase its products or services.

Client RetentionThe share of an organizations clients that

cont inue to purchase its products or services. See

Customer Retention.

Client Satisfaction

An organizational measure of the extent towhich the needs, wants, and expectations of

cl ient s are met. See Customer Satisfact ion.

Effectiveness

The degree to which an organizat ion is

successful in achieving a speci fi ed goal.

Efficiency

The extent to which maximum output is

achieved from a given input. Alternatively, a

minimum input for a given output.


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Goal

The end result of ultimate accomplishment

toward whi ch an effort is directed. Goals provide

purpose and direction to an organization and

thus must be capable of being effect ively pursued

and measur ed.

Goal Al ignment

The process of evaluat ing whether operationaloutputs, outcomes, or impacts meet

organizational goals and determining what can

be done to bet ter achi eve those goals.

Impact

Those organizational outcomes that can beattributed to the activity of the organization

above and beyond what would have happened

anyway.

Input

Resource used to implement an act ivi ty,

including money, people, time, facilities, and

equipment.

Intermediate Outcome

An outcome from an act ivi ty that can be

ident i f ied and measured in the medium-

term,which is pract ica l when long- term


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Objective

A measurable statement about the end result

that an organizat ion is expected to accompl ish

in a given period of time. Objectives flow from

goals, the purpose of an organization, or the

organizations overall mission.

Outcome

The change to the client population and itsenvi ronment t he organizat ion is t rying to make,

which could include attitudes, behaviours,

knowledge, skil ls, status, or socio-economic well-

being. (I f outcomes can be statist ically att r ibuted

to the organizations activities, they become

impacts.)

Output

The measurable product of an organizations

activities delivered to external beneficiaries.

Outputs are the tangible results of applying

inputs and under taking act ivi t ies.

Performance Management

The process of translating an organizations

mission into practice, which includes setting

social objectives, tracking social performance

and using this information to improve pract ice.


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Por t fol io at Risk > 30 days

The value of al l loans out standing that have one

or more instal lments of pr incipal past due more

than 30 days. This includes the entire unpaid

principal balance, including both the past due

and future instal lments, but not accrued

interest . I t does not include loans that have been

restructured or rescheduled. Source: The MIX

Market

Port fol io at Risk

Measur ement of t he total out standing balance

of loans past due - not late payments or

payments not yet due - divided by the active

por t fol io. A more r igorous manner of assessingport fo l io qual i ty than port fo l io past due/

delinquent portfolio. Sour ce: ACCION

Portfolio

A combinat ion of assets held for i ts investment

benefits, including financial and non-financial

returns. The asset mix is usually vari ed in kind

and size to maint ain an acceptable level of r isk

and return. Sour ce: Renz and Massarsky

Strategic Goal

See Strategic Object ive.


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Strategic Ini t iati ve

A specific activity or action undertaken to

achieve a strategic goal, i ncluding the plans and

milestones.

St rategic Object ive

An elaboration of the mission statement that

develops with greater specif icity how the

organization will carry out its mission. Theobjective may be of a programmatic, policy, or

management nature, and is expressed in a

manner that allows a future assessment to be

made of whether the objective was or is being

achieved. See Strategic Goal.

St rategic Plan

A document used by an organizati on t o ali gn i ts

organizat ion and budget s t ructure wi th

organizati onal pr ior i t ies, mission, and st rategic

objectives.

Strategic Targets

The numbers to achieve on each strategic

object ive by a specifi ed t ime.


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Target

A quantitative measurement of a performance

object ive that is to be achieved by a given t ime.

Target ing Tool

A marketing tool used to identify and extend

products or services to an organizations target

market or markets

Transact ion Costs

Imputed costs from organizational operations

and activities in relation to client services and

other organizat ional in teract ions (e.g. ,

Processing fees). Source: Calmeadow

Willingness to Pay

The amount a consumer wi l l pay for a par t icular

quantity of a good or service. In consumer

demand t heory, wi l l ingness to pay automat ically

implies ability to pay. In contemporary social

science writing, ability to pay is sometimes

cont rasted with wi l l ingness to pay. The impl ici t

assumpt ion here is that even t hough people are

willing and actually do pay a certain amount,

they lack the abi l i t y to pay because they should

have spent this money on something else.

