PARTICIPANT COURSE MATERIALS

Financial Analysis for Microfinance Institutions

CONSULTATIVE GROUP TO ASSIST THE POOR

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 for Microfinance 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).

Overview

Overview and Goals of the Course Financial Statements

........................................................................................ 4

............................................................................................................ 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 Indicators for Financial Analysis Portfolio Quality ........................................................................................ 12 ......................................................................................... 17

.................................................................................................................. 20

Rationale for Loan Loss Impairment and Impairment Loss Allowance ............................................. 24 Accounting for Loan Loss Impairment and Write-Offs.................................................................... 25 Analytical Adjustments Efficiency and Productivity ....................................................................................................... 27 ............................................................................................. 31 .................................................................................................. 36 ............................................................................................ 40 Asset /Liability Management Sustainability and Profitability

Use of Ratios ............................................................................................................................ 44

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.

Sustainability = Coverage of financial expense (cost of funds + inflation) + Loan loss + Operating expenses (personnel +admin expenses) + Capitalization for growth from financial revenue

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.

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

Assets = Liabilities + Equity

A balance sheet is a summary of the financial position at a specific point in time. It presents the economic resources of an organization and the claims against those resources.

Assets
Represent what is owned by the organization or owed to it by others Are items in which an organization has invested its funds for the purpose of generating revenue.

Liabilities
Represent what is owed by the organization to others.

Equity
Represents the capital or net worth of the organization. Includes capital contributions of members, investors or donors, retained earnings, and the current year surplus.

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
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.

Expenses
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 loan impairment and the impairment loss allowance. Uses a portfolio reports historical default rates (and the current impairment loss allowance) to establish the provision for loan impairment. Relates to a cash flow statement through the net profit/loss as a starting point on the cash flow (indirect method).

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 is being used over a period of time. A cash flow statement Classifies the cash flows into operating, investing and financing activities. o Operating activities: services provided (income-earning activities). o Investing activities: expenditures that have been made for resources intended to generate future income and cash flows. o Financing activities: resources obtained from and resources returned to the owners, resources obtained through borrowings (short-term or long-term) as well as donor funds. Can use either o The 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) o The 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.

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 operational and macroeconomic data must be captured to calculate key financial ratios. In order to provide 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 by the institution, as well as data on the resources used to serve them.

Relationships Between Financial Statements

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 year Other 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.

Three Ways in Which MFIs Treat Cash Donations

Goals:

1. 2.

Grants are separated from operating income Grants are fully disclosed in equity
Where to record them When to record them

IAS 20 Recommends Income approach Considerations:

Income Statement Operating Profit/Loss All Cash Grants/Donations ...for current year Operating Profit/Loss Grants for Operations Grants for Loan Funds Grants for Fixed Assets ...for current year

Balance Sheet Assets Liabilities Equity Donations Current year Liabilities Equity Donations Current year

Assets

Sample Income Statement

Financial Revenue Financial Revenue from Loan Portfolio Interest on Loan Portfolio Fees and Commissions on Loan Portfolio Financial Revenue from Investments Other Operating Revenue Financial Expense Operating Expense Personnel Expense Administrative Expense Depreciation and Amortization Expense Other Administrative Expense Net Operating Income Net Non-operating Income/(Expense) Non-operating Revenue

Financial Expense on Funding Liabilities Interest and Fee Expense on Deposits Non-operating Expense Interest and Fee Expense on Borrowings Other Financial Expense Net Financial Income Impairment Losses on Loans Provision for Loan Impairment Value of Loans Recovered

Net Income (Before Taxes and Donations) Taxes Net Income (After Taxes and Before Donations) Donations Donations for Loan Capital Donations for Operating Expense Net Income (After Taxes and Donations)

Source: SEEP Framework, 2005

Sample Balance Sheet

ASSETS Cash and Due from Banks Trade Investments Net Loan Portfolio Gross Loan Portfolio Impairment Loss Allowance Interest Receivable on Loan Portfolio Accounts Receivable and Other Assets Other Investments Net Fixed Assets Fixed Assets Accumulated Depreciation and Amortization Total Assets LIABILITIES Demand Deposits Short-term Time Deposits Short-term Borrowings Interest Payable on Funding Liabilities
Source; SEEP Framework, 2005

