i

MODULE II

Financial Analysis and Performance

Monitoring in
Microfinance Institutions

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 Financial Analysis and Performance Monitoring in
Microfinance Institutions
© Copyright (2019)
The Chartered Institute of Bankers of Nigeria

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system or transmitted in any form or by any means
without the prior written permission of the copyright owner.

ISBN: 978-978-57181-5-7

Published in Nigeria by
The Chartered Institute of Bankers of Nigeria (CIBN)
Bankers House PC 19, Adeola Hopewell Street,
Victoria Island, Lagos, Nigeria.

PR E S S L
BN I
I

M
C

IT E
T HE

Printed in Nigeria by
The CIBN Press Ltd
Lagos, Nigeria.
Tel: 09093624958
Email: cibnpress@yahoo.com

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 FOREWORD

The decision for the production of this Study Pack on Financial Analysis and Performance
Monitoring in Microfinance Institutions arose as a result of the need to provide an
updated, comprehensive and adequate material on the subject for the use of the students
preparing to write the examinations of Microfinance Certification Programme.
This became imperative for two reasons. First, the review of the Curriculum of the
Certification Programme which had been in use since it was introduced in 2011 has become
critical to provide the most relevant and up to date knowledge to existing and potential
practitioners in the Microfinance Subsector.

Secondly, the existing Manual only summarised and provided highlights of the topics of the
subject. It did not cover the Curriculum and adequately provide the required resource to be
successful in the examinations. The Candidates would have to read several books,
journals and papers delivered at different fora to have a good grasp of the subject matter.

Only the Manual was a publication of note available for the eight years of the existence of the
Certification Programme. This compelled the Governing Council of the Institute to direct the
production of the Study Packs for all the modules of the Certification Programmes for release
along with the newly approved Curriculum to adequately equip the students.
This Study Pack therefore is primarily intended to provide comprehensive study materials for
the students preparing to write on Financial Analysis and Performance Monitoring in
Microfinance Institutions in the Microfinance Certification Programme.
The Study Pack has been deliberately prepared in line with the Curriculum to reduce the
number of other publications the students would have to read to pass the examinations. It is a
handy tool for students preparing for the examinations and can be effectively
used for revision as well. It is hoped that readers, whatever their experience, will find the
Study Pack invaluable to the understanding of the subject matter and enhancement of their
knowledge.
Meanwhile, in view of the dynamism of the subject area, students are still encouraged to read
further to continuously update their knowledge.

The Study Pack can also be useful as resource and reference materials for students of
banking and finance and economics in tertiary institutions. Also, Practitioners who desire
further knowledge in the subject will find it a useful reference guide.
I wish those who will have cause to use this Study Pack the best of luck.

‟Seye Awojobi, FCIB

Registrar/Chief Executive
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 Acknowledgement

The publication of this Study Pack on Financial Analysis and Performance Monitoring in
Microfinance Institutions marks an important milestone in the Institute‟s bid to deepen
capacity in the Microfinance Subsector. For coming this far, we owe a debt of gratitude to
those who contributed one way or the other to making the Publication possible.

We owe a heartfelt appreciation to Mr. Promise Nwankwo, MCIB who undertook the writing of
this Study Pack.

We acknowledge the efforts of Mr. Fidelis Omokhapue, ACIB, Head Internal Control, NPF
Microfinance Bank for reviewing the book.

Our indebtedness also goes to the members of Capacity Building & Certification
Committee for their immeasurable support to the publication especially, the
Chairman, Mr. Abdulrahman Yinusa, FCIB, and the Vice Chairman, Mr. Rotimi Omotoso,
FCIB.

This work would not have been accomplished without the efforts of the Management of the
Institute led by the Registrar/Chief Executive, Mr. „Seye Awojobi, FCIB, Group Head,
Capacity Building & Certification, Mr. Segun Shonubi assisted by Senior Manager, Capacity
Building & Certification, Mr. Kayode Adeyemi, Manager, Human Resources, Mrs. Stella
Nwosu, Manager, Capacity Building & Certification, Mrs. Linda Daniel, Assistant Manager,
Audio Visual Unit, Mr. Shegun Shokunbi and Officer, Compulsory Continuing Professional
Development & E-learning, Mr. Kabiru Ogunfowodu
who both designed the Cover Page and indeed the entire staff of the Capacity Building &
Certification Division.

Lastly, our acknowledgement would be incomplete without thanking the Office Holders of the
Institute under the Chairmanship of Dr. Uche Olowu, FCIB for their tremendous contribution
to make this publication a reality.

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Aim

This course is designed to enable candidates understand basic financial

statements for Microfinance Institutions and to analyse and interpret them for
the purpose of taking decisions; to monitor performance and compliance with
regulations; and to ensure sound financial management of the organisation.

Learning Outcome

At the end of the module, candidates are expected to have a good

understanding of:
a. Analysis of Financial Statements of MFIs;
b. Key performance indicators and how to use them to assess the financial
position and overall performance of an MFI;
c. Peer Review within the Microfinance Subsector;
d. Funding Sources available to MFIs and how to access them;
e. Financial Modelling;
f. Financial Regulation and Assessment.

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Table of Contents

Foreword…………………………………………………………………….… iii
Acknowledgement………………………………………………………….… iv

Chapter One
An Introduction to Basic Accounting ……………………………….… 1
1.1 Introduction to Accounting ………………………………………… 1
1.2 Accounting Concepts, Principles and Conventions ………...… 2
1.3 Financial Statements ………………………………………..….… 6
1.4 Portfolio Report ……………………………………………….…… 11
Practice Questions ………………………………………………………. 13

Chapter Two
Analysis of Financial Statements and Ratio Analysis …………… 15
2.1 Introduction to Financial Analysis ………………………………. 15
2.2 Financial Analysis and Ratios …………………………………… 17
2.3 Different Type of Ratios and Their Uses in Analysis ………… 19
Practice Questions ………………………………………………..…….. 42

Chapter Three
Sources of Capital for MFIs ……………………………………………. 45
3.1 Introduction ………………………………………………………… 45
3.2 Equity Fund ………………………………………………………… 46
3.3 Debt or Borrowed Funds …………………………………………. 48
3.4 Savings and Deposits …………………………………………….. 49
3.5 Donations/Donor Funds and Grants ……………………………. 50
3.6 Bonds ………………………………………………………………. 51
3.7 Foreign Borrowings ……………………………………………….. 51
3.8 Development Funds ……………………………………………….. 52
3.9 Identifying, Costing and Leveraging on Funding Sources …… 53
Practice Questions ………………………………………………..…….. 55

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Chapter Four
Managing Concessionary Loans …………………………….……..…. 57
4.0 Introduction …………………………………………………………. 57
4.1 Borrowings ………………………………………………………….. 59
4.2 Subordinated Debts ……………………………………………….. 60
4.3 Programme/Project Funds ………………………………………... 60
4.4 Grants and Donor Funds …………………………………………. 61
4.5 Quasi-Equity ……………………………………………………….. 62
4.6 Co-operative Funds/Socially Responsible Funds ……………… 62
Practice Questions ………………………………………………..…..….. 64

Chapter Five
Business Planning, Financial Modelling and Budgeting …………. 65
5.0 Introduction ………………………………………………………...... 65
5.1 Introduction to Budgeting and Strategy ………………….………. 67
5.2 Financial Management of Microfinance Institutions ……………. 68
5.3 Interpretation of Liability in MFIs ……………………………….…. 71
5.4 The Central Bank of Nigeria (CBN) Minimum Operational
Template for Microfinance Banks in Nigeria …………………….. 73
Practice Questions ………………………………………………..………. 83

Chapter Six
Financial Regulation and Assessment Rating Tools ……………… 85
6.0 Introduction ………………………………………………………..… 85
6.1 C.A.M.E.L ………………………………………………………….… 86
6.2 P.E.A.R.L.S Rating System ………………………………..………. 92
6.3 Other MFI Ratings and Certification …………………………….... 95
Practice Questions ………………………………………………..…….... 99

References and further reading ……………………………………….. 101

Index………………………………………………………………………….. 103

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 CHAPTER ONE

AN INTRODUCTION TO BASIC ACCOUNTING

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain:

1.1 Introduction to Accounting

1.2 Accounting Concepts, Principles and Conventions
1.3 Financial Statements
1.3.1 Income Statement or Statement of Comprehensive Income
1.3.2 Statement of Financial Position or the Balance Sheet
1.3.3 Statement of Cash Flows
1.3.4 Statement of Changes in Equity
1.4 Portfolio Report

1.1 Introduction to Accounting

Accounting, as a subject, predated business. Since man was created or
came into existence as some believe, he has always taken account or
record of his resources either in values or numbers. With the evolution of
business, interaction between people and exchange of values, it became
necessary to keep a proper record or account of transactions. Early
Italian merchants were known to have started keeping accounting
records in a form that formed the basis of today‟s accounting system
known as double-entry system. The stewards of the merchants were
required to give account to their masters of their business transactions.
In a similar way, management of companies have the responsibility to
give to owners of the business a good account of what they have done
with resources committed into their hands. Investopedia defines
accounting as “… the systematic and comprehensive recording of
financial transactions pertaining to a business. Accounting also refers to
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 the process of summarising, analysing and reporting these transactions
to oversight agencies, regulators and tax collection entities”. All business
transactions relating to an individual, an entrepreneur or a business entity
at any given period must be properly recorded, communicated and
reported in a manner that shows a true and fair view of the transactions.
The purpose is simply to produce financial information about the entity
with regard to its performance and its financial position. Such information
is used to determine how well the organisation has performed and to take
informed decisions about present and future business transactions.
Users of such financial information include regulators, bankers, tax
authorities, investors, shareholders, fund providers, donors and, above
all, managers of the business and a host of other stakeholders.
An extension of the accounting activity is the interpretation of the
financial statements in what is known as financial analysis. By computing
and using analytical ratios, one is able to provide a better insight into an
organisation‟s performance by interpreting the financial statements for
better decision- making.

1.2 Accounting Concepts, Principles and Conventions

Accounting is considered both an art and a science. Though not a pure
science, it is a body of knowledge. On the other hand, it is also an art
which is based on creative judgement and skill. It is derived from practice
based on laid-down rules and procedures which also change from time to
time. In maintaining accounting records and preparing the financial
statements, some principles, rules or standards need to be followed.
There are also some methods that need to be adopted and assumptions
that need to be made. These, in broad terms, are classified as
accounting principles, accounting concepts and accounting conventions.
In all, financial statements are generally guided by what is called
“Generally accepted accounting principles” (GAAP). These principles
are basically norms and standards applied in accounting. In the
application of these principles, individuals and organisations still differ in
their choices of methods and interpretations; hence the principles serve
as guidelines.
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Accounting Principles
Accounting principles are based on certain concepts, conventions and
traditions which have been developed over time by both practitioners and
regulators. The primary objectives of these principles are to eliminate or,
as much as possible, reduce subjectivity in judgement, presentation and
value measurements in order to present a true and fair view acceptable
to stakeholders or users of financial statements. It is also important to
have uniformity and comparability between different organisations. The
underlying bases of acceptability of these principles include: Objectivity,
Reliability, Practical usability, Feasibility in terms of cost-effectiveness,
and easy comprehensibility.

Accounting Concepts
Accounting concepts are simply underlying assumptions or norms
generally followed in recording transactions or preparing financial
statements or reports. These concepts are usually set by accounting
bodies or regulators either at local level or internationally. At the local
level, professional accounting bodies such as Institute of Chartered
Accountants of Nigeria (ICAN), in collaboration with the Financial
Reporting Council of Nigeria (FRC), play a great role in this regard. At the
international level, the International Accounting Standards Board (IASB),
which issues the International Financial Reporting Standards (IFRS), and
the Accounting Standards Board (for United Kingdom), set the necessary
standards where global and regional adoption is applicable.

The following are the various accounting concepts which are commonly
in use:
a. Business Entity Concept – This concept assumes that the
business unit is a distinct entity from its owners. Transactions of
the business are viewed as relating to the business on its own and
not the owner.
b. Going Concern Concept – The business entity will continue to
exist to transact its business indefinitely unless there is evidence to
the contrary.
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c. Matching Concept – All revenues relating to a given period should
be matched with the relevant expenses of that period to determine
the performance of the business.
d. Cost Concept – This concept applies only to fixed assets and
assumes that they are recorded at the purchase price (cost) in the
year of purchase and used over time for the purpose of the
business over its useful life. This is also known as historical costs.
In some instances, for assets such as land and buildings, where
value appreciates significantly over time, asset revaluation can be
done under special treatment and reporting.
e. Money Measurement Concept – Only transactions that can be
quantified in monetary terms are recorded in the books of accounts.
Non-financial items cannot form part of the accounting records even
where they are known to have some intrinsic value.
f. Accrual Concept – Costs and Revenues due and receivable in
any period are recognised and accounted for in that period, whether
paid or received or not. When Income is not due and received,
recognition is deferred.
g. Periodicity or Accounting Period Concept – This concept
assumes that the accounting record or statement should cover a
given period of time. The period can be weekly, monthly, quarterly,
half- yearly or yearly. There should also be comparability of the
period.
h. Realisation Concept - Revenue should be recognised only when
earned or realised. It should not be recognised if it is yet to be
earned, even if it had been received. Such income is deferred.
i. Dual Concept – Every business transaction has two aspects, the
receipt of a value and the giving of a value. This informs the use of
a debit and a credit to represent the aspects of the transaction. A
one-sided transaction is incomplete.

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Accounting Conventions
Accounting conventions, on the other hand, are methods and procedures
adopted in applying the accounting principles to record business
transactions and prepare financial reports. Accounting conventions
evolved from practices and customs used by accounting professionals
and have become generally accepted. The major accounting conventions
are as follows:
a. Consistency – For purposes of making comparisons and ensuring
uniformity in standards, consistency is required in the application of
accounting policies adopted in the preparation of accounting or
financial statements over time. If there is any reason for change,
this should be disclosed and the effect of the change in any
particular period should be noted.
b. Conservatism – This convention requires that the firm should
maintain a conservative position in its reporting by ensuring that all
possible losses and expenses are duly provided for and revenue
and income are not recognised in anticipation. In other words, do
not be quick to recognise income until realised and provision has
been made for all losses that may likely occur.
c. Disclosure – This requires that all material information necessary
for proper understanding of the financial statement must be
disclosed. In this regard, assumptions, estimates, and methods
applied in recording the transactions and preparing the financial
statements should be properly disclosed to enable users properly
interpret the financial statements for rational decision-making.
d. Materiality – This requires that only items with significant economic
impact are disclosed in the financial statement. This, on its own,
seems to contradict the disclosure principle; but it is important that
where an item is insignificant, then the principle of disclosure can
be ignored. The definition of materiality is, however, relative,
depending on the organisation‟s size and policy.
In summary, Accounting concepts differ from accounting conventions.
While concepts are applied mostly in recording transactions, conventions
mostly apply in preparation and presentation of Financial Statements
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 which are the product of accounting. Also, while conventions evolved
from practice by accountants, concepts are usually set by the accounting
bodies and regulators as standards.