Buying the good (e.g., water ) resul ts in a loss of


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consumption of some other good or service and

places the purchasers further below some

socia l ly def ined minimum-consumpt ion

standard. Source: Vi r tual L ibrary on Microcredi t

Microfinance

This sect ion contains terms re levant to

understanding microfinance and placing social and

general per formance terms inn a microfinance cont ext

Types of Microfinance Institutions

Accumulating Credit and Savings Association

(ASCA)

Informal savings groups that resemble rotating

credit and savings associations, but are sl ight lymore complex. In an ASCA, all members

regularly save the same fixed amount while

some participants borrow from the group.

Interest is usually charged on loans. ASCAs

require bookkeeping because the members do

not al l t ransact in the same way. Some members

borrow while others are savers only, and

borrowers may borrow different amounts on

different dates for different per iods. I f members

pay interest on t heir loans, the return t o savings

has to be individually calculated and fairly

shared among the group.


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Alt ernat ive Financial I nst it ut ion (AFI)

All types of financial institutions that offer

financial services to low-income or persons

otherwise excluded from formal f inancial

services. It includes microfinance institutions,

rural banks, state/agricultural development

banks, and postal banks. The common thread

binding alternative financial institutions and

microfinance institutions is the pursuit of adouble bot tom l ine.

Apex Inst i tut ion

A wholesale lending inst itut ion operating within

a single country or integrated market that

channels funds, with or without technicalassistance or other support ing services, to retail

microfinance inst i tut ions.

Development Bank

Generally country-owned and state-based, these

banks offered agr icul tural credit or iginall y and

have moved to offer microfi nance services.

Microfinance I nst i tut ion (MFI )

A financial inst i tut ion specializing in providing

financial services to low-income persons or to

persons otherwise systemat ically excluded fr om


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formal financial services. It may also offer

business development or other non-financial

services. I t includes non-governmental

organizations, cooperatives, credit unions, non-

bank financial institutions, and commercial

banks.

Microfinance Non-governmental Organization

(microfinance NGO)A non-governmental organization that offers

financial services to it s cl ient s.

Non-bank Financial I nst it ut ion (NBFI )

An inst i tut ion that provides simi lar services to

those of a commercial bank, but is l icensed undera separate legal author ity or regulation that may

requir e lower capital r equir ements, limi tations

on financial service offerings, or supervision

under a dif ferent regulatory body.

(ROSCA)

An informal savings and credit group. I t

operates through a commitment of group

members to cont r ibute per iodic fi xed sums to a

common savings fund that is lent in succession

to all group members based on pre-existing

distribution rules. Once one group member


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repays the loan, the fund is re-lent to another

group member. This process cont inues unt i l each

group member has had the opportunity to

borrow the fund amount. The process differs

from an accumulating savings and credit

association in that all group members receive

loans.

TransformationThe conversion of a non-regulated microfinance

inst i tut ion into a regulated microf inance

institution.

Transformed Microfinance Inst i tut ion

A microfinance inst i tut ion that has t ransformeditsel f fr om a non-regulated financial inst i tut ion

into a financial inst itut ion that is author ized and

supervised by the nat ions supervisory

authorities.

Vil lage Bank

A loan group made up of approximately 2030

people (typically women) drawn from the same

communi ty and operating under a joint l iabi l i t y

arrangement. Vi l lage banks are semi-

autonomous organizations with an elected

leadership drawn from group members who


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manage the operation of t he vi l lage bank wi th

monitor ing by a representative of the sponsor ing

microfinance institution.

MicroFinance Products and Services

Business Development Services

Non-f inancial services offered tomicroenterprises that have the objective to

increase product ivi ty, compet i t iveness, and job

creation. They include, for example, training,

capacity development, market ing, account ing, or

strategic planning.

Compulsory Savings

Savings payments that are required as part of

loan terms or as a requi rement for membership,

usual ly in a credi t union, cooperat ive,

microfinance inst itut ion, vil lage bank, or savings

group. Compulsory savings are often required

in place of col lateral. The amount , t iming, andlevel of access to these deposit s are determined

by the pol icies of t he inst i tut ion r ather than by

the client. Compulsory savings policies vary:

deposits may be required weekly or monthly

before the loan is disbursed, when the loan is

disbursed, and/or each time a loan installment


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is paid. Cl ient s may be allowed to wi thdraw at

the end of the loan term; after a set number of

weeks, months or years; or when t hey terminate

their memberships. See Forced Savings.