Accounts Payable and Other Short-term Liabilities Long-term Time Deposits Long-term Borrowings Other Long-term Liabilities Total Liabilities EQUITY Paid-In Capital Donated Equity Prior Years Current Year Retained Earnings Prior Years Current Year Reserves Other Equity Accounts Adjustments to Equity Total Equity Total Liabilities + Equity

Financial analysis is required for many financial management 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 policy What 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

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 provides more 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)

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 Equity Liquid Ratio

Portfolio Quality
Portfolio at Risk (PAR) Ratio Adjusted Portfolio at Risk (PAR) Ratio Write-off Ratio Adjusted Write-off Ratio Risk Coverage Ratio Adjusted Risk Coverage Ratio

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 Member Client Turnover Average Outstanding Loan Size Adjusted Average Outstanding Loan Size Average Loan Disbursed

Portfolio Quality
Portfolio at Risk (PAR) and the Write-off Ratio are the preferred ratios for analysing portfolio quality. The other ratios are more limited as noted in the measurement column below .

INDICATOR

RATIO Unpaid Principal Balance of all loans with payments > 30 Days past due + Value of Renegotiated Loans Gross Loan Portfolio

MEASUREMENT The most accepted measure of portfolio quality. The most common international measurements of PAR are > 30 days and > 90 days. But can vary with terms of loan. The adjusted PAR reduces the Gross Loan Portfolio by the Write-off Adjustment. Represents the percentage of the MFIs loans that has been removed from the balance of the gross loan portfolio because they are unlikely to be repaid. MFIs write-off policies vary; managers are

(R9) Portfolio at Risk PAR By Age

Adjusted PAR Ratio

Write-Off Ratio

Adjusted Unpaid Principal Balance of all loans with payments > 30 Days past due + Value of Renegotiated Loans Adjusted Gross Loan Portfolio Value of Loans Written Off Average Gross Loan Portfolio

Adjusted write off ratio

Value of Loans Written Off + Write-off Adjustment Average Adjusted Gross Loan Portfolio

recommended to calculate this ratio on an adjusted basis.

Risk Coverage Ratio

Impairment Loss Allowance Unpaid Principal Balance of all loans with payments > 30 Days past due Adjusted Impairment Loss Allowance Adjusted Unpaid Principal Balance of all loans with payments > 30 Days past due Write-off Adjustment

Shows how much of the portfolio at risk is covered by the MFIs Impairment Loss Allowance. The adjusted ratio incorporates the Impairment Loss Allowance Adjustment and the Write-off Adjustment.

Adjusted risk coverage ratio

Calculating Portfolio at Risk ratios

Ref. R9 a b c d R9 Adj R9 a b c d Adj R9 R10 a b R10 Portfolio at Risk PAR > 30 Days DESCRIPTION

Value of Renegotiated Loans

a+b Gross Loan Portfolio PAR Ratio = c/d Adjusted Portfolio at Risk Ratio Adjusted PAR > 30 Days Value of Renegotiated a+b Adjusted Gross Loan Portfolio Adjusted PAR Ratio = c/d Write-off Ratio Value of Loans Written-off Average Gross Loan Portfolio Write-off Ratio = a/b

Adj R10 a b Adj R10 R11 a b R11 Adj R11 a b Adj R11

Adjusted Write-off Ratio Value of Loans Written-off + Write-off Adjustment Average Adjusted Gross Loan Portfolio Adjusted Write-off Ratio = a/b Risk Coverage Ratio Impairment Loss Allowance Portfolio at Risk > 30 days Risk Coverage Ratio = a/b Adjusted Risk Coverage Ratio Adjusted Impairment Loss Allowance Adj PAR > 30 days - Write-off Adjustment Adjusted Risk Coverage Ratio = a/b

Rationale for Loan Loss Impairment and Impairment Loss Allowance

Maintaining 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 to be 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.) PROVISION FOR LOAN IMPAIRMENT is the amount expensed on the Income and Expenses Statement.

It increases the Impairment Loss Allowance

LOAN LOSSES or WRITE-OFFs occur only as an accounting entry. They do not mean that loan recovery should not continue to be pursued.