1.3 Financial Statements

Accounting record is not complete until it is presented in its final form
known as financial statements. A financial statement, as stated above, is
the product or output of the accounting system in its final form that
conveys the financial performance of an organisation and its financial
status or position. Some refer to it as the financial report, with its
explanatory notes that are in conformity with the disclosure concept. The
format of presentation differs from one country to another, depending on
what the accounting standards‟ regulatory body of the country has
stipulated. There are, however, international standards which can
override or complement the national standards. The international
standards attempt to create a universally acceptable framework with
which organisations, especially big companies and multinationals, can
prepare their financial statements (Generally accepted accounting
principles), including International Accounting Standard (IAS) and
International Financial Reporting Standards.

Financial Statements have three major components; but with the

introduction of International Financial Reporting Standards (IFRS), a
fourth component has been added. The four components are:
(a) Income Statement or Statement of Comprehensive Income;
(b) Balance Sheet or Statement of Financial Position;
(c) Cash Flow Statement; and
(d) Statement of Changes in Equity.

1.3.1 Income Statement or Statement of Comprehensive Income

This is a statement that shows the revenue or income earned by
an entity in a given period and the matching expenses or cost of
running that entity during the same period. This indicates whether
the business has made a profit or loss for the period. It is also
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called a profit and loss account statement and usually covers a
specified period such as one month, a quarter, a half-year or one
year. This is the reason for stating “for the year or period ended
…” The revenues earned include income from sales activities,
services rendered, investment activities, and interest earned on
loans given or deposits placed with other banks or institutions.
The expenses, on the other hand, are costs incurred for goods
purchased, interest paid on borrowed funds, administrative
expenses, and all other costs incurred in generating the revenue
directly or indirectly. It also includes allowances made for
impairment of assets like loans and depreciation on fixed assets.
The major significance of the statement is that it measures the
financial performance of the organisation by showing whether a
profit or loss has been made by the entity, business or the
individual in any given period. Investors can also effectively
determine how well their resources have been managed and the
value their stock prices can attract now or in future. With the
introduction of IFRS, Income Statements are now commonly
called Statements of Comprehensive Income.

Revenue Items Expense Items

Income from sales of goods Cost of goods sold
Interest income from loans Interest paid on clients‟
and advances deposits and savings
Interest and other income Interest paid on debt
from investments funding/borrowed money
Fees and charges received Salaries, wages and
Commissions allowances
Fx Gains on transactions involving Administrative and marketing
foreign currency transactions expenses
Other transactions income Depreciation charges
Loan loss expense or
impairment charges
Other expense

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1.3.2 Balance Sheet or Statement of Financial Position
This statement shows the assets, liabilities and equity of the
owners of the business. In essence, it summarises the financial
position of the business at a given time like a snapshot. The major
components of a balance sheet are broken down into liquid and
current assets, loans and advances (for a lending institution), and
fixed assets on one side, which constitute the assets of the
business. On the other side are the liabilities made up of current
liabilities, deposits and savings from clients, borrowed funds from
third parties, and the capital (equity) of the owners of the
business.

In a simple parlance, we have what is called the „balance sheet

equation‟ which is represented by the formula:
Assets = Liabilities + Capital (Equity).
The equation can also be mathematically restated as follows:
Assets - Liabilities = Capital (Equity).

The product of the second formula above is referred to as Total

Net Assets which is a measure of the owners/shareholders‟ equity
or capital in the business.

Assets at all times in total are expected to be greater than

liabilities. Where the liabilities are greater than the assets, this
means that the capital of the business has been eroded and the
business is practically owned by creditors.

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 Examples of Assets
Current Assets
Cash and Bank Balances
Deposits or Placements with
Banks
Treasury Bills Purchased
Debtors (Accounts Receivable)
Payments in Advance for Services
Net Loans and Advances
Fixed Assets
Furniture and Fittings
Office Equipment
Computers
Computer Software
Machinery/Generators
Land and Buildings
Examples of Liabilities and
Capital
Current Liabilities
Overdrawn Bank Accounts
Accrued Expenses yet to be paid
Payments Received in Advance
Taxes and Dividends Payable
Clients Savings and Deposits
Other Liabilities (Medium/Long-
Term)
Debts or Borrowed Funds
Capital (Equity)
Issued and Paid-Up Capital
Share Premium Reserves
Statutory Reserves
Retained Earnings

The nature of items appearing on the balance sheet may vary

from the above list, depending on the industry. The order of listing
may also vary. The table above however reflects typical items in a
microfinance bank balance sheet. The major essence of a
balance sheet is to show the financial position or strength of the
entity at the date of the balance sheet and this is why the title
reads, “Balance Sheet or Statement of Financial Position as
at…”

1.3.3 Cash Flow Statement

The cash flow statement of a business entity shows the statement
of cash generated by the business over the reporting period
against the expenditure incurred during the same period to
indicate a net cash-flow position. It is more of reconciling the
difference between the opening and closing cash balances to
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 indicate how funds have come into the business and how they
have been expended in between the two periods. Changes in
balance sheet items of assets and liabilities indicate inflows of
fund/cash when assets decrease in Naira value or liabilities
increase in Naira value. On the other hand, increase in assets
and decrease in liabilities in Naira value give an indication of
funds/cash outflow. The funding from business activities
represented by the profit before tax is duly adjusted for non-cash
items like depreciation, impairment allowance, and amortisation of
intangible assets to reflect a big source of cash inflow.

1.3.4 Statement of Changes in Equity

This is the fourth and a recent introduction in Financial
Statements in compliance with International Financial Reporting
Standards (IFRS) provisions for financial reporting. Over the
centuries, the three statements enumerated above made up the
basic financial statements. With the introduction of IFRS, it
became mandatory to include statement of changes in equity in
any financial statement that has to comply with IFRS
requirements. This statement, also known as equity statement,
shows the movements in shareholders‟ funds or equity in the
business in the course of the reporting period. This is
understandable, since their stake in the business should also be
given adequate attention and should be clearly seen or explained
to potential investors and other users.

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 Statement of Changes in Equity

Share Share Retained Statutory Regulatory Total

Capital Premium Earnings Reserve Risk Equity
Reserve Reserve
As at 1
January,
2016 Profit
for the Year
Transfer to
Statutory
Reserve Staff
Share Option
Dividend

As at 31 December, 2016

A sample of the equity report format is shown above.

1.4 Portfolio Report

In addition to the financial statements which form the basis for any
meaningful financial analysis or interpretation of financial data for
microfinance banks, some other reports are necessary for complete and
detailed analysis. One of such reports is the Loan Portfolio Report. This
report is a product of the bank‟s Management Information System (MIS)
which should have the capacity to produce adequate and accurate data
for analysis. As part of the credit process, a good portfolio report is
necessary for loan credit administration, delinquency management, loan
monitoring and portfolio analysis. Portfolio report contains both financial
and non-financial data which makes it possible for both qualitative and
quantitative indicators to be produced for analytical purposes.

Most MFBs have 70-80% of their total assets as loans. As a matter of

fact, most people think microfinance business is all about lending, which
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is the case for most MFIs. In order to support this most singular asset,
banks must have in place a robust IT system and MIS that supports
portfolio reporting. A detailed portfolio report must clearly show a well
analysed data, reflecting portfolio performance indicators such as PAR
(Portfolio at Risk) for all segments of the portfolio in terms of regional and
branch distribution, loan officers, portfolio quality, outreach numbers, etc.
This report is therefore crucial for management‟s decision-making and to
ensure that the loan portfolio is kept under a close watch at all times. The
frequency and distribution of this report is a reflection of the importance
the institution attaches to maintaining a quality portfolio. A daily report is
recommended and this should be supported with a monthly or quarterly
Portfolio Quality Report (PQR) to the Board.

Segregation of Portfolio by how many days‟ principal loan amounts are

overdue is the high point of Portfolio report and is vital for Credit Risk
management, Portfolio performance assessment, Loan monitoring, and
Portfolio growth strategy.

The major contents of the Portfolio Report include:

a. Value and number of loans;
b. Value and number of loan disbursements;
c. Value of loans and number in branches, regions, per loan officer or
supervisor;
d. Value and number of Portfolio in arrears;
e. Value and number of Portfolio at Risk;
f. Value and number of loans written off;
g. Classification of loans by gender
h. Classification of loans by age or number of days in arrears;
i. Portfolio at Risk (PAR ratio);
j. Average loan balances, etc.

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Practice Questions

a. Explain this statement “Accounting is both a science and an art.”

b. Distinguish between accounting concepts and accounting conventions.
How did accounting concepts and conventions evolve?
c. Explain each of the following accounting terms and the relationship
between them:
i). Balance Sheet or Statement of Financial Position;
ii). Income Statement or Statement of Comprehensive Income; and
iii). Cash Flow Statements or Statement of Cash Flows.
d. What is the purpose of preparing „Statement of Changes in Equity‟?
What does it contain?
e. What is balance sheet equation? What is the significance?
f. An MFI credit process must have a good Portfolio report. At what stage
of the credit process is Portfolio report important, and what are the major
contents of the report?
g. Explain how each of the following listed transactions affects the Financial
Statement. State which accounts are affected, and how it increases or
decreases.

Example:
Paid travel expense of N2,500. Answer: Recorded as a decrease in
Cash/Assets on the Balance Sheet and as an expense on the Income
Statement.
1. Write off loans of N5,000
2. Client withdraws N25,000 from her savings account.
3. Purchased office furniture for N45,000 - paid N25,000 in cash and
N20,000 in credit to be paid later.
4. Loan Repayment of N100,000 due to be paid to the commercial bank
with interest of N10,000.00
5. Additional capital of N5,000,000 to be invested by a major shareholder.

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 CHAPTER TWO

ANALYSIS OF FINANCIAL STATEMENTS AND RATIO

ANALYSIS

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain:

2.1 Introduction to Financial Analysis

2.2 Financial Analysis and Ratios
2.3 The Different Types of Ratios and their Uses in Analysis
2.3.1 Portfolio Quality Ratios
2.3.2 Sustainability and Profitability Ratios
2.3.3 Efficiency and Productivity Ratios
2.3.4 Asset and Liability Management Ratios
2.3.5 Regulatory Indicators
2.3.6 Ratios and Trend Analysis (Time Series)
2.3.7 Capital Adequacy Ratios
2.3.8 Adjustments and Ratio Analysis

2.1 Introduction to Financial Analysis

Financial statements provide valuable information on organisational
financial and social performance. They are also technical documents that
need to be skillfully and professionally prepared and interpreted to serve
various interest parties and stakeholders. They present critical business
information that users rely upon for judgement on decisions affecting
investments, financing, reward and incentives, pricing and a whole lot
more. Most users may not be equipped on their own to use financial
information as presented until the information is further analysed,

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interpreted and presented in such a manner that makes sense or
provides more information for users and decision-makers.

External Audits - One vital step towards reliability of financial

statements is External Audit and its expression of an audit opinion. The
preparation of Financial Statements is the primary responsibility of the
Management on behalf of the Board. The Board bears the ultimate
responsibility. In order to rely on the report, as presented by the
Management and the Board, the External Auditors must review the
records, accounts and the Financial Statements prepared in order to
express an independent opinion on its reliability and whether it was
prepared in compliance with the relevant standards and regulations, and
whether it shows a „true and fair‟ view of the state of affairs of the
business.

Financial Analysis can be defined as “…the process of evaluating

businesses, projects, budgets and other finance-related entities to
determine their performance and suitability. Typically, financial analysis is
used to analyse whether an entity is stable, solvent, liquid or profitable
enough to warrant a monetary investment.” (Investopia).

Consultative Group Against Poverty (CGAP) further defines financial

analysis as “the computation of analytical ratios from financial statements
and interpretation of these ratios to determine their trends as a basis for
management decisions.” These definitions highlight the purpose of
financial analysis which is varied and dependent on the needs of the
user.

Microfinance practitioners apply the ratios in two perspectives: 1)

Institutional perspective, to determine their own performance against
targets or peers in the industry; and 2) Clients‟ perspective, which
focuses on the performance of clients or prospective clients to determine
their viability for loans during evaluation.

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 Generally, the purposes of institutional financial analysis include:
(1) To monitor performance and risks of the institutions providing
financial services;
(2) For managers of the institution to understand areas of operation
that may require attention or focus;
(3) For Investors who use financial information to measure value and
determine institutional performance relative to business plan
targets;
(4) For funders who use information on financial and social
performance to allocate funding for specific interventions or to
monitor existing grants or debts
(5) For regulators who use the information to monitor compliance by
institutions and to support their oversight and policy enforcement
role; and
(6) For policy-makers that use the information on institutional financial
performance to structure and protect the financial sector.

2.2 Financial Analysis and Ratios

Financial analysis and its interpretation, no doubt, is a useful tool in
determining comprehensive financial health of the microfinance
institution, aids managers in financial decision-making and helps MFBs
achieve sustainability. A very vital key to proper interpretation of data and
financial statements in financial analysis is the computation and use of
analytical ratios. These analytical ratios are usually applied by the MFI in
different dimensions in taking appropriate business decisions. It is
therefore essential to have very accurate financial records, good and
reliable data and financial statements, as the product of a good
management information system from which these ratios could be
derived. Proper interpretation of the ratios provides clarity on the
organisational performance and this could drive the motivation for
investment, financing, and other business decisions.

The Ratio or Performance Indicator is the expression of one figure or

value against another. This gives rise to a quantitative fraction or
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percentage. This value or ratio, with its interpretation, forms the basis for
analysis either on its own or when used with other ratios.

Ratios help MFB managers answer some basic fundamental questions:

On Products‟ Depth – Is the institution reaching the desired number of
clients with different financial products?

On Cost and Outreach - Does the institution provide services to many

people at the lowest possible cost?

On Efficiency – How efficient is the institution in managing its financial

resources?

On Sustainability – Is the institution generating enough financial

resources to continue serving people sustainably now and in future?

Ratios and ratio analysis serve as managerial decision tools in

different ways:
h. Measure profitability and explore possible means of enhancing
profitability.
i. Achieve breakeven point and attain self-sufficiency.
j. Achieve cost efficiency and reduce cost per client.
k. Efficiently deploy the resources of an organisation.
l. Determine efficiency level for business conduct and organisational
performance, including efficient service delivery
m. Determine the optimum levels of different operational expenses,
including its cost of funds.
n. Operate within, or in compliance with, statutory and regulatory
boundaries.
o. Criteria to set write-off and rescheduling policy.
p. Appropriate product pricing, including interest rate and fees.
q. Efficient liquidity management – liquidity level suitable for the
organization.
r. Maintain an ideal asset structure.

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 s. Determine appropriate funding mix or the right financing structure,
including timing and sources.
t. Determine optimal level of investment in fixed assets with the
attendant policies in compliance with regulatory requirements for
MFBs
u. Provide effective human resources management since they can be
used as performance benchmarks.
v. Serve as budgetary control measures.

2.3 Different type of Ratios and their uses in Analysis

Ratios, Trend Analysis and Comparisons

Ratios are synonymous with benchmarking. In absolute terms, they may
not all be useful in themselves until they are benchmarked or set as
standards for purposes of comparison. They can therefore be set as
performed standards to be used with actual performance. They can also
be compared with peers or Industry standards.

