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

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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

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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 .

and 5. purpose. 2. and in-kind donations. Learning the formats of income statements and balance sheets to easily separate the effect of donor funds. Identifying the components. 4. Adjusting costs for inflation. by 1. relationships. Analyzing financial statements to monitor profitability. and importance of the main financial statement.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 institution’s sustainability. . Identifying critical factors for moving toward financial sustainability. efficiency. subsidized cost of funds. and portfolio quality. 3.

Income statement 3. Portfolio report Balance Sheet Assets = Liabilities + Equity A balance sheet is a summary of the financial position at a specific point in time. 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. It presents the economic resources of an organization and the claims against those resources. and the current year surplus. Balance sheet 2. • Liabilities Represent what is owed by the organization to others. Cash flow statement 4. Includes capital contributions of members. retained earnings. • • Equity Represents the capital or net worth of the organization. • . investors or donors.Financial Statements MFIs commonly use four types of financial statements: 1.

Expenses Represent costs incurred for goods and services used in the process of earning revenue. and in the relationship between the provision for loan impairment and the impairment loss allowance. It summarizes all revenue earned and expenses incurred during a specified accounting period. 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. • • . including • • • Interest earned on loans to clients Fees earned on loans to clients Interest earned on deposits with a bank. Revenue Refers to money earned by an organization for goods sold and services rendered during an accounting period. etc.Income Statement An income statement reports the organization’s financial performance over a specified period of time. Relates to a cash flow statement through the net profit/loss as a starting point on the cash flow (indirect method). Uses a portfolio report’s historical default rates (and the current impairment loss allowance) to establish the provision for loan impairment. An institution prepares an income statement so that it can determine its net profit or loss (the difference between revenue and expenses).

and items of income or expense associated with investing and financing cash flows to arrive at net cash flow. A Cash Flow Statement cannot be changed by any accounting policy. 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. resources obtained through borrowings (short-term or long-term) as well as donor funds. o Operating activities: services provided (income-earning activities). A cash flow statement • Classifies the cash flows into operating. • Can use either o The direct method. o Financing activities: resources obtained from and resources returned to the owners. Note: The Balance Sheet and Income Statement are accounting reports. works back from net profit or loss. deferrals or accruals. Cash Flow Statement A cash flow statement shows where an institution’s cash is coming from and how it is being used over a period of time. o Investing activities: expenditures that have been made for resources intended to generate future income and cash flows. investing and financing activities. adding or deducting noncash transactions. .• Starts at zero for each period (in contrast to the Balance Sheet which is cumulative since the beginning of the organization’s operation). The figures can be influenced by management’s choices regarding accounting policies.

The purpose of the portfolio report is to represent in detail an MFI’s microlending activity. 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. present the quality of the loan portfolio. the design of this report varies from MFI to MFI. and cash flow. Non-Financial Data Report In addition to the information collected in the preceding reports. and provide detail on how the MFI has provisioned against potential losses.Portfolio Report and Activity Report A portfolio report and activity report link the loan portfolio information of the three previously discussed statements—income statement. • Movement in the Impairment Loss Allowance. should be consistent and must include the following: • Portfolio activity information. . however. and • A Portfolio Aging Schedule. balance sheet. important operational and macroeconomic data must be captured to calculate key financial ratios. Unlike other statements. The content. In order to provide tools that will give managers and others a complete picture of an MFI’s financial condition.

Relationships Between Financial Statements .

We want to create financial statements that will show the impact of donor funds on the MFI’s financial position and its relationship to sustainability.” ♦ Donor money is recorded after the net income (after taxes before donations). So what’s different ? • INCOME STATEMENT – ♦ Donor funds are treated “below the line. BALANCE SHEET – There are three separate sources of equity from the income statement: ♦ Retained earnings/losses–current year (minus cash donations) ♦ Donations–current 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.Formatting Financial Statements Most MFIs depend on donor funds but do not realize to what extent and that donor money is not limitless. .

2.for current year Balance Sheet Assets Liabilities Equity Donations Current year Liabilities Equity Donations Current year Assets .Three Ways in Which MFIs Treat Cash Donations Goals: 1. 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 ..