Forced Savings

See Compulsory Savings.

Group GuaranteeA loan guarantee based on joint l iabil i ty in which

each group member who receives a loan pl edges

to guarantee the loans of all other group

members. I f one member of t he group defaul ts,

the remaining group members are responsible

either for enforcing loan repayment by thedefaul t ing member or for paying of f the

out standing loan balance.

Group Lending

Lending mechanism that allows a group of

individualsoften called a sol idar i ty groupto

provide col lateral or loan guarantee through a

group repayment pledge. The incent ive to repay

the loan i s based on peer pressur eif one group

member defaults, the other group members

make up the payment amount .


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Group L oan

A loan extended to a group of persons under a

joint l iabil i ty arrangement . It is generally shor t-

term, relati vely small in size, and not t ied to any

speci fi c investment act ivi ty.

Guarantee Fund

A fund that can provide an organizati ons ini t ial

access to the formal fi nancial sector, st rengthenthe organizations capabilities as financial

intermediari es, and provide impor tant leverage

in terms of lending capabil i ty. See Br idge Fund.

Guaranteed Loan

A pledge to cover the payment of debt or toper form some obli gation i f t he person l iable fai ls

to perform. When a third party guarantees a

loan, it promises to pay in t he event of a defaul t

by the borrower.

Joint Li abil it y

A method of providing guarantees for loans in

which members of a loan group agree to joint ly

guarantee the loans of al l group members. If one

member of the group defaults, the remaining

group members are responsible either for

enforcing loan repayment by the defaulting


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member or for paying off the out standing loan

balance.

Microfranchising

A business approach designed to assist

individuals to be more successful as independent

ent repreneurs. The impetus behind t he idea is

to provide sound business opportunities and

services to the poor by int roducing scaled-downbusiness concepts drawn from successful

commercial fr anchi se businesses.

Microinsurance

A sub-sector of microfinance that provides

insurance products to micro- and smal l businessowners, their employees, and low-income

persons.

Microleasing

A sub-sector of microfinance that provides small-

scale leasing. I n one microleasing arrangement ,

the lessee (cl ient ) goes to an equipment suppl ier,

chooses the needed equipment, and negotiates

the price and terms of delivery. Then, rather

than approaching a bank for a loan, the lessee

approaches a lessor (MFI) or the equipment

provider itself. The lessor evaluates the lease


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appli cation and, if i t is approved, the two par t ies

sign a lease contract. The lessor purchases the

equipment fr om t he supplier and leases i t to the

lessee for a period that is usually close to the

est imated economic l i fe of t he asset . Dur ing this

period (the lease term), the lessee uses the

equipment and makes regular payments to the

lessor. I n many cases, the lessee has the opt ion

to buy the equipment fr om the lessor at the endof t he lease term.

Microsavings

Small-scale savings deposits mobilized by

microf inance inst i tu t ions, o f ten wi thout

minimum balance requirements.

Peer Lending

Lending methodology that relies on the peer

pressur e of group members to act as a guarantee

in place of more traditional forms of collateral

and credit scor ing.

Remittances

Transfers of funds from people in one place to

people in another. Compared with other sour ces

of money that can fluctuate depending on the


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pol i t ical or economic cl imate, remi t tances are a

relat ively steady sour ce of funds.

Self-Help Group (SHG)

A community-based group of low-income persons

who come together to address issues of mut ual

concern, share knowledge, and provide

Financial, not -financial , services to each other.

Finanical services provided typically includesavings and loans in which l oans are funded by

group savings. Government and non-

government al organizat ions oft en play a role in

forming and serving self-help groups to faci l i tate

and st rengthen group format ion and operati on.

Social Col lateral

A method for guaranteeing loans that uses joint

l iab i l i ty wi th in a loan group ra ther than

individual real collateral or personal guarantees.

Sol idar i ty Group

A loan group made up of approximately 310

people drawn from the same community and

operating under a joint l iabi l i ty ar rangement .


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Sol idar i ty Loan

A group loan made to members of a solidarity

group.

Stepped Lending

The process by which borrowers who repay loans

on t ime are el igible for increasingly larger loans.

Stepped lending keeps ini t ial r isk at minimum

while allowing microent repreneurs to grow theirbusinesses and i ncrease their incomes.

Technical Assistance (TA)

The exchange of knowledge, products, servi ces,

and management technology between t echnical

service providers and microfinance inst i tut ions.