The standards of comparison are set out below against which they can
be measured.
a. Performance Targets (Management/Internal or
Statutory/External)
Same scope and time
b. Industry Standards
Same market and technology for process; same size and
characteristics for competitors.
c. Past Performance
Time series for trend.
d. Ideal Standards -
Generally accepted or expected.

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Classifications
Ratios are commonly classified according to their purposes. CGAP
identifies these major classes for use in Microfinance in its Microfinance
consensus guidelines:
e. Portfolio Quality Ratios
f. Sustainability and Profitability Ratios
g. Efficiency and Productivity Ratios
h. Asset and Liability Management Ratios

2.3.1 Portfolio Quality Ratios

Loan portfolio is usually the most important and largely significant
part of an MFI‟s asset composition, in most cases constituting
over 70%. Therefore, loan quality remains paramount for an MFI‟s
sustainability and profitability.
The following ratios are used in measuring loan quality:
i. PAR – Portfolio at Risk
This is the value of all loans in a portfolio with one or more
installments of principal past due for a certain number of days.
This includes all unpaid principal balance, such as past due and
future installments not yet due. Past due or accrued interests are
not usually included as well as restructured or rescheduled loans.
This amount is usually expressed as a percentage of the total
outstanding (gross) portfolio to arrive at PAR ratio. It is usually
categorised according to total outstanding days such as 1, 30, 60,
90, 180 days and above. PAR 30 means PAR for all loans with
outstanding amount for 30 days and above. This is the most
widely used measure of loan quality and indicates that all clients‟
portfolio with arrears or overdue are at the risk of not being repaid
once any part of the portfolio is overdue and has not been paid.
When weekly repayments are involved, PAR 1 day becomes the
most applicable measure since 30 days would have become too
late. PAR in itself, however, may not indicate reasons for default
but further portfolio analysis can give a better indication.

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Portfolio in Arrears – Arrears Rate
This is like Portfolio at risk, but considers only the installments past due.
Future installments are not included. It is important to monitor and follow
up arrears once they occur to avoid a lot more installments going into
arrears.

Arrears Rate = Principal Amount Past Due

Outstanding Gross Outstanding Loan Portfolio

j. Loan Loss Reserve Ratio

Loan Loss Reserve (Provision) is the cumulative amount of loan
provisions expensed in anticipation of losses due to default.
The amount of write-off (if any) would have been deducted.
Note that this is not a cash reserve but just an accounting
concept of ensuring that all possible losses are duly provided
for.

Loan Loss Reserve Ratio = Cumulative Amount of Provisions Made

Outstanding Gross Loan Portfolio

k. Risk Coverage Ratio

This ratio measures adequacy of loan loss provisions or reserve
to cover the portfolio at risk. If all past due becomes
irrecoverable; the question to ask is: has adequate provision been
made by the MFI to cover or absorb the losses?

Risk Coverage Ratio = Loan Loss Reserve

Portfolio at Risk > x Days

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l. Write-Off Ratio
This is another portfolio quality ratio that indicates the percentage
of loan portfolio that has been written off over a period. The higher
the ratio, the worse the portfolio quality. This is an indication that
a higher proportion of the loan portfolio is uncollectable. Write-off
of non-performing loans is usually driven by the Board policy
which sets write-off rate as a target to guard against excessive
write-off. Loans may be written off if all collection and recovery
efforts have failed and the clients no longer have the capacity to
pay back, especially in cases of business failure, client‟s death or
incapacitation. By CBN policy, all loan write-offs must be
approved by the Board and all such loans must have been
fully provided for.

Write-Off Ratio = Value of Loans Written

Gross Loan Portfolio

Write-offs improve portfolio-at-risk (PAR) ratio as the impact

reduces the amount of portfolio at risk. This, however, leads to
window dressing or masking the true portfolio quality. It is
therefore important to track the percentage of PAR that eventually
gets written off. It should be noted that write-off erodes MFI value
and reduces its future earnings‟ potential. Regular write-offs are
not encouraged; rather, the MFI should address its collection
efforts to avoid deterioration of its portfolio and subsequent write-
offs. Written-off loans should not entirely be forgotten as some
measure of efforts need to be exercised for further recovery which
would be recognised immediately as income, if successful. Most
MFIs engage recovery agents to assist in the recovery effort at a
fee, which is usually based on the amount recovered.

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2.3.2 Sustainability and Profitability Ratios
The purpose of commercial microfinance is to ensure that
microfinance is run as a profitable business venture. This ensures
adequate returns for investors and the continuity of the business
in the long run. The organisation does not have to depend on
willful donations or non-existent grants for its survival.
Government‟s intervention is also not good for business in a
market economy as politically motivated programmes are not
sustainable. Prior to CBN‟s Microfinance Policy of 2005 in which
purely commercial microfinance was introduced, all governmental
and non-governmental efforts of banking the poor failed due to
lack of sustainability of the operations of the institutions that
provided microfinance services.

Over the years, many MFBs have been licensed by the CBN and
a good number of them, especially those run on purely
commercial principles with a dual purpose of also making social
impacts, have become resilient, strong and profitable. MFIs have
the need to measure themselves both for economic and social
performance in terms of profitability and social impacts. This is
what guarantees operational sustainability and continued
existence.

The ratios used in measuring financial performance include

Return on equity, Return on assets, Operational self-sufficiency,
Financial self-sufficiency, and Profit margin.
a. Return on Equity
This ratio, which is not necessarily peculiar to microfinance,
measures return on capital or owners‟ equity in the MFI. This
is the measure of commercial viability of the MFI and usually
excludes non-operating income such as donations. In the
early years of operation, ROE may be low or even negative
and, as the MFI achieves efficiency over the years, ROE is
expected to grow until it attains a saturation point.
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 Unfavourable economic circumstances may depress ROE in
a particular period. Profit after tax before donations is
measured against average equity over the period. This ratio
is of particular interest to the institution‟s owners who have
their eyes on how much returns their investments have
made and the possibility of continuous growth of the
institution in future. Equity includes all paid-up capital plus
retained reserves over the years.

Return on Equity = Net Income (Profit) after tax before donations

Average Equity (opening and closing equity)

b. Return on Assets
This is another indicator of how well an organisation has
deployed resources available to it. The consideration is the
entire resources deployed in the business by way of total
assets. A bank‟s funding comes from a variety of sources
beyond shareholders‟ equity, including deposits and debts
and these are deployed in a number of ways. Maximum
return on investment is therefore expected if the resources
have been effectively used. This is what ROA measures,
especially where most of the funding came from sources
other than equity. A typical bank has its funding coming
essentially from Deposits and Debts. It is therefore more
realistic to use ROA to measure the bank‟s performance.

Return on Assets = Net Income (Profit) after Tax before Donations

Average Total Assets (opening and closing
assets)

c. Operational Self-Sufficiency (OSS)

This indicator also known as breakeven indicator measures
the extent to which the organisation has covered its cost
through revenue generated from operations. In the early

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 years of operation, the MFI incurs a lot of costs which are
not expected to be recovered immediately. The indicator
ordinarily should be less that 1 (one) or less than 100% at
this stage. As the MFI grows, revenue base increases and
more cost efficiency is achieved, the OSS increases above 1
(one), indicating that the organisation has attained
breakeven by generating enough revenue to fully cover its
costs. Revenue here is mainly financial revenue from
interest, and loan fees and other related income. Income
from non-core business activities such as donations and
grants are excluded. Operating costs include all operating
expenses, loan loss expenses, interest expenses or cost of
funds.

OSS = Financial Revenue

Operating Expenses + Loan Loss expense + Financial Expenses

d. Financial Self-Sufficiency (FSS)

Financial self-sufficiency (FSS) indicator goes further from
determining breakeven and operating cost coverage in
OSS to sustainability and survival of the institution,
especially in an unstable economic environment. It
incorporates the impact of inflation on operating costs as
well as where cost of funds have been subsidised; it
adjusts financial cost to reflect market cost of funds. Some
funds, especially development funds, may have been
sourced at a much lower cost, FSS would make
adjustments for such costs to be reflected at what
equivalent market-oriented costs should be. After
adjustments for inflation, market-based interest rates and
loan loss provisioning, the base or denominator in the
formula escalates the total operating costs to be covered
and this tends to force the indicator to go down; and if it is
still above 100%, then the institution is assessed strong
- 25 -
 enough to withstand the storms of tougher challenges for
its sustainability.
FSS = Financial Revenue
Adjusted Operating Expenses + Adjusted Loan Loss
expense+ Adjusted Financial Expenses

e. Operating Profit Margin

This is another good indicator for measuring commercial
performance. It indicates how good or comfortable the
margin of profit on loan is. This is a function of pricing and
good loan quality. A note of warning here is that the MFI
should not overcharge clients in order to have a good profit
margin. The emphasis should be on maintaining good loan
quality, adequate and efficient system of cost control and
reasonable product pricing that motivates clients to
perform.

Profit Margin = Net Income (Profit) before Tax and Donations

Gross Revenue

2.3.3 Efficiency and Productivity Ratios

These ratios measure how efficiently an MFI uses or
deploys assets or resources available to it in terms of
personnel, assets and time. Efficient use of resources
gives rise to high productivity. We can define productivity
as „the volume of business or output generated from a
given resource or asset (input)‟. Most efficiency and
productivity indicators consider numbers or values
achieved against certain resources applied. They are
mainly used for performance measurement as well as to
discover areas of improvement.
The efficiency ratios include:
Borrowers/Loan clients per loan officer;

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 Loan portfolio per loan officer;
Active clients per staff;
Operating efficiency ratio;
Cost per client;
Average outstanding loan size;
Average loan disbursement value.
f. Borrowers per Loan Officer (Case Load)
This ratio is used in measuring the productivity or
performance of loan officers. In MFIs where incentive
scheme or incentive-based pay is in place, clients per loan
officer is used in setting performance targets for the number
of clients to be achieved to qualify for incentive. Usually,
such targets are set based on the lending age of loan
officers and the type of clients involved. Such ratio increases
over time until it achieves a maximum upper limit. In ideal
cases, standard case-loads could reach 220-250 clients per
loan officer for individual loans and up to 300 or more for
group loans. Also, where average loan balance is high, such
as where a significant number is SME loans, number of
clients is expected to be much lower. Standard benchmarks
vary between countries or regions and determinants include
clients‟ concentration, population density, ease of accessing
clients, etc. In setting targets, management should strike a
balance between achieving a certain number of clients and
maintaining loan quality. The ratio is computed as follows:

Borrowers per Loan Officer = Number of Active Borrowers

Number of Loan Officers

g. Portfolio per Loan Officer (Value)

Another variant of case load is the loan portfolio per loan
officer. In this regard, the entire portfolio is used against
number of loan officers. It has similar uses as the case

- 27 -
 above with clients‟ number for incentive- based schemes
and performance measurements.

Portfolio Amount per Loan Officer = Loan Portfolio Value

Number of Loan Officers

h. Active Clients per Staff

Where activities of an MFB are well diversified and not
limited to loans, the entire staff strength and clients become
a more relevant measure of performance than loan officers‟
case load. It is a good indicator for measuring outreach
since clientele coverage is important. This indicator
considers all active clients for loans, savings and other
clients; and the wider the reach, the higher the ratio. While
the loan officer productivity focuses only on the MFB‟s loan
productivity, the staff member productivity focuses on the
MFI‟s performance relative to its diversified product base.
This ratio also considers the region or the country, the
environment, the nature of the clients and business in
determining an optimum benchmark. This can be used in
setting the organisation‟s benchmark for the purpose of
business planning and performance measurement.

Active Clients per Staff Member = Number of Active Clients

Number of Loan Officers

i. Operating Efficiency or Operative Efficiency Ratio

This is perhaps one of the most important MFI ratios applied,
especially in cost control and pricing. It is an indicator for
measuring an MFI‟s effectiveness in cost control, and
determines how much cost the MFI incurs in generating its
loan portfolio. Over time, an MFI is expected to achieve
- 28 -
 greater efficiency as it grows its portfolio. This enables it to
reach out to more clients at a cheaper cost. The lower the
ratio, the more efficient the MFI becomes in generating
loans. It is also applied in pricing, especially in a market-
driven pricing structure where competitive pricing is a factor.
There is the possibility of lowering charges as the MFI
becomes more efficient.
Further analysis can be made by breaking the cost into
administrative and personnel costs. Where the MFI engages
in other services, it becomes necessary to use average total
assets than average loan portfolio since cost incurred relates
to these other services as well.

Operating Efficiency (Expense) Ratio = Operating Expenses

Average Gross Loan Portfolio
(Portfolio at beginning + Portfolio at closing)/2

j. Cost per Client

This is a measure of cost incurred in generating a client or
cost of maintaining an active client. Total operating
expenses made in running the business is put into
consideration to determine how effective the marketing plan
is in acquiring clients at the cheapest possible cost. It is
important to consider clients‟ composition in terms of
different products. This ratio is also important in determining
product pricing, and useful in financial planning. Definition of
client or active client is important in computing this ratio.

Cost per Client Total Operating Expenses

Total Number of Active Clients

k. Average Outstanding Loan Size

This ratio is used in measuring the depth of outreach of the
MFI among lower-income earners. As the average loan
- 29 -
 balance grows over time, it could mean that the value of
impact is also rising as the clients may now have increased
capacity. When average loan size is very high, it may also
indicate that the MFI is not focusing on the very low clients
who should actually benefit from the microcredit lending.
Average Loan Balance = Gross Loan Portfolio Outstanding
Number of Loans Outstanding

l. Average Loan Disbursement Value

The purpose of this indicator is similar to average loan
above. In addition to the use as stated in (6) above, it can be
used for determining loan product type. Many MFIs classify
their loans on the bases of disbursement size which can be
related to the average disbursement amount when
categorised according to ranges of values. Many MFIs,
especially the smaller ones, prefer higher disbursement
amounts in order to maintain a limited or fewer number of
clients as a means of managing cost; but this has its
negative implications of greater risk concentration and the
obvious possibility of not serving the real micro clients.
Credit managers should watch this ratio and the trend
among loan officers who may unnecessarily increase the
disbursement size to grow their portfolio for one reason or
another such as to meet performance targets. Whatever the
reason for disbursement size increases, it should be
checked with PAR measures for loan quality.

Average Disbursement = Total Disbursement Amount for the Period

Number of Loan Disbursements for the Period

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2.3.4 Asset and Liability Management Ratios
This class of indicators is used to manage assets and
liabilities of the MFI, especially as it relates to its sources
of funds and their deployment in acquiring assets and
generating income. The ratios focus on how the bank‟s
assets and liabilities are structured in relation to interest
rates, asset management, funding, and liquidity. Some of
the ratios are: loan to asset ratio; loan yield, cost of funds
ratio, debt to equity and liquidity ratio.

a. Loan to Asset Ratio

The most dominant and profitable business of an MFI is
lending. Loan to asset indicator measures how much of its
resources are committed to this primary business. It
therefore gives an indication of how important it considers
these high-yielding assets as well as the MFIs‟ risk
appetite since lending attracts the highest risks for the
MFIs. The management can know from this ratio if it has to
raise additional funds for its operations, if it has invested in
low-yielding assets, and if it may have excess liquidity.