2005 .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.

SEEP Framework.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. 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 .

the depreciation policy. 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. are they insured.. how to finance them.. setting a target level of liquidity • What is the best financing structure.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 liquidity—i.e.e. how to keep solvent at the same time as disbursing the maximum number of loans. 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 . i..e. i.

39. Waterfield and Ramsing. p. 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) . Indicators generally compare two or more pieces of data. the best information for that purpose is in the concise form of a financial or management indicator. resulting in a ratio that provides more insight than do individual data points.Indicators for Financial Analysis An MIS is created to generate information for decision making.

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 .

The most common international measurements of PAR are > 30 days and > 90 days. The other ratios are more limited as noted in the ‘measurement’ column below . MFIs’ write-off policies vary. 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.Portfolio Quality Portfolio at Risk (PAR) and the Write-off Ratio are the preferred ratios for analysing portfolio quality. Represents the percentage of the MFI’s loans that has been removed from the balance of the gross loan portfolio because they are unlikely to be repaid. But can vary with terms of loan. The adjusted PAR reduces the Gross Loan Portfolio by the Write-off Adjustment. 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 MFI’s Impairment Loss Allowance. Adjusted risk coverage ratio . The adjusted ratio incorporates the Impairment Loss Allowance Adjustment and the Write-off Adjustment.

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 .

Write-off Adjustment Adjusted Risk Coverage 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 .

(An alternative presentation is to show it as a liability. 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.) PROVISION FOR LOAN IMPAIRMENT is the amount expensed on the Income and Expenses Statement. ↑ It increases the Impairment Loss Allowance .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.

instead of waiting until the actual loss of the asset is realized. The loss of value of assets may arise through wear and tear such as the depreciation of physical assets. like saving for a rainy day. They do not mean that loan recovery should not continue to be pursued. A provision for loan impairment charged to a period is expensed in the Income Statement. and they do not involve a movement of cash. 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 . loss of stocks. or unrecoverable debts. Provisions are only accounting estimates and entries. 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.LOAN LOSSES or WRITE-OFFs occur only as an accounting entry. ↓ 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 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. Because the possibility that some loans would be unrecoverable has been provided for in the accounting books through allowances. Financial Management Training for Microfinance Organizations. loan losses are written off against the impairrment loss allowance and are also removed from the gross loan portfolio. they are booked in the Income Statement as Value of Loans Recovered which reduces the Provision amount. When write-offs are recovered. Adapted from: Joanna Ledgerwood. .Loan losses or write-offs occur when it is determined that loans are unrecoverable. Calmeadow. 1996.

costs incurred by the MFI that we need to recognize for internal management purposes.Analytical Adjustments Adjustments are additional. Which costs does an MFI incur that are not reflected in the expenses? •Subsidies •Inflation •Portfolio at risk . They are not to be included in the audited financial statements. they are internal adjustments. for example. when calculating and analyzing efficiency and profitability ratios. or hidden.

Subsidies FORMULA A1 Subsidized Cost of Funds Examines the difference between an MFI’s financial expense and the financial expense it would pay if all its funding liabilities were priced at market rate. ACCOUNT NAME EXPLANATION 1. Inflation The rationale behind the inflation adjustment is that an MFI should. consulting services. Beginning pf Period x Inflation Rate) . preserve the value of its equity (and shareholders investments) against erosion due to inflation. this adjustment is important to consider when benchmarking institutions in different countries and economic environments. and free services of a manager. Beginning pg Period x Inflation Rate) – (Net Fixed Assets. 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.. 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. at a minimum. 2. free office space. Unlike subsidy adjustment. In addition. Common examples of these inkind subsidies are computers.REF.