They decrease the Impairment Loss Allowance and the Gross Loan Portfolio

Accounting for Loan Loss Impairment and Write-Offs

An 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 Cr Provision for loan impairment Impairment loss allowance

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 Cr Impairment loss allowance 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.

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? Subsidies Inflation Portfolio at risk

REF.

ACCOUNT NAME

EXPLANATION 1. Subsidies

FORMULA

A1

Subsidized Cost of Funds

Examines the difference between an MFIs financial expense and the financial expense it would pay if all its funding liabilities were priced at market rate. The difference between what the MFI is actually paying for a donated or subsidized good or service and what it would have to pay for the same good or service on the open market.. Common examples of these inkind subsidies are computers, consulting services, free office space, and free services of a manager. 2. Inflation The rationale behind the inflation adjustment is that an MFI should, at a minimum, preserve the value of its equity (and shareholders investments) against erosion due to inflation. In addition, this adjustment is important to consider when benchmarking institutions in different countries and economic environments. Unlike subsidy adjustment, recording an inflation adjustment

{(Average Short-term Borrowings + Average Long-term Borrowings) x Market Rate for Borrowing} Interest and Fee Expense on Borrowings

A2

In-kind Subsidy

Period Estimated Market Cost of [Accounts] Period Actual Cost of [Accounts]

A3

Inflation

(Equity, Beginning pg Period x Inflation Rate) (Net Fixed Assets, Beginning pf Period x Inflation Rate)

is common in many parts of the world and is mandated by Section 29 of the International Accounting Standards (IAS) in high inflation economies. 3. Portfolio at Risk A4 Impairment Loss Allowance Intended to bring as MFIs Impairment Loss Allowance in line with the quality of its Gross Loan Portfolio. Intended to identify loans on an MFIs books that by any reasonable standard should be written-off. This adjustment can significantly reduce the value of an MFIs assets if persistent delinquent loans are not counted as part of the gross loan portfolio. Gross Loan Portfolio x [Allowance Rated] (Impairment Loss Allowance)

A5

Write-off

Portfolio at Risk > 180 days

Calculating Adjustments
DESCRIPTION

Adjustment for Subsidized A1 Cost of Funds a. b. c. d.

Average Short-term Borrowings Average Long-term Borrowings Average Loang and Short Term Borrowings Market Rate, End of Period

e. f. g. Adjustment for In-kind A2 Subsidies a. b. c. A3 Inflation Adjustment a. b. c. d. e. f. Adjustment for Impairment A4 Loss Allowance a. b. c. A5 Adjustment for Write-off

Market Cost of Funds = c x d Interest and Fee Expense on Borrowings Adjustment for Subsidized Cost of Funds =e - f

Personnel Expense Administrative Expense Adjustment for In-kind Subsidies = a + b Equity, Beginning of Period Inflation Rate Inflation Adjustment to Equity = (a x b) Net Fixed Assets, Beginning of Period Inflation Adjustment to Fixed Assets = (d x b) Net Adjustment for Inflation = c - e

Adjusted Impairment Loss Allowance Actual Impairment Loss Allowance Adjustment to Impairment Loss Allowance = a - b >0

PAR > 180 days Past Due

Asset /Liability Management

Asset/ Liability Management is the ongoing process of planning, monitoring and controlling the volumes, maturities, rates and yields of assets and liabilities. The basis of financial 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 using borrowed funds. At the same time, the MFI must manage the cost and use of its borrowings so that it generates more revenue than it pays in Interest and Fee Expense on those borrowings. Liquidity Management: The MFI must also make sure that it has sufficient funds available (liquid) to meet any short-term obligations.