Loan to Asset Ratio = Gross Loan Portfolio

Total Assets

b. Debt/Equity Ratio
This is a measure of leverage or how well an MFI is
capitalised. It gives an indication of whether an MFB is
using more of borrowed funds or not as well as its capacity
to raise debts. MFBs with high debt equity/ratio may find it
difficult raising more debt funding and should therefore
have the need to look for other funding alternatives. An
MFI with high gearing would have high cost of funds
unless it has access to very cheap funds. This could
ultimately affect its profitability. It also increases MFIs‟ risk
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 level as borrowings can cause loss of control. Some MFIs
may have a policy which restricts the level of debt funding
it can undertake. The Board of a Nigerian MFB restricted
its borrowing to only 20% of its total assets.

Debt/ Equity Ratio = Debt + Deposit Liabilities

Equity

c. Loan Yield
This is a measure of loan profitability. It measures how
much of income on loans the MFI received in respect of
interest, fees, insurance commission and others. The yield
ratio can be used in measuring effectiveness in the cash
collection system and how much income the loan portfolio
generates during a given period. Accrued interest/income
on loans not yet received are not included in the
measurement until received. Poor- quality portfolio can
significantly reduce the yield as substantial income is
suspended or deferred on account of bad loans. Yield, to a
greater extent, is determined by the prevailing market
conditions, especially in a competitive market.

Loan Yield = Financial Revenue or Cash received from

Loan for Interest, Fee, Commissions

Avenue gross loan Portfolio for the period

d. Cost of Funds Ratio

This ratio measures the cost of funding or interest
payments on the funding liabilities. It essentially measures
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 the cost of financing the loan portfolio. Fixed assets are
expected to be financed from equity and not borrowed
funds or clients‟ savings. An MFI with a good treasury
management capability would compare the yield on
portfolio with cost of funds ratio to determine whether it has
a reasonable margin on its funding costs. Where there is
an excessive gap or where the gap is otherwise slim, the
MFI could take a decision on its pricing policy.
An MFI with access to cheaper funds would invariably
record a lower cost of funds ratio, which is good for the
MFI. This can be passed on to clients in form of reduced
interest rates and could thus make the MFI more
competitive. Cost of funds generally is high in Nigeria due
to inability of MFIs to borrow funds at a cheaper rate from
local banks. Many MFIs resort to raising funds by
accepting fixed deposits.

Loan Yield = Interest in Loans, Fees, Commissions

Average Gross Loan Portfolio for the Period

e. Liquidity/Current Ratio
Liquidity ratio is one of the most crucial ratios in
microfinance and it is a measure of how well an MFB is
prepared to meet maturing obligations. It is important and
statutorily required for every MFI and other financial
services organisations, especially deposit-taking banks to
maintain enough liquid resources to meet all maturing
obligations and to meet all daily demands for its business
activities. It is also a means of checking if the MFB is
keeping idle cash. The most common of the ratios is the
current ratio which measures the current assets against

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 current liabilities. Current assets are expected to fully
cover all short-term and maturing obligations at all times.

For purposes of statutory or regulatory compliance,

another liquidity indicator is the one that measures liquid
assets (assets that are in cash or near cash form; cash
and bank balances, treasury bills, placements with banks
and other forms of liquid assets) against the MFI‟s total
deposits. Due to the demand nature of most deposits,
regulators prescribed a certain percentage of the deposits
to be maintained in liquid assets.

Statutory Liquidity Ratio = Amount of Liquid Assets (as defined above)

Total Depositors

Current Ratio = Current Assets

Current Liabilities

2.3.5 Regulatory Indicators

The regulator, Central Bank of Nigeria, as part of its role of
stabilising the economy and in carrying out regulatory
functions, stipulates some prudential indicators or
benchmarks which the MFIs and other financial institutions
have to meet or comply with. These include:
a. Liquidity Ratio – A minimum of 20% of total
deposits to be kept in liquid assets as stated above.
b. Capital Adequacy – Minimum of 10% of the
bank‟s risk-weighted assets for first- and second-
tier capital.

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 c. Maximum Investment in Fixed Assets – Not more
than 20% of the bank‟s equity capital unpaired by
losses to be invested in fixed assets.
d. Portfolio at Risk – 1 day: Not more than 5%.
e. Adequate Provision for Loan Losses –
- Performing loans 1%.
- 1-30 days – 5%.
- 31-60 days – 20%.
- 61-90 days – 50%.
- Over 90 days -- 100%.

2.3.6 Ratios and Trend Analysis (Time Series)

A major significance of ratios is its application in tracking
performance over time. The time frame can be as long as
from the inception of the MFI, where the MFI is young, or
up to five or more years in the past. This can be used to
assess the performance of the MFI and track its
performance over the period. This is time series analysis,
and CFOs and CEOs can justify taking some business
decisions such as funding, investment and performance
appraisal. It provides investors necessary insight into
what the MFI had been able to do over the period. It is
important to note that ratios based on a single period,
such as a year, may not reveal much or may be impacted
upon by certain events of that period. This makes it
necessary to have indicators tracked and compared over
an extended period for better comparative use and
interpretation.
Other stakeholders will also get critical information on the
MFBs‟ performance over the period. Trend analysis gives
a concise summary of historical performance without the
challenges of studying and analysing detailed financial
performance. In addition to historical performance, current
and future projections can be presented in the same

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manner and used in decision-making for business and
financial planning. Performance-driven MFIs use time
series to monitor their performance on monthly, quarterly
or yearly bases for periods of up to five years or more and
projected performance of up to five years ahead.

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Format of Performed Trends and Ratios

- 37 -
2.3.7 Capital Adequacy Ratio
This is one of the prudential ratios requiring compliance by
the CBN not only for MFIs but also for all banks operating
in Nigeria. Deposit-taking institutions are expected to be
adequately capitalised as a further means of protecting
depositors‟ money. This is to ensure that depositors‟ funds
are not used in acquiring assets and running the
operations of the business. Shareholders‟ funds should be
adequate to cover this while depositors‟ funds are to be
invested and used in creating loans, which is the most
prominent business of MFIs.
The value of tier-1 and tier-2 capital is divided by the total
value of risk-weighted assets. The weights represent the
risk level attached to each item on the bank‟s balance
sheet. Tier 1 comprises equity and reserves while tier 2
comprises long- term borrowings of up to 7 years. A
statutory benchmark of not less than 10% is the standard
for capital adequacy for MFBs. A high capital adequacy
ratio is an indication that the MFB is well and adequately
capitalised.

- 38 -
The standard format for CAR computation is shown below:

- 39 -
2.3.8 Adjustments and Ratio Analysis
Advanced form of ratio analysis attempts to make use of certain
adjustments on items used in the normal ratio computation. These
adjustments, made mostly on cost items and in fewer cases
revenues, affect the outcome and give further meaning to their
interpretation. The following adjustments, which can be
categorised into four, are commonly used:
a. Inflation Adjustment: This is an adjustment to recognise
and quantify the impact of loss on equity value due to
inflation. Inflation leads to a loss on real value of equity,
especially in developing countries where inflation rate is
often very high. This is necessary for the MFI to preserve
the real value of equity. Inflation adjustment calculation is
done using:
Inflation Adjustment = (Assets-Liabilities)*Inflation Rate

b. Subsidy Adjustment: This come in two forms -

subsidised cost of funds and In-kind subsidy. Some MFIs
access some categories of funds at subsidised rates, such
as development funds or funds from related companies.
Cost of funds adjustment tries to determine the
differential cost of the subsidised funds if it had been
commercially borrowed. The difference between the
subsidised cost and what would have been paid if the
funds are borrowed from non-subsidised sources is the
cost of funds adjustment. (Subsidised cost of funds minus
commercial cost of funds multiplied by the average funding
liability). In-kind adjustment arises when an MFI receives
subsidies or donations in a non-monetary form or in kind.
The market value of subsidy received is the in-kind
adjustment

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c. Non-Performing Loan Adjustment: This comes in three
categories: (i). Loan loss provision expense - This arises
when loan loss expense is adjusted to comply with a
standard requirement such as prudential guideline. The
provision expense is adjusted upwards leading to increase
in loan loss reserve while reducing profit. (ii). Write-off
adjustment - When some long overdue loans have not
been written off as at when due, in line with standard
requirement, board policy or statutory compliance,
additional write-off could come as an adjustment which
reduces the net outstanding loan in the balance sheet. (iii).
Reversal or suspension of accrued interest in non-
performing loans - When loans are overdue by 30 days
for instance or any shorter period, interest accrued on
them could be suspended or reversed as an adjustment on
the financial income, leading to reduced profit.

d. Foreign Exchange Adjustment: This adjustment comes

when an MFI has foreign currency assets and liabilities.
Fluctuations in foreign (fx) rates could lead to losses or
gains that affect the MFI assets. This adjustment could
become substantial with high instability in fx rates and it
has to be applied in operating costs. Differences in
treatment of this adjustment are often a challenge.

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Practice Questions

a. What is Financial Analysis? Why is Financial Analysis important to the

following:
(a) The MFI Managers;
(b) .The Investors; and
(c) The Regulator?

b. State reasons why the MFI needs to analyse financial information.

Discuss the importance of ratios to decision-makers.

c. What is Social Performance and how is it measured? How does it differ

from financial performance?

d. (i). PAR (Portfolio at Risk) is a key indicator in MFIs‟ survival and

sustenance. Discuss.
(ii). Which are the other ratios used in measuring portfolio quality?

e. What are the major categories of ratios recommended by CGAP? Briefly

explain each category.
f.
g. What are the major limitations of ratios in Financial Analysis?

h. What are the regulatory or prudential indicators in the Central Bank of

Nigeria supervisory guidelines?

i. Give a proper interpretation of the following ratios:

(a) Cost of Funds Ratio
(b) Portfolio in Arrears
(c) Return on Equity
(d) Operating Self-Sufficiency
(e) Operating Cost Efficiency

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(f) Case Load
(g) Cost per Client
(h) Capital Adequacy Ratio.

(i) Based on CBN Prudential Guidelines, prepare a table showing

the computation of Loan Loss Reserve required for the Portfolio
given below for ABC MFB Ltd:
Total Loan Portfolio is N500,000,418

84% of the portfolio is current;

10% is over for 1-30 days;

3% is outstanding for 31-60 days;

1% is outstanding for 61-90 days;

2% is outstanding for over 90 days.

What is the PAR amount and percentage for ABC MFB Ltd?
The bank had previously made a provision of N25 million for its
loan loss.
Is this provision adequate for ABC MFB Ltd?
If not, how much extra provision would be required?

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- 44 -
 CHAPTER THREE

SOURCES OF CAPITAL FOR MICROFINANCE INSTITUTIONS

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain the
following:

3.1 Equity Fund

3.2 Debt or Borrowed Funds
3.3 Savings and Deposits
3.4 Donations/Donor Funds and Grants
3.5 Bonds
3.6 Foreign Borrowings
3.7 Development Funds.
3.8 Identifying, Costing and Leveraging on Funding Sources

3.1 Introduction
Every business starts with one form of funding or another, or a
combination of different sources of funds. Various sources are available
for funding MFIs but the challenge for them is the ability to meet access
requirements. While well-established MFIs have easier access to
funding, many others, especially unit MFBs, cannot easily access
funding. Since 2005 when commercial microfinance started as regulated
institutions in Nigeria, over 300 MFIs registered with the Central Bank of
Nigeria have been liquidated on account of inadequate capitalisation or
lack of access to enough capital. Funding is essential for survival,
sustainability and growth of the MFI programme. Earlier microfinance
programmes which were mainly by non-governmental organisations
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 (NGOs) and government-backed programmes were funded, in line with
their social or welfare objectives, by donors and governmental agencies.
Many of these programmes, such as government-backed Peoples Bank,
died a natural death because they were politically motivated and not
sustainable. With the advent of commercial and regulated MFIs in 2005,
private equity investors, businessmen, banks, and international investors
flooded the scene with different kinds of funds. International Investors
made a great difference with direct equity investments by establishing
full-fledged MFIs, most of which have become national MFBs in the
Nigerian microfinance market.
Despite the array of different funding options, many MFIs, as indicated
above, have very limited access to funding. Several reasons can be
adduced for this. They include:
i. Very limited scope of operation for many MFBs, especially unit
MFBs;
ii. Lack of financial viability for many of the MFBs;
iii. Lack of good corporate governance principles in management
and board oversight;
iv. Poor organisational performance due to lack of institutional
capacity and poor management;
v. Poor loan quality as shown by high portfolio at risk (PAR) which is
prevalent with many of the MFIs;
vi. Inability to meet the criteria or requirements for raising funds; and
vii. Lack of transparency in business process.

3.2 Equity Fund

This is the most basic or primary source of capital for MFIs. Virtually all
promoters started with equity mobilised through savings, family income
or businesses and borrowings by the promoters. Many MFIs in Nigeria
were started with equity (capital) which, by CBN requirements, was
categorised for Unit (Minimum of N20,000,000.00); State (Minimum of
N100,000,000); and National (Minimum of N2,000,000,000.00).

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Most MFIs were unit MFBs that started with about N20 million which was
indeed too small to maintain a good outreach. Along the line, some MFBs
injected more equity funds while others could not; and, due to their
unprofitable operations and bad loans, their small equity funds were
eroded by persistent losses.
New Capital Requirements
In the second half of 2018, the Central Bank of Nigeria announced new
capital requirements for MFBs in different categories. All the banks have
18 months up to April 2020 to comply with the requirements. The new
requirements are as follows:
i. unit MFBs – Minimum of N200,000,000 is required for new
licensing while the old MFBs have up to April 2020 to have a paid-
up capital of N200 million unimpaired by losses.
ii. State MFBs – Minimum of N1,000,000,000 is required for new
licensing while the old MFBs have up to April 2020 to have a paid-
up capital of N1.0 billion unimpaired by losses.
iii. National MFBs – Minimum of N5,000,000,000 is required for new
licensing while the old MFBs have up to April 2020 to have a paid-
up capital of N5.0 billion unimpaired by losses.
Equity providers face the highest risk of losing their funds if the
MFI suffers failure. They are the last to have their investment
returned to them as they are the real owners of the business and
ultimate risk bearers. On the other hand, when the business is
doing well and earns substantial returns, the equity owners earn
the highest reward in form of dividend payout and earnings
retained in the business. Apart from the initial equity which is
raised by the owners, more equity funds can be raised through
private placements to a select group of new investors or through
public offerings. Such public offerings can only be possible for big
MFIs with track records of good performance with ultimate listing
as public limited companies (PLC). Only two MFIs in Nigeria have
been able to go through this process of public offering and listing.
Most others have only been able to raise additional capital

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 through private placements or additional capital injection by
existing owners through rights offer.
International Microfinance Networks have invested in local MFIs
through equity in collaboration with other local investors who are
mostly institutional investors, DFIs (Development Finance
Institutions) and MIVs (Microfinance Investment Vehicles). A good
number of National and State MFIs in Nigeria fell into this
category. They included Accion, Finca, Microcred, AB, Lafayette,
etc. These international networks have invested heavily in equity
in local MFIs as wholly owned institutions or core investors along
with local institutional investors like banks and DFIs.