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. Intended to identify loans on an MFI’s books that by any reasonable standard should be written-off. Average Short-term Borrowings Average Long-term Borrowings Average Loang and Short Term Borrowings Market Rate. c. Portfolio at Risk A4 Impairment Loss Allowance Intended to bring as MFI’s Impairment Loss Allowance in line with the quality of its Gross Loan Portfolio. d. b. This adjustment can significantly reduce the value of an MFI’s 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. End of Period .

d. c. Adjustment for Impairment A4 Loss Allowance a. b.b >0 PAR > 180 days Past Due . e. f. g. c. Beginning of Period Inflation Rate Inflation Adjustment to Equity = (a x b) Net Fixed Assets.e Adjusted Impairment Loss Allowance Actual Impairment Loss Allowance Adjustment to Impairment Loss Allowance = a . A3 Inflation Adjustment a. 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 .e.f Personnel Expense Administrative Expense Adjustment for In-kind Subsidies = a + b Equity. c. b. Adjustment for In-kind A2 Subsidies a. b. Beginning of Period Inflation Adjustment to Fixed Assets = (d x b) Net Adjustment for Inflation = c . f.

monitoring and controlling the volumes.Asset /Liability Management Asset/ Liability Management is the ongoing process of planning. At the same time. 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. • Leverage: The MFI seeks to borrow funds to increase assets and thereby increase revenue and net profit. rates and yields of assets and liabilities. maturities. • Liquidity Management: The MFI must also make sure that it has sufficient funds available (“liquid”) to meet any short-term obligations. 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. The basis of financial intermediation is the ability to manage assets (the use of funds) and liabilities (the source of funds). • Asset Management: Funds should be used to create assets that produce the most revenue (are most “productive”). The term leverage indicates the degree to which an MFI is using borrowed funds. .

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 .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% .

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.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 . 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.

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. Measures the average caseload of (average number of borrowers managed by) each loan officer. The adjusted ratio usually increases this ratio when the affect of subsidies are included. allowing it to determine the average cost of maintaining an active client. Provides a meaningful measure of efficiency for an MFI. 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 . The adjusted ratio usually increase this ratio when the affect of subsidies are included.

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. voluntary savers. Measures the average value of each loan disbursed.Active Clients per Staff Member Number of Active Clients Total Number of Personnel Number of Active Clients. Measures the net number of clients continuing to access services during the period. used as one measurement of client satisfaction. and other clients. Average Loan Disbursed Value of Loan Disbursed Number of Loans Disbursed . This ratio or R17 can be compared to (N12) GNI per capita. Measures the average outstanding loan balance per borrower. This ratio is frequently used to project disbursements. This ration is a profitability driver and a measure of how much of each loan is available to clients. end of period Average Number of Active Clients Gross Loan Portfolio Number of Loans Outstanding The overall productivity of the MFI’s personnel in terms of managing clients. beginning of period + Number of New Clients during period – Number of Active Clients. including borrowers.

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 .

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 .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 .

Sustainability and Profitability Profitability and sustainability ratios reflect the MFI’s ability to continue operating and grow in the future.Taxes_ Average Assets . 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. This ratio is net of taxes and excludes nonoperating items Return on Assets (ROA) _Net Operating Income . Measures how well the MFI uses its assets to generate returns.

the ratio is frequently used as a proxy for commercial viability.Taxes_ Average Adjusted Equity Calculates the rate of return on the average Equity for the period. .Adjusted Return on Assets (AROA) _Adjusted Net Operating Income .Taxes_ Average Equity Return on Equity (ROE) Adjusted Return on Equity (AROE) _Adjusted Net Operating Income . Because the numerator does not include nonoperating items or donations and is net of taxes. _Net Operating Income .Taxes_ Average Adjusted Assets and donations.

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 .Calculating Sustainability and Profitability Ratios Ref.

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 .

and other operations of the institution. Ratios must be analyzed together. They can help answer two primary questions that every institution involved in microfinance needs to ask. .Use of Ratios Ratio analysis is a financial management tool that enables managers of microfinance institutions to assess their progress in achieving sustainability. No one ratio tells it all. There are no values for any specific ratio that is necessarily correct. Is this institution either achieving or progressing towards profitability? How efficient is it in achieving its given objectives? Taken together. It is the trend in these ratios which is critically important. and ratios tell you more when consistently tracked over a period of time. the ratios in the framework provide a perspective on the financial health of the lending/savings.

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