Asset/Liability Management Ratios

Interest rate management Yield on gross Portfolio Cash Received from Interest, Fees and Commissions on Loan Portfolio Average Gross Loan Portfolio 100% - Cash Revenue from Loan Portfolio Net Loan Portfolio x Expected Annual Yield Financial Expense on Funding Liabilities (Average Deposit + Average Borrowing) Adjusted Financial Expense on Funding Liabilities (Average Deposit + Average Borrowing)

Yield gap

Cost of Funds

Adjusted Cost of Funds

Asset Management Portfolio to Assets Gross Loan Portfolio Assets

Leverage Debt/Equity Adjusted debt/Equity Liabilities Equity Liabilities Adjusted Equity Liquidity Management Cash + Trade Investments Demand Deposit + Short-term Time Deposit + Short-term Borrowing + Interest Payable on Funding Liabilities + Accounts Payable and Other Short-term Liabilities)

Current Ratio

Calculating Asset/Liability Management Ratios

Ref. R4 a b R4 R5 a b R5 R6 a b c d R6 Adj R6 a b c d Adj R6 R7 a b R7 DESCRIPTION Yield on Gross Portfolio Ratio = a/b Cash Received from Interest, Fees,and Commissions on Loan Portfolio Average Gross Loan Portfolio Yield on Gross Portfolio Ratio = a/b Portfolio to Assets Ratio Gross Loan Portfolio Assets Portfolio to Assets Ratio = a/b Cost of Fund Ratio Financial Expenses on Funding Liabilities Average Deposits Average Borrowings b+c Cost of Fund Ratio = a/d

Adjusted Cost of Fund Ratio Adjusted Financial Expenses on Funding Liabilities Average Deposits Average Borrowings b+c Adjusted Cost of Fund Ratio = a/d Debt to Equity Ratio Liabilities Equity Debt to Equity Ratio = a/b

Adj R7 a b Adj R7 R8 a b c d e f g h i R8

Adjusted Debt to Equity Ratio Liabilities Adjusted Equity Adjusted Debt to Equity Ratio = a/b Liquid Ratio Ratio Cash Trade Investments a+b Demand Deposits Short-term Deposits Short-term Borrowings Interest Payable on Funding Liabilities Account Payable and Other Short-term Liabilities d+e+f+g+h Liquid Ratio Ratio = c/i

Efficiency and Productivity

Efficiency is related to Productivity in terms of serving clients and keeping costs low.
RATIO Operating Expense Ratio FORMULA Operating Expense Average Gross Loan Portfolio EXPLANATION Highlight personnel and administrative expenses relative to the loan portfolio the most commonly used efficiency indicator. The adjusted ratio usually increases this ratio when the affect of subsidies are included. Provides a meaningful measure of efficiency for an MFI, allowing it to determine the average cost of maintaining an active client. The adjusted ratio usually increase this ratio when the affect of subsidies are included. Measures the average caseload of (average number of borrowers managed by) each loan officer.

Adjusted Operating Expense Ratio Cost per Active Client

Adjusted operating Expense Average Adjusted Gross Loan Portfolio Operating Expense Average Number of Active Clients

Adjusted Cost per Active Client Borrowers per Loan Officer

Adjusted Operating Expense Average Number of Active Clients Number of Active Borrowers Number of Loan Officers

Active Clients per Staff Member

Number of Active Clients Total Number of Personnel Number of Active Clients, beginning of period + Number of New Clients during period Number of Active Clients, end of period Average Number of Active Clients Gross Loan Portfolio Number of Loans Outstanding

The overall productivity of the MFIs personnel in terms of managing clients, including borrowers, voluntary savers, and other clients. Measures the net number of clients continuing to access services during the period; used as one measurement of client satisfaction. Measures the average outstanding loan balance per borrower. This ration is a profitability driver and a measure of how much of each loan is available to clients.

Client Turnover

Average Outstanding Loan Size

Adjusted Average Outstanding Loan Size

Adjusted Gross Loan Portfolio Adjusted Number of Loans Outstanding

The adjusted ratio incorporates the Write-off Adjustment. Measures the average value of each loan disbursed. This ratio is frequently used to project disbursements. This ratio or R17 can be compared to (N12) GNI per capita.