3.3 Debt or Borrowed Funds

Debt funding or borrowing is another important source of funds for MFIs.
Borrowed funds, usually for a fixed term at a market or subsidised rate,
come handy when the MFI has the capacity to borrow. Such debts can
be secured or unsecured and can be sourced from banks, DFIs or fund
managers. Banks in Nigeria generally require a collateral or a pledge of
assets of the MFI against which the lender can have a lien in the event of
inability to pay back. However, international DFIs may lend without
collateral by relying on the creditworthiness and willingness to pay on the
part of the MFI. In such cases, they rely on the good financial
performance of the MFI, good business plan and financial projections,
good corporate governance, quality and experienced management team,
etc. Some others may include guarantees by directors or international
parent network.

Debts come in different forms and in order of right of repayment in the

event of financial problems for the borrower, especially when borrowing
from international DFIs.

Senior Debts have the first right of repayment after paying depositors.
Usually, such loans have covenants that specify the terms and conditions
to be fulfilled throughout the duration of the loan for the borrower to
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 remain in good standing. Covenants can include the limit of PAR,
percentage of operating self-sufficiency (OSS), foreign currency
exposure, capital adequacy ratio (CAR), insider credits, etc. Where
breach of the covenants occurs, the lender can demand for immediate
repayment of the outstanding loan.
Subordinated Debts, on the other hand, can be repaid after the senior
debt and other forms of debt have been settled. They are usually riskier
but attract high interest rates to compensate the higher risks involved.

3.4 Savings and Deposits

Savings and Deposit mobilisation is one of the core financial services of
the MFI, especially for deposit-taking institutions. While many MFIs have
not fully leveraged on this due to credibility and trust issues, other MFIs
have also not done very well in savings mobilisation due to lack of potent
and appropriate strategies for deposit mobilisation. A good number of
the MFIs, especially the big and well-established ones, have over time
mobilised substantial funding from retail savings and fixed deposits,
making it the first or second biggest funding source in their institution.
Most Nigerian MFIs attach savings as part of their lending conditions and
this not only provides a certain percentage of the security for the loan for
a fall-back position in the event of default but also as a means of funding
the loan portfolio. The technique is either to save for a certain length of
time or for a certain target amount before lending to the client. This is
usually called compulsory savings. In some cases, clients are simply
encouraged to save on a regular basis to serve as a means of paying
back the loan on due dates while, in other cases, the clients are required
to maintain some account turnovers in their transaction accounts. In all
cases, a substantial float is achieved by the MFI as part of their savings
portfolio.

In order to protect depositors‟ funds, deposit-taking institutions are

mandated to maintain minimum liquidity standards by keeping a certain
percentage of their deposits in liquid assets: cash and near- cash assets
such as cash and bank balances, treasury bills, and deposits with
- 49 -
 commercial banks. This is to make provision for clients‟ withdrawal
demands, especially demand deposits. The MFI is also expected to pay
premium and insure all savings deposits with the Nigeria Deposit
Insurance Corporation (NDIC).

Savings duration is usually short-tenured (mostly under three months)

but they tend to be very stable as savers would always continue to build
up their capital or roll over their deposits. New savers would also join.

Fixed deposits are also short-tenured, could be substantial in value but

more difficult to mobilise at a reasonable rate, especially from corporate
bodies. They are also highly vulnerable and cannot be relied upon as a
dependable source of financing. Non-regulated MFIs are not deposit-
taking institutions and so cannot take deposits. However, they engage in
collection of contributions from members as a means of providing some
percentage of funding for loan portfolio as an alternative. This is referred
to as capital contribution.

3.5 Donations/Donor Funds and Grants

This is another source of funding, especially at the initial stage of the
programme. NGO MFIs and MFIs with potentials for growth and sector
development are the major beneficiaries. At the early stage of
commercial microfinance in Nigeria, the major MFIs then were selected
and given a World Bank-sponsored grant programme as a means of
encouraging the development of the sector. The purposes were mainly to
deepen outreach and promote financial inclusion, support new product
development, develop new channels, especially in the area of
technology, IT support, and new market development. They were also
used to fund technical assistance (TA).

Some MFIs could receive performance-based grants for the purpose of

subsidising or funding technical assistance (TA). In such instances,
performance benchmarks are necessary to be set against grant tranches
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 to be paid when the grant milestones are attained. Some grants also
come as in-kind grants, where the grants to be received are not in cash
form but in form of other assets. Grants and donations generally are
limited in scope and only a few MFIs in Nigeria have benefited from such
funding sources.

3.6 Bonds
This is an extension of borrowing by issuance of a “tradeable” or
“transferable” paper (security) or note. It can be through a private
placement to selected investors or public issuance through the capital
market. Public issuance means that the instrument is listed in the stock
exchange and can be traded or transferred from one holder (lender) to
another in the capital market. Raising funds through bond issuance
requires the MFI to be prominent and visible in order to command public
confidence and attract attention and patronage. It can only do so if it has
a track record of good performance. The credibility of the MFI
performance can be validated through rating by international or reputable
rating agencies known for that purpose.

Bond issuance increases the scope and diversifies the source of MFI
funding. Some big MFIs in Nigeria have raised substantial funds through
corporate bond issuance to support their growth and expansion. This
guarantees medium- and long-term funding which is currently not readily
available. However, because of the current size and challenges facing
most of the Nigerian MFIs, this funding source is not easily available to
them.

3.7 Foreign Borrowings

Foreign currency loans or loans from International funders are available
to many MFIs, especially the big ones. Where an MFI has visibility
through some platforms like MIX, it can attract funding from international
development institutions (DFIs). These DFIs are mainly from developed
countries seeking investment opportunities in developing economies like
Africa. They may not necessarily require security or putting in place some
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 form of collateral so long as the institution is viable and the country is
considered safe for investment. International DFIs look out for well-
structured MFIs with high prospect and a track record of good
performance with a need for expansion and growth.

The major challenge with foreign loans is the foreign currency risk
associated with foreign loans as these loans are often repayable in
foreign currency. The loans are usually in US Dollars and Euros but
could be denominated or indexed against the local currency. This could
address the currency risk if foreign currency is easily available for
repayment on due dates. If the repaying currency is not available on the
due date, then the indexing and hedging ends and the paying institution
automatically assumes the foreign currency risk from the due date. In
2016, many Nigerian MFIs were faced with the challenges of paying back
such loans due to scarcity of foreign exchange, mainly US Dollars and
Euros. Many of them defaulted in their obligations not because they
lacked capacity to pay back or were unwilling to pay. In order to mitigate
fx challenges, some risk-mitigating factors could be put in place to
address the challenges. This can be done with “…hedging using back-to-
back lending, swaps, forwards, partial credit guarantees, and specialised
foreign currency funds” (Joanna Ledgerwood, Julie Earne, and
Candace Nelson). In back-to-back hedging, the funder provides the loan
in foreign currency to a local bank as a security and the local bank now
provides the local currency equivalent to the MFI. The MFI pays back the
Naira equivalent to the local bank which now pays back the foreign
lender in foreign currency. Many commercial banks have exploited this
opportunity to charge the MFI high local interest rates which increases
finance charges unnecessarily. In all, this is another funding opportunity
to explore.

3.8 Development Funds

Many development funds are now available through the Central Bank of
Nigeria (CBN), Development Bank of Nigeria (DBN), Bank of Industry
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 (BOI) and other agencies and institutions with or without government
backing at both national and state levels in Nigeria. Some of these funds
are available at subsidised interest rates; some can be accessed with or
without collateral requirements, while others can be accessed if some
strict conditions can be met.
In 2013, the Central bank of Nigeria floated N220 billion MSME fund to
be given to commercial banks, MFIs, and state microfinance agencies for
on-lending purposes to SMEs and micro-clients at a highly subsidised
rate of 3% at the first instance and later reduced to 2%. The MFIs are
required to meet certain conditions to qualify for access to the funds and
to lend to the clients at a below-market rate of 9%. Other conditions for
qualification to access the loan include:
i. Provide a collateral cover of 30% of the loan amount;
ii. Provide a list of prequalified candidates, 60% of whom must be
women and 80% micro-clients;
iii. Membership of National Association of Microfinance Banks with
evidence of up-to-date membership dues;
iv. Portfolio at risk (PAR) of not more than 5%;
v. Evidence of continuous submission of CBN returns;
vi. Tenor of loan must not exceed 1 year;.
vii. Capital adequacy of not less than 10%, etc.

In 2017, Development Bank of Nigeria also started operations to provide

long-term loans (up to 10- year tenor) to MFIs for the purpose of funding
SMEs and micro clients. This provided, for the first time, an opportunity
for MFIs in Nigeria to access long-term funds at a relatively cheaper rate
for their business growth. However, challenges of meeting the loan
access conditions remain a major hindrance.

3.9 Identifying, Costing and Leveraging on Funding Sources

Access to funding sources, as identified above, is very key to MFIs‟
survival. Many of the sources are not available to many small- and
medium-sized MFIs. One key criterion to access is visibility. When an
MFI is visible and information is easily available on its business
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 performance, it can easily be identified, recognised and reached for
funding and other business relationships, as discussed in 3.7 above. It is
important for the MFI to be able to identify and explore different funding
options as part of its overall funding strategy and business plan. It is
always important too to know the cost structure and cost implication of
each funding source. Optimal funding structure and funding mix must
always consider incremental as well as weighted average cost of funds.
A highly geared source is an indication of exposure to high-risk level for
the MFI. In accessing funds, the MFI must consider the following:
i. Cost of funds;
ii. Risk inherent in each funding option, including the risk of loss of
control of management and the business;
iii. The level of leverage it can accommodate;
iv. The specific terms of the funding sources;
v. Availability and its sustainability;
vi. Financial policy of the MFI as instituted by the Board; and
vii. Regulatory requirements.

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Practice Questions

a) What is an optimal or ideal funding structure for an MFI?

b) Briefly outline the major funding sources available to Nigerian MFIs and
explain two of the sources and what could be the major hindrances to
accessing them.

c) Goldbars MFB is a unit MFB established in 2010 with a capital base of

N20,000,000.00 fully paid which the promoters considered sufficient.
They had expected that after two years of operation the MFB would have
started paying a reasonable dividend to its 10 Investors. After seven
years of operation, however, Goldbars is yet to break even. Its share
capital has been completely eroded with a need to recapitalise the MFB
to the tune of N15 million to its original N20 million share capital. The
Loan Portfolio of Goldbars is N65 million with N30 million already at risk,
out of which about N10 million is in arrears. Deposits are mainly
directors‟ deposits amounting to NN20 million. Compulsory deposits also
amount to N5.0 million. The directors of the MFB are already fed up.

They are considering several options which include:

i. Outright disposal

ii. Return of CBN licence

iii. Recapitalisation.
The MFB has approached you for advice as a consultant.
What are the possible funding options available to them and how
accessible are these options?
Do you foresee any survival hope for Goldbars MFB as they are
still opening doors to their clients?
Which options above do you advise or is there another alternative
to be explored?
What relevant ratios can you compute from the information above
that can help in decision-making?

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d) What are the major challenges facing Nigerian MFIs in raising
funds from local sources (DFIs and banks) and from foreign
DFI‟s?

e) What are the major considerations for accessing funds for an

MFI?

f) What are the requirements for accessing CBN MSME

development funds?

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 CHAPTER FOUR

MANAGING CONCESSIONAL LOANS

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain the
following:

4.0 Introduction
4.1 Borrowings
4.2 Subordinated Debts
4.3 Programme/Project Funds
4.4 Grants and Donor Funds
4.5 Quasi-Equity
4.6 Co-operative Funds/Socially Responsible Funds

4.0 Introduction
Microfinance is considered a social programme as well as a commercial
venture due to the nature of clients and their vulnerabilities. Their primary
purpose is to provide financial services to the people at the base of the
pyramid. The intention is to take them out of poverty and to lift their social
status. Sustainability of the MFI is crucial for the continuity of the
organisation. It must therefore be a viable (profitable) venture to be
sustainable since grant alone cannot sustain any MFI. The quest for
sustainability, however, should not override social impact. The poor
should be taken out of poverty and not be further impoverished when
they embrace financial services. Studies over time have acknowledged
the positive impact of microfinance; but this impact is uneven and limited
in different climes. The study indicates that low level of usage and
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persistent barriers to inclusion continue to be a limitation to poverty
alleviation (Johnson and Arnold, 2011). In Nigeria today, MFIs are
concentrated in very few urban centres, thereby limiting access and
inclusion to only a few of the excluded and underserved population.
From a social standpoint, some fund providers in some cases make
funding available to MFIs at below-market rates. Governmental agencies
do so to deepen access and to support financial inclusion initiatives. The
Central Bank of Nigeria MSME development fund is a typical example.
This is applicable in many developing economies and comes in different
forms. Concessional funds require special handling by the MFI where
they are available, as their use may be highly restricted. It is seen in
some quarters as undue interference in a free market economy and
therefore not good enough. Some of the reasons for this view are:
a. It has a lot of restrictions attached to it and this cannot permit
easy access to all MFIs and even to their clients.
b. It can hinder competitiveness among MFIs.
c. It brings about unfair and discriminatory pricing for MFIs.
d. The process might be prone to abuse and lack of transparency,
especially with political influence.
e. “Concessional” could be misunderstood, especially in this clime
where people expect microfinance services to be rendered at the
cheapest cost whereas the reverse is the case.

Concessional loan applies when one or more of the following conditions

exist:
a. Longer maturities (up to 10 years);
b. Longer grace periods (up to 3 years);
c. Lower collateral requirements;
d. Subordinated debt or other forms of quasi-equity finance;
e. Complementary technical assistance grant.

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4.1 Borrowings
A number of borrowings may come under this category. This includes
borrowings from the Central Bank of Nigeria (the MSME Development
Fund) and Development Bank of Nigeria. In managing such borrowings,
the MFI should carefully note:
(a) The restrictions on the loan, including clients‟ gender, business
sector, loan category (Micro or SME), pricing, etc. It is obvious that
this fund cannot be blended with other funds since it is not meant for
every client. A particular National MFI decided to channel the funds to
the education sector to avoid balkanising other loan products. The
use of this fund is highly restricted and, to avoid violating the loan
terms and conditions, it is necessary for the MFI to properly define
their target clients and strictly stick with them.
(i) Timing is also important since the Central Bank of Nigeria has
one year tenor after which the funds should be returned. A
new loan can be extended to the MFI on fresh application and
fulfilment of fresh conditions.
(ii) Risk management is equally important. The MFI bears total
risk and, if default occurs, the CBN does not share in the risk.
The Development Bank of Nigeria also gives out single-digit
loan to MFIs for a tenor of up to ten (10) years. This could be
drawn in tranches. Unlike CBN funds, this could blend with
other more expensive funds to reduce average funding costs.
The usual challenges of unit and state MFIs limit access to
concessional funds for a number of reasons:
a. They do not have the capacity to qualify to have access to
such funds.
b. Current performance for many of the MFIs is nothing to
write home about. Many of these MFIs hardly break even
in terms of financial performance.
c. Loan quality is a big suspect. Portfolio at Risk (PAR) for
many of them is five to ten times the required PAR of 5%.
d. Corporate governance issues atre a major handicap.