Volunt ary Savings

Savings that are voluntarily deposited in a

microfinance inst i tut ion by its cl ients. Voluntary

savings pay an interest rate and typically permi t

reasonably unrestr icted deposits and

withdrawals.


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Microfinance Context Terms

Commercialization

Refers to steps taken by microf inance

insti tut ions to adopt principles and pract ices of

commercial banks, including bank or bank-li ke

legal status, formal regulatory oversight and

other integration into the formal f inancial sector.

Downscaling

Descr iption of formal f inancial inst itut ions move

down market by offer ing products and services

to micro- and smal l enterpr ises and low-income

persons.

Development Finance

General term that encompasses all types of

fi nancial services and financial service del ivery

models to promote social and economic

development among low-income, vulnerable, or

otherwise marginal persons.

Financial Self-Sufficiency

A situat ion in which an organizati on generates

sufficient revenues from clients to cover all of

its operating and financing costs, both actual

and imputed.


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Formal Financial Sector

The financial sector consisting of legally l icensed

and registered financial i nst i tut ions.

Formal Financial I nst it ut ion

Financial institution operating in the formal

financial sector. I t may or may not be supervised

by national supervisory authorities.

Gender Relat ions

Focuses on womens bargaining power within the

household, power imbalances between the

genders, effects of microfinance on gender-

related issues, empowerment and/or ill effects

on women, gir l /chi ld issues. Source: Calmeadow

I nformal Financial Sector

The financial sector consist ing of unl icensed and

unregistered (and often community-based)

organizations, groups, or individuals offering

financial services.

Informal Credit

Credit services provided by independent persons

or community-based groups that do not belong

to the formal financial system.


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I nformal Savings

Savings held outside of a formal financial

inst i tut ion. Informal savings mechanisms

include saving at homein cash or in kind

savings groups, rotating savings and credit

associations, accumulating credit and savings

associations, through reciprocal savings and

lending with neighbors or relatives, and with

money guards (fr iends or relatives wil l ing to holda saver s money for a per iod) or informal sector

deposit collectors (people who charge a fee to

hold a saver s money for a determi ned per iod).

Informal savings devices are often highly

convenient , but may be unreliable, insecure, and/

or i ll iquid.

Microcredit

A sub-segment of microfinance that focuses on

givi ng smal l loans to low-income people for the

purpose of allowing them to earn additional

income by investing in the establishment or

expansion of microent erpr ises. Microcredit may

also refer to the actual microloan.

Microfinance

The provision of financial services adapted to

the needs of microentrepreneurs, low-income


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persons, or persons otherwise systematically

excluded from formal f inancial services,

especially small loans, small savings deposits,

insurance, and payments services.

Microenterprise

A market -or iented economic act ivi ty wi th 10 or

fewer employees (including the owner and

unpaid family members) that is owned andoperated by someone of modest means.

Microenterprise Development

Any activity undertaken to encourage the

formation of microenterprises and/or the

improved performance of exist ingmicroenterprises.

Microentrepreneur

The owner and operator of a microenterprise,

sometimes an individual who is economically,

socially, or educationally disadvantaged, and

usually one who lacks access to the formal

f inancial system and tradit ional business

development services.


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Microloan

A l oan provided by a microfinance inst i tut ion t o

a microentrepreneur or low-income person for

business or personal use.

Non-prudential Regulation

Financial r egulation in which t he regulator does

not vouch for or assume responsibility for the

soundness of the regulated institutions. Non-prudential regulatory techniques may include

registration and legal chartering of licensed

entities; disclosure of ownership or control;

repor t ing or publicati on of f inancial statements;

norms for the content and present ation of such

statements; accounting and audit standards;transparent disclosure of interest rates to

consumers; external audits; submission of

names of bor rowers and status of t heir loans to

a cent ral credit informat ion bureau; and int erest

rate limits. Enforcement of non-prudential

regulations seldom involves regular supervision

or on-si te inspect ion.

Operational Self-Sufficiency (OSS)

A situat ion in which an organizati on generates

suffi cient revenues from operat ions to cover all

of i ts operational costs.


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Performance Standards

Normative levels set for specific performance

measurements, l ike por t fol io quality or leverage.