Average Loan Disbursed

Value of Loan Disbursed Number of Loans Disbursed

Calculating Efficiency and Productivity Ratios

Ref. R12 a b R12 Adj R12 a b Adj R12 R13 a b R13 Adj R13 a b Adj R13 R14 a b R14 R15 a b R15 DESCRIPTION Operating Expense Ratio Operating Expense Average Gross Loan Portfolio Operating Expense Ratio = a/b Adjusted Operating Expense Ratio Adjusted Operating Expense Average Adjusted Gross Loan Portfolio Adjusted Operating Expense Ratio = a/b Cost per Active Client Ratio Operating Expense Average Number of Active Clients Cost per Active Client Ratio = a/b Adjusted Cost per Active Client Ratio Adjusted Operating Expense Average Number of Active Clients Adjusted Cost per Active Client Ratio = a/b Borrowers per Loan Officer Ratio Number of Active Borrowers Number of Loan Officers Borrowers per Loan Officer Ratio = a/b Active Clients per Staff Member Ratio Number of Active Clients Total Number of Personnel Active Clients per Staff Member Ratio = a/b

R16 a b c d R16 R17 a b R17 Adj R17 a b Adj R17 R18 a b R18

Client Turnover Ratio Number of Active Clients, beginning of period Number of New Clients during period Number of Active Clients, end of period Average Number of Active Clients Client Turnover Ratio = (a+b-c)/d Average Outstanding Loan Size Ratio Gross Loan Portfolio Number of LoanOutstanding Average Outstanding Loan Size Ratio = a/b Adj Average Outstanding Loan Size Ratio Adjusted Gross Loan Portfolio Number of LoanOutstanding - Write-off Adjustment Adj Average Outstanding Loan Size Ratio = a/b Average Loan Disbursed Ratio Value of Loans Disbursed Number of Loan Disbursed *) Average Loan Disbursed Ratio = a/b

Sustainability and Profitability

Profitability and sustainability ratios reflect the MFIs ability to continue operating and grow in the future.
RATIO Operational SelfSufficiency FORMULA _Financial Revenue_ (Financial Expense + Impairment Losses on Loans + Operating Expense) EXPLANATION Measures how well a MFI can cover its costs through operating revenues.

Financial SelfSufficiency

_Adjusted Financial Revenue_ (Adjusted Financial Expense + Adjusted Impairment Losses on Loans + Adjusted Operating Expense)

Measures how well a MFI can cover its costs taking into account adjustments to operating revenues and expenses. Measures how well the MFI uses its assets to generate returns. This ratio is net of taxes and excludes nonoperating items

Return on Assets (ROA)

_Net Operating Income - Taxes_ Average Assets

Adjusted Return on Assets (AROA)

_Adjusted Net Operating Income - Taxes_ Average Adjusted Assets

and donations.

_Net Operating Income - Taxes_ Average Equity Return on Equity (ROE) Adjusted Return on Equity (AROE) _Adjusted Net Operating Income - Taxes_ Average Adjusted Equity

Calculates the rate of return on the average Equity for the period. Because the numerator does not include nonoperating items or donations and is net of taxes, the ratio is frequently used as a proxy for commercial viability.

Calculating Sustainability and Profitability Ratios

Ref. R1 a b c d e R1 Adj R1 a b c d e Adj R1 R2 a b c d R2 Adj R2 a b c DESCRIPTION Operational Self-Sufficiency Ratio Financial Revenue Financial Expense Impairment Losses on Loans Operating Expense b+c+d Operational Self-Sufficiency Ratio = a/e

Financial Self-Sufficiency Ratio Financial Revenue Adjusted Financial Expense Adjusted Impairment Losses on Loans Adjusted Operating Expense b+c+d Financial Self-Sufficiency Ratio = a/e Return on Assets (ROA) Net Operating Income Taxes a-b Average Assets Return on Assets (ROA) = c/d

Adjusted Return on Assets (AROA) Adjusted Net Operating Income Taxes a-b

d Adj R2 R3 a b c d R3 Adj R3 a b c d Adj R3

Adjusted Average Assets Adjusted Return on Assets (AROA) = c/d Return on Equity (ROE) = c/d Net Operating Income Taxes a-b Average Equity Return on Equity (ROE) = c/d

Adjusted Return on Equity (AROE) = c/d Adjusted Net Operating Income Taxes a-b Adjusted Average Equity Adjusted Return on Equity (AROE) = c/d

Use of Ratios
Ratio analysis is a financial management tool that enables managers of microfinance institutions to assess their progress in achieving sustainability. They can help answer two primary questions that every institution involved in microfinance 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 the financial 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 necessarily correct. It is the trend in these ratios which is critically important. Ratios must be analyzed together, and ratios tell you more when consistently tracked over a period of time.