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 There is practically no competition between subsidised
funds, which usually come from quasi- governmental
agencies, multilateral agencies, DFIs and other foreign
development organisations, and private funds, which are
available from banks and private (commercial) fund
providers. While a few well-established MFIs enjoy the
privilege of access on both ends, small- and medium-sized
MFIs are sidelined on both ends looking for funding.

4.2 Subordinated Debts

Investopedia defines Subordinated fund as “…a loan or security that
ranks below other loans or securities with regard to claims on assets or
earnings. Subordinated debt is also known as a junior security or
subordinated loan. In the case of borrower default, creditors who own
subordinated debt won't be paid until after senior debt holders are paid in
full.”
Most of the time, it is a long-term debt that ranks least in priority of
repayment. This implies that lenders are exposed to higher risks. The
higher-risk factor also implies that a higher-risk premium or return is paid
to compensate for the higher-risk level. In the event of liquidation,
winding up, bankruptcy or even restructuring, subordinated debts are
ranked least. In some cases, they may also be given an option for
convertibility to equity. They also qualify as Tier-2 capital for capital
adequacy computation for statutory compliance. Like other funding
sources, subordinated debts are not an attraction for Nigerian MFIs as
they are not readily available.

4.3 Programme/Project Funds

International Multilateral Agencies and Development Finance Institutions,
in some cases, support private sector projects in developing countries
with concessional or blended concessional funds. Most World Bank
projects and International Development organisations for developing
countries fall under this category to support development initiatives with
- 60 -
 very low interest loans and donations. GIZ (German Co-operation) is a
typical example of such international organisation that has extensively
supported programmes in Nigeria through funding, donations, technical
assistance programmes for SMEs and microfinance institutions.
DFI Working Group on Blended Concessional Finance for Private Sector
Projects in 2015 published its summary report which stated: “There has
been a substantial growth in international attention on the role of blended
concessional finance to promote private sector participation in developing
countries.” Included in this group are African Development Bank, Asian
Infrastructure Development Bank, European Development Bank,
European Investment Bank, International Finance Corporation, etc. While
this funding initiative is commendable, unfortunately many MFIs in
Nigeria do not have access to such concessional funds except through
institutions like GIZ (German Co-operation) which has been able to
support a few MFIs and SME lenders in some states in Nigeria.

4.4 Grants and Donor Funds

Donor funds had long existed and once formed the singular and most
important funding source for MFIs, especially the NGO MFIs. The
significance of this source had since disappeared with the introduction of
commercial microfinance. MFIs find it difficult to attract donor funds as
private sector investments with private equity dominate the sector. As
noted earlier, grants were made available by the World Bank to selected
MFIs that took the lead in sector development at the inception of
commercial microfinance. The grants were mainly for either technical
assistance support or to encourage investors who dared risky market
frontiers. Under the first option, the grants or donor funds were treated as
income when received in the financial statements while the Technical
Assistance (TA) expenses which the grants are meant to fund are treated
as normal business expenses. NGO MFIs that received grants in support
of their programmes were required to give detailed accounts of what they
received and how they were used. Where the grants are intended to
support investment in a frontier market, they are treated as part of equity
but separated from mainstream equity in reporting. Sources of the grants
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 had since dried up and practically no MFI has for quite a long time
received any grant. The array of MFIs in Nigeria (over 900 in number)
was considered too small and never as good enough to receive
development grants. In a similar manner, NGO MFIs that exist today in
Nigeria are substantially commercial ventures and as such are also not
good candidates to be considered for grant.

4.5 Quasi-Equity
This is a long-term loan that bears almost the same features as equity. In
other words, it appears in most instances as usually unsecured and
flexible when it comes to the repayment terms of the loan. The
repayment is predicated upon the organisation doing well in future. The
lending is therefore structured on the projected cash flows growth of the
MFI. When long-term financing need arises and normal long-term debt
finance or even capital issuance is not possible, then quasi-equity
finance becomes a good alternative.

Pricing for quasi-equity is flexible. When the borrowing company is not

doing well as expected, the returns or interest payment is significantly
reduced. If, however, the company does well and better than expected,
then the investor gets much higher returns. In such cases, a maximum
ceiling could be placed on how much returns can be paid to the investor.
The risk in quasi-equity is high but the corresponding reward is also high.
Like some other funding sources already examined, quasi-equity is not
common and is hardly used by Nigerian MFIs.

4.6 Co-operative Funds/Socially Responsible Funds

Financial Co-operatives is one of the different arrays of institutions that
are engaged in rendering financial services to the underserved or the
financially excluded. Co-operatives are usually members of an open or a
closed group sharing a common interest. They may be staff members of
a company, a church group, community or town group, market
association, labour group, professional body, etc. In most cases,
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membership is restricted to a group only; and such group may or may not
be registered, depending on the purpose or type of group. Financial co-
operatives organise some form of financial services like savings by
means of contribution and lending to the members. They usually operate
with a charter, a constitution or agreement which guides membership
with the aim of the organisation, rights and duties of members and other
rules clearly defined.

Many companies in Nigeria have co-operative unions for their staff,

mainly for the welfare of members. They run savings and investment
schemes for their members and also extend credit facilities to them.

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Practice Questions

a. Concessional Loans are mainly a form of government interference with

more political motives than economic reasons. Discuss.

b. What are the major hindrances to accessing concessional loans on the

part of smaller MFIs (Unit and State MFBs)?

c. Concessional Loans are not “concessional” in real terms since they are
discriminatory. Discuss. What makes a loan concessional?

d. Five Nigerian MFBs benefited from World Bank-assisted grants between

2006 and 2010. Today, many of those MFBs are no more in existence.
This is contrary to the intention of the World Bank and the programme
was indeed a colossal failure for some of the MFBs.

i) Considering the intention of the World Bank, was this a case of

misplaced priority?

ii) What was the motive for the grant as intended by the World Bank?

e. What are the major considerations when taking a concessional loan?

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 CHAPTER FIVE

BUSINESS PLANNING, FINANCIAL MODELLING AND

BUDGETING

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain the
following:
5.1 Introduction to Budgeting and Strategy.
5.2 Financial Management of MFIs, including Financial Projections (costs,
earnings) and Business Modelling.
5.3 Interpretation of Liability in MFIs such as Equity, Quasi-Equity, Senior
Debts, Subordinated Loans, Deposits and Savings and Subsidies.
5.4 CBN Minimum Operational Template for Microfinance Banks in Nigeria

5.0 Introduction
A common adage states that “he who fails to plan plans to fail.” This
saying is also true in any business organisation. The foundation for
success in business begins with a good business plan. What is a
business plan? Business encyclopaedia defines a business plan as “…
a document that describes a new business, its products or services, how
it will earn money, leadership and staffing, financing, operations model,
and other details that are essential to both operation and success.
Entrepreneurs create them as part of the start-up process while existing
businesses often write them when changing direction or strategy”. In
other words, a business plan sets out the strategy, direction and plan for
the business and how those plans are to be executed to achieve the

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desired objective or purpose of setting up the business either as a new
business or for an ongoing business.

Typically, most business plans cover a three- to five-year period after

which the plan is either renewed or changed entirely. Plans, however, are
not cast in stone and can be altered as occasion demands. Business
plans are to be subjected to regular reviews and updates in the process
of execution. One critical condition for issuing an MFI an operating
licence is the submission of a five- year business plan which gives details
of what the MFI is expected to do for its first five years of operation.
Unfortunately, at the point of applying for licence, many MFI promoters
engage consultants to prepare an imaginary business plan for the
purpose of obtaining a licence rather than a well-thought-out document
that contains the blueprint for the real intent of the promoters. This is as
good as not having any business plan at all and is largely responsible for
mission drift and large- scale business failure after a few years of
operation by the MFI.

A good business plan considers the following issues:

w. The financial and other resources needed to run the business over
the plan period and how they can be mobilised.
x. The human resources or personnel required by the organisation.
y. The equipment and facilities needed by the organisation.
z. The business locations and branches as well as various channels
to be used.
aa. Products and services to be delivered.
bb. The markets and competitors if the organisation is going to face
existing competition.
cc. The organisation‟s strengths and weaknesses as well as business
opportunities available to it.

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5.1 Introduction to Budgeting and Strategy
Strategy is an action that gives rise to a business plan. A business plan
must be preceded by a strategy, an exercise that attempts to look at all
possibilities of winning in business. It is during the strategy session that
the vision, mission and objectives of the business are properly defined
and the actions to get them accomplished are determined. What is
Business Strategy? Strategy is defined as “an integrated set of choices
that uniquely positions the firm in its industry so as to create a
sustainable advantage and superior value relative to competition.
Strategy precedes every budget, usually conducted by the organisation's
management team and sometimes the board in a brainstorming session
to decide a way forward on its goals or objectives over a given period.
Once ratified by the board, it becomes the driver for the organisation's
business plan for the given period.” (LBS AMP 27 Presentation, 2015).

The CEO has the primary responsibility for the MFI‟s overall strategy on
behalf of the board; but the CFO has the duty to translate the strategy
into a financial plan known as financial projections spanning over some
years ranging from 1-5. Strategy produces the values and the CFO
translates the values into numbers.

Strategy is usually a collective decision of all concerned; and once it

produces an output in form of financial plan or budget, it becomes
binding on all heads of departments and units of the organisation. On a
yearly basis, the financial plan is translated into an annual budget which
gives the authority to spend or not to spend.

Wikipedia defines budget as “a financial plan for a defined period of a

year. It may also include planned sales volumes and revenues, resource
quantities, costs and expenses, assets, liabilities and cash flows”. It is an
important managerial tool for executing an organisation‟s business plan.
It is a strategy translated into numbers for a period of one year, mostly
broken down in monthly periods. It is a short-term financial projection of

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 the organisation‟s business activities in view for the period it covers.
Budgeting enables us to determine, ahead of time:
a. Future or expected revenues for the period from planned business
activities;
b. Costs or expenditure needed to carry out those business activities;
c. Projected performance targets;
d. All resource requirements;
e. How to exercise financial discipline with the possible resources
available;
f. Possible funding plans to meet resource needs of the business.

5.2 Financial Management of Microfinance Institutions

Financial planning is a key component of Financial Management and
business plan for a Microfinance Institution (MFI). This involves
managing cash flows and liquidity to ensure that the MFI has enough
financial resources to meet the demands of day-to-day business needs.
Big MFIs have elaborate units or committees like ALM (Asset and
Liability Management) or a full-fledged unit under the Finance
Department that oversees Financial Management in the MFI. Finance (or
Money in the ordinary sense) has always been described as the lifeblood
of any organization, and proper financial management is a vital key for
keeping the organisation alive and sustainable. An MFI needs a very
strong Finance department to handle its financial management with
sound financial management principles. The CFO (Chief Finance Officer)
plays a very key role in managing the financial resources of the
organisation to ensure:
a. Availability of funds at all times as and when needed to meet the
maturing obligations of depositors, funding needs of borrowers,
and all other funding needs of the MFI to run the organization;
b. Proper financial performance reporting to shareholders, the board,
management and all other stakeholders;
c. Proper and efficient resource allocation to ensure optimal business
performance;
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d. Proper financial advice to the board for their oversight functions;
e. Appropriate regulatory compliance with regard to prudential
requirements; and
f. Appropriate investment decisions for optimal utilisation of all
available funds to maximise returns

Financial projection is a major important role of the CFO or the Finance

department that translates the bank‟s strategy into action plans
expressed in numbers. As the name implies, it is a statement of possible
outcome of present and future business decisions expressed in monetary
terms. In essence, it provides the financial framework that guides future
action and presents a picture of what the outcome of business decisions
and actions would look like when business plans are executed. As earlier
discussed, budget is the one-year financial plan or financial projection of
the MFI for the period. Normal financial projections cover several (3-5)
years into the future and consist of multiple years‟ budgets. It is the
product of a well-articulated strategy and must be realistically prepared to
express management intentions and decisions.

Financial Modelling is the tool adopted in preparing financial

projections. Many financial modelling tools are available; but it is
pertinent to choose a model that relates to the MFI business and
produces accurate results.

Introduction to Microfin – Microfin is an Excel-based financial planning

tool specifically designed for microfinance banks for financial planning
and budget preparation. It is a specialised software application that takes
into consideration all microfinance activities, special needs, products,
nature of staff, branch network, etc. It incorporates all elements of good
strategic planning and relates the operational assumptions to generate
quality financial projections in future months and years. Microfin is known
to produce one of the most accurate and reliable budget results from a
microfinance data and decisions as a result. It gives a step- by-step
approach of building the entire budget structure with each section
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requiring well-defined input data from decisions taken within the strategy.
The software program can be downloaded on-line free of charge; but one
must be adequately trained to make use of it. It has the capacity to
produce or generate a five-year financial plan which is the product of the
strategy. Microfin also comes with numerous indicators or ratios that
measure profitability, efficiency, asset utilisation and loan quality which
provide performance benchmarks for the MFI.

Microfin Budget Assumptions

As it is in a normal budget preparation, Microfin Budget is driven by a
series of realistically determined assumptions which drive the budget
preparation. These assumptions are also largely derived from strategy
formulation. Areas covered by the assumptions include:
1. Definitions of various types of products and features (savings and
loans and their characteristics).
2. Organisation/Regional/Branch structure and set-up.
3. Classes of staff and their remunerations.
4. Economic factors such as GDP and inflation growth, exchange rate,
tax rates.
5. Business performance such as retention ratio, productivity.
6. Plans for branch expansion/costs and expenses.
7. Statutory and prudential requirements,
8. Average loan and savings balances,
9. Loan products‟ tenor, rates, etc.

Financial projection for an MFI using Microfin covers all aspects of its
activities and business typically shown in the Financial Statements. A
typical projection using Microfin looks at MFI – products and services,
revenues of different sources (financial and non-financial), costs (salaries
and wages, financial costs, administrative costs), loan provisioning,
applicable taxes, staffing, branch network and expansion, funding
sources and funds flow, clients‟ acquisition, different asset categories,
liabilities, equity, cash flows and liquidity management, benchmarking

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 and ratio computations for performance management and assessment,
etc.