In the field of microfinance, there are several

ent i t ies and projects attempt ing to set universal

performance standards for MFIs. Sour ce:

ACCION

Prudent ial RegulationRegulation set out and enforced by the financial

sector regulator; it defines detailed standards

for financial st ructure, account ing pol icies, and

other important dimensions of a financial

institutions business. Prudential regulations

will include requirements for liquidity, capitaladequacy, loan-loss provisioning, and loan

diversifi cati on, as wel l as l imi ts on del inquency

and non-earning assets. Compared to non-

prudential regulations, enforcing prudential

regulations requi res more intensive report ing as

well as on-site inspection that goes beyond the

scope of normal financial statement audits.

Regulation and Supervision

The creation and enforcement of a set of rules

for financial inst i tut ions, including MFIs. These

rules are usually set by a countrys cent ral bank


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or super intendency of banks, or by other banking

agencies.

Rural Area

An area in which the primary economic act ivit ies

are small-scale agriculture and l ivestock

rearing, although it also includes small-scale

t rade, service, and manufactur ing act ivi t ies. I t

is also characterized, in relative terms, bygeographic isolation, low population densities,

poor ly developed infr astructure, underdeveloped

market for goods and services, and high pover ty

concentration.

Rural FinanceThe provision of financial services to rural areas

and rural inhabitants. Although the term

applies to all forms of rural-based financial

services, the term is often used to connote the

provision of f inancial services to support

t radi t ional rura l and agr icul tura l income

generating activities.

Rural Microenterprise

A microenterprise owned and operated by a

resident of a rural area. It often serves to

supplement income generated through

agriculture and livestock activities.


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Small and Medium Enterprise (SME)

Enterpr ises employing 5 to 10 workers (small)

or between 10 and 50 workers (medium).

Smallholder

A person engaged in small-scale agr icul tur e and

l ivestock act ivi t ies in r ural areas.

Subsidized CreditLoans offered at int erest rates and fees that fai l

to cover the ful l long-run costs of providing those

loans.

Subsidy

A monetary or non-monetary grant given bygovernments, indiv iduals, foundat ions,

investors, or non-governmental organizations.

Also refers to the offer of a pr oduct or service to

the market at a price below the cost of

product ion, general ly targeted to certain

disadvantaged groups believed unable to pay the

full-cost pr ice or for whom paying a ful lcost pr ice

is bel ieved to consti tut e a bur den.

Tradit ional Finance Schemes

Pawnbrokers, rotating savings and credit

associat ions, individual savings groups,

tontines. Source: Calmeadow


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Training

Staff, may be senior, field or loan officer, training

regarding microcredit methodologies, case

management, etc. This does not include client

training which would be found under business

development services. Source: Calmeadow

Transformation

In a microfinance context , t ransformat ion refersto the process by which a nonprofit community

organization or an NGO becomes a regulated

financial inst it ut ion.

Unbanked

A person or persons without access to formalfi nancial services.

Ur ban Ar ea

An area including and sur rounding large ci t ies

characterized, in relat ive terms, by high

populat ion densit ies, concent rat ion of economic

activity, and high infrastructure development.

General Institutional Types and Sectors

This sect ion contains terms re levant to

understanding different institutional types and the


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economic sectors in which they operate as a cont ext for

understanding social and general per formance terms

General Financing Institutions

Arrears

Interest or principal which was not paid when

due, but is st i l l owed.

Bank

A licensed financial intermediary regulated by

a state banking supervisory agency. It may

provide any of a number of financial services,

including deposit taking, lending, payment

services, and money transfers.

Commercial Bank

A type of financial intermediary and a type of

bank. I t raises funds by col lect ing deposits fr om

businesses and consumers via checkable

deposi ts, savings deposi ts, and t ime deposi ts. I tmakes loans to businesses and consumers and

buys corporate bonds and government bonds. Its

primary li abi l i t ies are deposi ts and i ts primary

assets are loans and bonds. It is regulated by

nati onal banking supervisory author i t ies.


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Communi ty-Based Finance I nst i tut ion (CBFI )

Financial organizat ion structured to enable low-

income communi ty groups to par t icipate in and

govern the development process and to access

services of the institutions. Frequently, these

organizat ions are referred to as cooperatives, but

some community-based organizat ions are in fact

not cooperatives but groups with a similar

st ructur e and object ives.

Cooperative

A non-bank financial inst i tut ion organized as a

mut ual society and joint ly owned by i ts members

for the purpose of mobil izing and int ermediat ing

savings and providing other financial and non-financial services to its owners/members. See

Credit Union.