5.3 Interpretation of Liability in MFIs

The composition and structure of liabilities in MFIs‟ financial statements,
in most cases, are often overlooked with a whole lot of attention
concentrated on risk assets (the loans) and other assets of the MFI.
Management of the liabilities, on the one hand, is as critical as that of the
assets and proper balance is needed to be maintained between assets
and liabilities for an MFI to be effectively managed. This is why an Asset
and Liability Management Committee is very essential, especially for big
MFIs. We will examine the liability components of an MFI for proper
interpretation and management. The following components come under
liabilities:
a. Equity: This is the capital of the business or what the owners have
committed into the business of their own resources. It is the
ultimate risk-bearer that only gets residual value if the company
faces liquidation and after all other claimants have been paid. They
may end up getting nothing in return. However, if the company
does well, they receive much higher returns on investment than
the other fund providers. Any undistributed earnings also belong to
them. Equity consists of the issued and paid-up capital plus all
manner of accumulated reserves resulting from profit retention,
share premium, and statutory reserve due to regulatory provisions.
It is important that the MFI grows its capital over time to strengthen
the business. If equity gets eroded over time due to persistent
losses, the MFI cannot be sustainable and may not meet the
regulatory requirement of capital adequacy.
b. Quasi-Equity: As earlier discussed, this is a long-term loan that
shares some features with equity. Quasi-equities are unsecured,
and highly risky for the lender. They also have flexible repayment
terms and rank lower than Senior Debts for purposes of repayment.
They can receive extra returns when the organisation makes higher
net income but up to a specified maximum limit. There is also the
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 danger of not receiving much when the organisation goes into
liquidation.
c. Deposits and Savings: Deposits or Savings, as they may be
called, are by far one of the most important components of
liabilities. Availability and access to deposits, to a greater extent,
can contribute to the success of the MFI as they provide a cheaper
source of fund for MFI operation. Depositors are also protected to
ensure safety of their funds more than any other fund provider and,
as a result, this liability must be insured with the Nigeria Deposit
Insurance Corporation (NDIC). An MFI with reputation issues would
find it difficult to mobilise savings and this can pose liquidity
challenges to it. This is also a risk element for the MFI as
depositors‟ demands for their funds must be met at all times.
d. Senior Debts and Subordinated Debts: Debt Funding is quite
critical as part of an organisation‟s liabilities. It is important as a
viable source of funding and given almost as much priority as
clients‟ deposits. When substantial, debts exercise significant
control over assets, especially where they are secured against
assets. Decisions affecting assets cannot just be taken without
considering debt fund providers as important stakeholders. Priority
in repayment depends on the type or class of debts.

Senior Debts have the first right of repayment after paying depositors.
Usually, such loans have covenants that specify the terms and conditions
to be fulfilled throughout the duration of the loan for the borrower to
remain in good standing.

Subordinated Debts: It has already been noted that a subordinated

debt is a loan or security that ranks below other loans or securities with
regard to claims on assets or earnings. In the case of borrower default,
creditors who own subordinated debts won't be paid until after senior
debt holders are paid in full. It is mostly a long-term debt that ranks least
in priority of repayment. This implies that lenders are exposed to higher
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 risks. The higher risk factor also implies that a higher risk premium or
return is paid to compensate for the higher risk level. In the event of
liquidation, winding up, bankruptcy or even restructuring, subordinated
debts are ranked least. In some cases, they may also be given an option
for convertibility to equity.

1. CBN Minimum Operational Template for Microfinance Banks in

Nigeria
The Central Bank of Nigeria in 2013 updated the Supervisory
Guideline for Microfinance Banks. The update included a section on
Minimum Operational Template which stipulated guidelines in the
different areas of operation and standards to be complied with by
MFIs in their service offerings. There is need to emphasise,
however, that these are guidelines and minimum standards to be
complied with, which implies that they are not hard and fast rules to
be followed. By implication, one can operate within or well above
the standards in the guideline. Below is the complete version of the
operational template.

5.4 The Central Bank of Nigeria (CBN) Minimum Operational Template

for Microfinance Banks in Nigeria

Recommended Minimum Operational Template for Microfinance Banks

in Nigeria
Measures Item Recommended Standard
for Microfinance Banks in
Nigeria (MFBs)
CAPITAL Capital Adequacy 10% minimum (S.8.1.3a of
ratio the Revised Guidelines.)
Adjusted Capital to 1:10 maximum (S.8.1.3a of
Net Credits ratio the Revised Guidelines.)
Maintenance of S.8.1.7 of the Revised
Capital Funds Guidelines.

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 Maximum 20% of Shareholders‟ Funds
Investments in Fixed unimpaired by losses (SHF)
Assets
S.8.1.4 of the Revised
Guidelines.
Maximum Equity ≤ 7.5% of SHF (S.8.1.11 of
Investment Holding the Revised Guidelines.)
ratio
ASSET Maximum amount per N500,000.00 or 1% of SHF
micro loan (S.1.2.4 of the Revised
Guidelines.)
Micro loans as a 80% (S.8.1.10 of the
percentage of total Revised Guidelines.)
loans
Portfolio at Risk ≤ 5% (S.8.3 of the Revised
(PAR) Guidelines.)
Net Loan portfolio as 60% minimum
a percentage of total
assets
Growth in outreach >20% annually
Maximum aggregate ≤ 5% of SHF (S.8.1.9b of
insider-related the Revised Guidelines.)
lending
Single obligor limit ≤ 1% of SHF (S.8.1.9a of
(Individual lending) the Revised Guidelines.)
Single obligor limit ≤ 5% of SHF (S.8.1.9a of
(Group lending, the Revised Guidelines.)
including co-
operatives and
corporate bodies)
Savings as a 60% minimum
percentage of total

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 deposits
Percentage loans to 80%
deposits
Loan portfolio > 10%
profitability (Group
Lending)
Loan Officer 250 – 300
Productivity/Case
Load (No. of active
clients per Loan
Officer)
Provision for S.8.1.2 of the Revised
classified accounts Guidelines
Adequacy of loan 100%
loss provisioning
Risk Management RMF should be in place and
Framework (RMF) operational.
MANAGEMENT Frequency of board At least once per quarter.
(Corporate meetings (minimum)
Governance, Minimum Board Audit; Credit and Risk
Management, and Committees Management; and Finance &
Credit General purpose.
Administration) Minimum number of Operations; Credit &
Unit Heads Marketing; Finance &
Admin.; and Internal Audit.
Minimum Finance & Admin.; Credit;
management and Assets & Liabilities
committees
No. of Loan Officer To be determined by the
per branch number of clients.
No. of members Not less than 5 and not more
(clients) per group than 30.

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Loan purpose and Must be clearly stated and
repayment cash flow from verifiable income
source(s).
Lending methodology e. Group solidarity model
is more cost- effective and
highly recommended.
f. Individual loan but
group responsibility.
g. Repeat loan increment,
say N10,000 – N20,000,
should be based on past
repayment records.
h. Cash
collateral/contractual savings
– not less than 10% of
principal amount of loan and
refundable.
Lending / outreach to i. Encourage formation of
women and linkage with women
groups.
j. Annual incremental
loans to women as a
proportion of the bank‟s
portfolio and client outreach.
Micro loan tenure 6 months. For agriculture or
projects with longer
gestation, a maximum
tenure of 12 months is
permissible. In housing
microfinance, a maximum
tenure of 24 months is

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 permissible (S.1.2.4 of the
Revised Guidelines.)

Follow-up and 7 days after disbursement,

collection of loan weekly collection.
First loan Minimum of 4 weeks after
disbursement enrolment as a client or
member of solidarity group.
First repayment 15 days after loan
instalment starts disbursement.
Loan repayment Weekly, except agricultural
frequency loans.
No. of instalment to Should depend on the
complete loan duration of loan.
repayment
Group member‟s Minimum of N100.00 per
mandatory savings week.
Mandatory loan Optional.
Service charge Market-determined but
(interest rate per transparent.
annum)
EARNINGS Operational Self- > 100%
sufficiency (OSS) – a
measure of total
operating income to
total costs (operating
costs + loan loss
provision + financing
cost), that is,
OSS = Operating
Income X 100
Operating
costs + loan loss
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provision
+ financing cost
Financial Self- > 120%
sufficiency (FSS) - a
measure of an MFB‟s
adjusted operating
income to adjusted
direct and indirect
costs (i.e. operating
costs + loan loss
provision + financing
cost), that is,
FSS = Adjusted
Operating Income
Adjusted
(operating costs +
loan loss provision +
financing cost)
NB: Operating
income and expenses
are adjusted for
inflation and low
interest or
concessionary loans.
Financial k. Operate at full-cost
Sustainability recovery basis.
l. Maintain lean
operational costs in order to
record positive ROA and
ROE.
Average percentage 80%

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 of interest income to
gross income
Average percentage 20%
of non-interest
income to gross
income
Operating Expenses ≤15%
to Total Assets
Staff Costs to Total ≤10%
Assets
Administrative ≤5%
Expenses to Total
Assets
Total Expenses to ≤30%
Total Assets
LIQUIDITY Liquidity Ratio 20% (S.8.1.2 of the Revised
Guidelines.)
Maximum investment 15% of total deposit
in placements liabilities.
Minimum investment Minimum of 5% and
in Treasury Bills Maximum of 10% (S.8.1.1 of
the Revised Guidelines.)
SOCIAL Mission and Vision Should be clear and focused
PERFORMANCE on the poor, women, or
MEASUREMENT vulnerable groups.
Transparent and Prices, terms and conditions
responsible pricing of financial products
(including interest charges
and all fees) should be clear,
transparent, and adequately
disclosed in a form
understandable and
affordable to the clients.

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 Avoidance of over- Reasonable steps should be
indebtedness taken to ensure that credit
will be extended only if the
borrowers have
demonstrated adequate
ability to repay and loans will
not put borrowers at
significant risk of over-
indebtedness.
Disclosure of required Information on all credit
information to Credit clients should be supplied to
Reference Bureaux licensed CRBs from time to
(CRBs) time (S.12 of the Revised
Guidelines.)
BUSINESS PLAN Strategic Plan and m. Adherence to Board‟s
Annual Budgeting approved strategic plan.
n. Board‟s approval of
annual budget.
Funding / Financial Clear financial strategy
Strategy evidenced by a diversified
funding base.
OTHER Office Simple and cost-effective
PARAMETERS accommodation
Own office building o. Prior CBN‟s approval
strictly required for
construction.
p. At no time should
depositors‟ funds be used for
this purpose.
Branch expansion q. Simple, standardised,
(including meeting and cost- effective branch
points, customer structure.
service point, cash r. Prior CBN‟s approval
centres and strictly required.
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branches) – for State s. At no time should
and National MFBs depositors‟ funds be used for
only this purpose.
Decision-making Guided by authorisation
hierarchy limits as approved by the
Board of Directors.
Manning level Lean middle and top
management.
Management t. Simple, robust with
Information System relevant modules, and e-
(MIS) FASS/FINA-compliant.
u. Cost included in the
prescribed 20% for fixed
assets.
Staff Training v. On-the-job at zero cost.
w. Low-cost staff training
budget as a function of net
profit.
x. Microfinance
Certification Programme
(MCP) is compulsory for top
management, that is, the
Managing Director and
Departmental Heads, and
highly recommended for
other staff.
Credit administration y. Regular review and
monitoring of loans and
advances by loan at least
once every thirty days
(S.8.1.12b of the Revised
Guidelines.).
z. Monitoring activities

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 should be supported with
periodic field visits (Places of
business) to the clients.

Key operational Wide outreach at low

objective operational unit costs and
group solidarity model.
Source: CBN Supervisory Guideline 2013

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Practice Questions

a. Business plan is a blueprint for a new business for years to come.

Discuss.
b. Strategic plan is vital to any business. Outline key elements of a good
strategic plan. What is the relationship between a strategic plan and a
business plan?
c. Outline 8 key elements and their ratios under CAPITAL and ASSET in
CBN Minimum Operational Template for MFBs in the 2013 Supervisory
Guideline for MFBs.
d. Distinguish between Senior Debts and Subordinated Debts, stating their
advantages and disadvantages.
e. Didia MFB is a state microfinance bank with a paid-up capital of
N600,000,000 and commenced business in 2013. In 2017, it acquired a
property for its head office at a value of N200 million. The current
Portfolio of Loans is about N365 million, out of which N160 million are
non- performing loans. N280 million of the total loan portfolio is above
N1.0 million per client. It is an aggressive MFB and has been able to
mobilise deposits of about N500 million. In the last four years, it has
accumulated losses of N511 million due to uncontrollable costs and non-
performing loans. It has on its Board 10 members, four of whom are
Executive Directors. Most of the Heads of Departments/Units are ex-
bankers who have basically no microfinance experience. They also do
not have Microfinance Certification. Liquidity has become an issue with
only 4% of deposits invested in Treasury Bills.
i. Considering the CBN‟s Minimum Operational Template, state
twenty (20) elements of key concern to the Board and management
of Didia MFB Ltd and the CBN.
ii. As the new Chief Compliance Officer just recruited from a high-
flying MFB, what should the company do urgently to avoid CBN
intervention?

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- 84 -
 CHAPTER SIX

FINANCIAL REGULATION AND ASSESSMENT RATING TOOLS

Learning Outcome
At the end of this Chapter, readers should be able to understand and explain the
following:

6.1 CAMELS Rating - Capital Adequacy, Asset Quality, Management

Capacity, Earnings, Liquidity and Sensitivity to Market Risk
6.2. PEARLS Rating - Protection, Effective Financial Structure, Assets
Quality, Rates of Return and Costs, Liquidity, and Signs of Growth
6.3 Other MFI Ratings and Certification -
6.4 Governance and Decision Making, Information Management and
System, Activities (Product and Services), and Financing and Liquidity

6.0 Introduction
The hallmark of Microfinance practice is regulation. Microfinance banks
are highly regulated institutions like every other bank and other financial
services organisations. They are deposit taking institutions and hold
themselves out to take and manage other people‟s resources and wealth.
This qualifies them as public interest entities with fiduciary obligation to
their clients. As regulated institutions, they must comply with regulations
guiding their activities and must operate within the confines of the
regulatory laws and policies of the Regulatory body.

The supervisory and regulatory bodies in Nigeria include The Central

Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation
(NDIC). There are also other statutory bodies to which MFIs submit some

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 compliance data or information periodically. These include Financial
Reporting Council of Nigeria, Corporate Affairs Commission, Relevant
Tax authorities, Economic and Financial Crime Commission etc. These
supervisory and regulatory bodies carry out site supervision visits
periodically to the MFIs to review performance and enforce compliance.
The Central Bank of Nigeria OFISD (Other Financial Institutions
Supervision Department) engages in supervision visits to the MFBs for
compliance and Risk assessment at least once in two years on routine
basis and also conducts spot checks or special purpose visits when the
need arises.

6.1 C.A.M.E.L
(Capital Adequacy, Asset Quality, Management Capacity, Earnings and
Liquidity).
CBN‟s current assessment criteria is Risk based on the basis of Basel
Committee and ACCION principle known as CAMEL model which was
later modified to include Sensitivity to the Markets (CAMELS). CAMELS
assessment criteria focuses on areas of risks relating to the six key
elements in banking. These include Capital Adequacy, Asset quality,
Management capacity or soundness, Earnings capacity, Liquidity and
Sensitivity to Market Risks.
CAMEL Rating is a US concept developed in the Seventies but has
become universally accepted as the Risk assessment criteria for
evaluating and assessing banks condition. The Central bank of Nigeria
uses this to rate banks during their inspection visits. The Rating uses
analysis of various ratios earlier discussed in financial analysis in each of
components of performance measurements in financial statement of the
MFI together with on-site examination of the MFI. During the
examination, records of the MFI are thoroughly reviewed, checking for
Compliance or otherwise with regulatory and internal policies of the MFI
as well as conditions of components listed above. The parameters are
assigned ratings of A for Good, B for Satisfactory, C for Unsatisfactory
and D for Poor.