Credit Union

A cooperative financial institution owned and

cont rol led by the members who use i ts services.

I t serves groups that share a common bond, such

as where they work or l ive, or go to church and

offers a place for members to save money and t o

get loans and other f inancial services at

reasonable rates. See Cooperat ive.


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Financial I nst it uti on

An organizati on whose pr imary l ine of business

is to provide financial servcies to i t s cl ient s. I t

may specialize in a narrow range of financial

servcies or offer a wide array of financial

services. Includes formal and informal

organizat ions, for-prof i t and non-prof i t

organizat ions, and r egulated and non-regulated

organizations.

Lending Investor

Lending investors are basically moneylenders

who are licensed by the Bangko Sentral ng

Pil ipinasand subject to minimal regulatory

requirements and supervis ion. They arepermitted to accept deposits from a maximum

of 19 individuals, and are permitted to make

loans to whomever they wish. There has been a

rapid increase in the number of lending

investors in recent years, and increased

compet i t ion has led to reduct ions in the interest

rates they charge. Some 1,400 lending investors

typically charge interest of between 3.5 and 4

per cent flat per month. Together wi th more than

2,000 pawnshops, they deal with segments of the

population usually beyond the reach of formal

financial inst itut ions and compete wi th informal


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fi nancial sector lenders. They are character ised

by simple procedures, low transaction costs,

rapid response and accessibility, but normally

require col lateral and probably do not reach t he

ultra poor. Source: Getting the Framework

Right: Policy and Regulation for Microfinance

in Asia Paul B. McGuire, John D. Conr oy, and

Ganesh B. Thapa, 1998

Moneyshops

A phenomenon in the urban areas of the

Phil ippines where a few formal f inancial

intermediaries extended banking services

through a br idge-bui lding mechanism. These

shops occupy stall s in publ ic markets and offerworking capital to market vendors. They charge

an int rest rate of about three percent per month,

but st i l l much lower than the usurer s several

hundred per cent under the five-six scheme.

Source: Vir tual L ibrary on M icrocredit

Mutual Savings and Loan Association

A non-bank financial inst i tut ion organized as a

civi l association authorized to engage in

f inancia l in termediat ion and of fer o ther

financial services to the public.


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Rural Bank

A banking inst i tut ion t hat t argets cli ents who

l ive and work in non-urban areas and who are

general ly involved in agricultural-related

activities.

Savings and Credit Cooperative (SACCO)

Another word for a credit union in Afr ica. The

term credit union is generally not used inAfr icaand specifi cally not in South Afr icato

avoid confusion with the var ious labor

movements.

Savings Bank

A bank that focuses on savings mobi l izat ion asits core business. Found worldwide, some

savings banks are publ ic, some are pr ivate, and

some function as cooperat ives. Many are postal

savings banks that offer their services through

their countries post office branch network.

Savings banks often have far greater rural

out reach than other bank networks and tend to

of fer products wi th terms that are more

manageable for the poor than t ypical commercial

banks.


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Savings Mobil izati on

Programs intending to mobilize capital and to

provide savings accounts, as well as credit

services, to individuals and households.

General Other Institutional Types

For-profit Enterpri se

An enterprise that operates for the sole or

pr inciple object ive of earning a financial r eturn.

Non-governmental Organizati on (NGO)

A non-profit group or association organized

outside of i nst i tut ionali zed pol i t ical st ructures

to realize particular social objectives or servepar t icular const i tuencies. I t s act ivi t ies include

program operation, service delivery, research,

in fo rmat ion d is t r ibu t ion , t ra in ing , loca l

organizat ion, and community service, as well as

legal advocacy, lobbying for legislat ive or social

change, and civil disobedience.

Non-profi t Enterpri se

A revenue-generating non-profit organization

operating with a focus on the financial bottom

line.


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Non-profi t Organization

An organization whose income is not used for

the benefit or private gain of shareholders,

directors, or any other persons with an interest

in the organization. Such organizations are

typically funded through a mix of private or

public donations. They may also be funded by

an endowment or separate for-profi t ent erpr ise,

social franchise or other commercial means.

Private Voluntary Organization (PVO)

A term used to describe international non-

governmental organizations based in North

America.

General Sectors

Community-Based Sector

See Voluntary Se

Self-Learning Guide in Microfinance

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