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(a) Capital Adequacy Ratio – We had earlier emphasized the
importance of Capital in the MFI. A strong capital base
unimpaired by losses is always a good case for investors‟ and
depositors confidence. Minimum Capital requirement for the MFI
category is necessary and the growth of this minimum over time is
an indication of sustainability and strength of the MFI. This can
always absorb unexpected shocks and an assurance that the MFI
will always meet its financial obligations. A good measure of
Capital adequacy takes into account risk elements in asset
composition of the MFI. CAR computation therefore considers risk
vulnerability of assets in the Balance Sheet to arrive at Risk
adjusted assets. Compliance with statutory or regulatory
standards is the ultimate consideration by examiners during
inspection. They also consider investment concentrations, growth
plans, and economic environments.
For computation of Capital adequacy ratios, (See format in 2.2.8).
Other ratios for assessing Capital include: Debt Equity ratio;
Borrowings to Equity (This limits the numerator to borrowings
only) etc.

(b) Asset Quality – Asset quality assessment focuses on value of

risk assets and possible weakening or impairment of these values
due to delinquencies and level of provisioning. High level of
delinquency portends high risk and threat to the sustainability of
the organisation and the ability to lend profitably in future.
Questions bother on not only the level of provisioning, but also on
write offs, interest suspension, days of delinquency measured by
PAR (Portfolio at Risk in different delinquency buckets, (1, 30, 60,
90, 120,180,360 days respectively). The higher the rate of PAR,
the higher the provisioning, and the flow rate etc. the lower the
quality of risk assets and the bigger the threat. High rate of
delinquency may hamper access to funding and liquidity as well
as significantly reduce profitability or increase losses. Non-
Performing loans (NPA or NPL) poses great concern to not only
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 the regulators but also the MFI and their staff whose future is
threatened as job security cannot be guaranteed.

The Microfinance Industry in Nigeria is generally fraught with threat of

high rate of non-performing loans due to a number of reasons. This
can include:
- Absence of good credit policies or non-adherence to same where
they exist
- Poor loan evaluation techniques
- Poor loan monitoring and lack of delinquency management
techniques
- Lack of skill on the part of loan or credit officers and their
managers
- Mission drift
- Lack of proper corporate governance structure
- Failure to train appropriate persons who are responsible for
lending decisions
- Lack of adequate supervision of loan officers and inadequate
internal control
mechanisms.
- Fraudulent practices among staff and clients or even the
executive who throw caution to the winds.

Beyond credit and advances, other assets could also be poorly

managed and this could to that extent affect the MFI‟s overall quality
and value. Rating for other items like investments considers market
value of investment against initial cost or book value to determine
any possible diminution in value. Many MFIs liquidated overtime has
similar features of poor asset quality which over time erodes their
capital base and ultimately pull down the MFI for failure to
recapitalise.

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(c) Management Soundness - Management Capacity and
soundness is very vital to good organisational performance.
Availability of resources alone is not enough to guarantee good
performance; who manages and how the resources are managed
is a key factor. Many MFI managers have failed in many cases to
put up good management performance due to lack of appropriate
managerial skills and capacity to deliver. This is the major reason
the regulatory authorities specify minimum qualification and
experience required to head strategic departments of MFI and the
need for them to undergo certification training before they can
handle sensitive positions. Skilled Managers are lacking in the
MFI sector today and assembling the right Management team is
an issue for many MFIs. Consideration for sound management
will include ability to identify and manage risks in different
categories.
This is a qualitative factor which may not easily be measured but
translates into ratios such as good Return on Equity or Return on
Total assets and profit per employee; good efficiency indicators
such as low operating efficiency ratio (cost in relation to portfolio);
high client ratio per staff, high Revenue per staff, good case load
for field officers, low staff attrition ratio etc.

(d) Earnings – Profitability or earnings is the hallmark of Commercial

Microfinance. The MFI has to be profitable to be sustainable.
Profitability is also important to attract substantial private sector
investments into the MFI subsector. Earnings provide formidable
support for growth as it is a good source of increasing capital
internally without looking up to external equity investors or other
potential investors. Sustainable earnings guarantees present and
future growth especially with good retention policy and stability of
the MFI.
Good earnings or profitability is a function of several factors
including booking quality loans; effective cost control, good loan
provisioning policy, and effective management. A profitable MFI
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 can always absorb losses, promote expansion and growth, and
pay reasonable reward to shareholders.
Some of the earnings indicators include Return on assets (ROA),
Return on equity (ROE), Operating self-sufficiency (OSS) etc. The
regulator is concerned about MFIs without adequate earnings to
sustain their operations and meet the needs of the MFI and
clients for sustainable growth and safety of depositors‟ funds.

(e) Liquidity – Liquidity assessment is very vital to the survival and

continued operation of the MFI. Liquidity measures the ability of
the MFI to meet all obligations as they fall due. Issues may arise
when liquid assets fall short when compared with maturing
obligations. Adequate liquidity ensures that depositors and loan
clients can always have their funding needs met by the MFI
without any challenges. The availability of good assets that are
easily convertible to cash and level of access to funds when
needed determines the ability to meet liquidity requirements. CBN
has standard benchmarks for measuring liquidity and they must
compute this as at the last balance sheet date during their
inspection visits. A certain percentage of depositors‟ funds
(currently 20%) of deposits must be kept in liquid assets to meet
urgent demand shocks when demand need arises. It is not
advisable to fully depend on volatile short term financing which
can only meet emergency needs. (Shodhganga, CAMEL MODEL
Conceptual Framework) outlines the following as the determinant
of a bank‟s liquidity:
 The institution's short-term need for cash;
 Cash on hand;
 Available lines of credit;
 The liquidity of the institution's assets;
 The institution's reputation in the market place - how willing
will counterparty transact with or lend to the institution?

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(f) Sensitivity to Market Risks
The „S‟ of CAMELS model is a later development added in 1995.
This simply measures how sensitive the institution is to specific or
several market risks. This includes lending to specific market
segments (credit concentration to a sector such as agriculture),
exposure to foreign exchange rates such as through borrowings,
interest rate differentials, commodities and equities prices,
financial derivatives etc. Changes associated with these market
prices and conditions could adversely affect an MFIs performance
and its existence. In our current economic situation where we
largely depend on oil export which faces fluctuation, the economy
and its institutions are highly exposed to risks associated with
market prices. Banking in particular (MFIs inclusive) is highly
vulnerable to Interest rate risk as well as other financial risks in
the market place, including liquidity risks.
MFIs are expected to have Risk management departments
headed by an experienced Risk manager depending on the size
of the MFI. Examiners insist on making adequate provisions
where there is high level of fluctuation in prices and economic
conditions.

Rating criteria
CAMELS rating assigns an average rating value of 1 to 5 to indicate
an assessment condition of the institution. This is an indication of the
institutions vulnerability and strength based on calculated ratios where
applicable. They also apply qualitative assessments in the process in
determining the overall rating.
Rating 1 – Strong performance with good risk management
practices
Rating 2 – Satisfactory performance with good risk
management practices
Rating 3 – Performance that is flawed in some areas with risk
management practices that are less than

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 satisfactory. Poor risk identification procedures, with
some degree of supervisory concern.
Rating 4 – Poor performance with unacceptable risk
management practices. There is serious
supervisory concern here.
Rating 5 – Very unsatisfactory performance that is grossly
deficient in virtually all aspects. Risk management
almost absent or poorly administered.

6.2 P.E.A.R.L.S Rating System

“PEARLS is a financial performance monitoring system designed to offer
management guidance for credit unions and other savings institutions.
PEARLS is also a supervisory tool for regulators”. (Anna Cora Evans
and Brian Branch, contains information sourced from David C.
Richardson‟s “PEARLS Monitoring System,” WOCCU Toolkit
Number 4). This is an alternative performance rating system developed
for MFIs and adopted world-wide by Regulators and MFIs for ranking
MFIs within and across countries and for institutions to monitor their
performance and that of their peers. It should be noted that Pearls uses
only ratios and quantitative values for its assessment unlike CAMELS
that uses both qualitative and quantitative values for institutional
assessment. PEARLS is widely acclaimed rating standard for WOCCU
members which stands for World Council of Credit Unions.
PEARLS stands for Protection, Effective financial structure, Asset quality,
Rates of Return and Costs, Liquidity, and Signs of growth. We shall
examine the individual components below.

(i) P – Protection – This measures adequacy of provisions made for

loan losses against delinquent loans. The intention is to protect
clients with savings from possible risk of loss of their investment
by ensuring the adequacy of loan loss provisions. Provisions act
as first line of defence against possible losses for the MFI since it
cushions loan impairment that would otherwise erode capital if not
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 made. When loan losses are not made, higher profits are declared
and possibly paid out as dividends to shareholders. Under
PEARLS, a provision of 100% of delinquent loans of 12 months
and above is considered adequate whereas 35% is considered
adequate for delinquent loans of between 1 to 12 months. Another
ratio under protection is 100% write of all loans overdue for more
than 12 months.

(ii) E – Effective Financial Structure - This focuses on ideal

combination of assets and liabilities: fund sources in the financial
statement such as deposits, borrowings, equity etc and their uses
in the business to generate growth, profitability, business
efficiency and financial strength. It emphasizes effective financial
structure with revenue generating assets like loans and
placements to generate sufficient earnings. It recommends 70-
80% of total assets to consist of loans. Also, 70-80% of loans to
be funded by member clients savings to avoid rate fluctuations of
other funding sources. Liquid assets to total assets should be
about 20%.

(iii) A – Asset Quality - This refers to a percentage of performing

loans to overall (gross) loan portfolio. A high portfolio at risk (PAR
– percentage of delinquent loans to total portfolio) is an indication
of poor loan quality. The lower the Portfolio at Risk (PAR), the
higher the loan quality and vice versa. Defaulting loans cause
delayed payments and increase the value of non-earning assets
which ultimately affects profitability. High PAR gives an indication
of serious institutional weakness which in turn weakens both net
earnings and institutional capital. PEARLS advocates monitoring
of the ratio of non-earning assets to total assets to ensure that
interest bearing sources of funds are not used in funding non-
earning assets. They can only be invested in income earning
assets. Some standard bench marks for capital adequacy

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 includes PAR of not more than 5% and Non income generating
assets to total assets of not more than 5%.

(iv) R – Rates of Return and Costs - Rates of return and costs

measure yields on each category or type of assets or where funds
have been invested and on the liability side, measures cost of
funds for each category of funding sources. This addresses basic
questions as to where the MFI is earning the most and least
income on its assets and where it is paying a lot of costs on its
liabilities. This compares rates it earns on its highest income
bearing assets and highest cost of funds. Rates of returns for a
larger proportion of MFI assets should effectively cover funding
costs, administrative costs and operating costs, impairment costs
and any other costs of running the MFI. As commercial or profit
making ventures, the rates should be entrepreneurial to cover all
costs and provide good return on investment for the promoters.
Standard measurements include: 1) Yield which is Financial
Revenue from loans/Average gross portfolio and 2) Cost of
savings.

(v) L – Liquidity – Liquidity considerations for an MFI cannot be over

emphasised. Liquid assets must be sufficient at all times to meet
withdrawal needs and loan funding. Central Bank of Nigeria
considers a minimum of 20% of all deposits as sufficient liquidity.
PEARLS also give an indicator of not less than 15% of all
Deposits. Three measures are considered namely: obligatory
liquidity reserves, idle liquid funds, and total net liquidity reserves.
Idle liquid funds must not be more than 1% of total assets.

(vi) S – Signs of Growth – This is a measure of growth in different

aspects of MFI operations. Seven areas of growth are identified
for monitoring and measurement and these are; Total assets,
Loan portfolio, Savings deposits, Debt funding or external credits,
shares, institutional capital and membership (clients). It is
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 important to maintain a balanced growth in different parameters.
Growth in deposits drives growth in total assets and this should
also lead to increase in loan portfolio, otherwise idle funds may be
recorded. “The growth indicators of PEARLS can help
managers maintain a balanced and effective financial
structure” (WOCCU: A Technical Guide to PEARLS – A
Performance Monitoring System, November 2002, p.10). Some
recommendations include: Growth in total Assets should be
greater than inflation rate; Growth in Membership (Clients) should
be greater than 12% etc.

CAMAELS differ from PEARLS in three ways:

(a) CAMELS combine both quantitative and qualitative criteria in
measurement. Management is more of a qualitative factor than a
quantitative factor. PEARLS consider only measurable or
quantifiable factors.
(b) Financial structure or composition of assets and liabilities is taken
into consideration by PEARLS unlike CAMELS
(c) PEARLS rating also considers Growth rates in indicators as this has
a lot of bearing on profitability and performance of the MFI.

6.3 Other MFI Ratings and Certification

A Microfinance Institutional Rating provides an opinion on the long term
viability and credit-worthiness of a regulated or unregulated microfinance
institution through a comprehensive assessment of risks, performance,
and market position. (Julie Abrams - Microfinance Analytics: .Global
Microfinance Rating Comparability September 2012)
Microfinance Practice and MFIs are expected to meet certain minimum
performance standards to:
(a) Attract funding from both donors and investors
(b) Remain competitive and meet both their social goals and
commercial objectives and
(c) Meet regulatory requirements in their operating environment.

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Ratings and bench marking are therefore extremely important as
assessment tools for common performance standards for MFIs for
transparency, effectiveness, optimum productivity and regulatory
compliance. Prospective Donors want to support MFIs with high impact
potentials especially in under-developed and underserved markets but
they want to see good reasons for doing so. In the same manner, debt
funders want to be convinced that their funds are safe when they lend.
Certifications have also gained prominence and ratings are used as
certification standards. Two Nigeria MFIs in 2017 were certified by
SMART Campaign for Consumer Protection principles and many others
have commenced the SMART Campaign Rating process. Reputable
international agencies conduct the rating exercise for MFIs and this
makes it quite expensive as we do not yet have local agencies involved
in the exercise.

Why Rating?
(1) Rating raises performance standards and improve efficiency and
quality to give assurance and confidence to funders and donors
(2) Rating improves competitiveness separating serious MFIs from
the rest of the other players
(3) Donors use rating performance benchmarks to set performance
targets for fund release in project and program execution.

Rating Standards
A common Rating standards is not readily available and Nigerian MFIs
are yet to embrace rating and certification partly due to expensive nature
of the exercise as only foreign institutions are currently conducting the
exercise and again due to the fact that many MFIs do not appreciate the
relevance. A Nigerian Institution that currently conducts rating Agusto &
Co does a general performance rating of institutions and not MFI
specialised rating. International rating institutions use different rating
methodologies such as:

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- ACCION Camel. This is based on the CAMELS principles earlier
discussed and was popularized for MFIs by Accion International.
- PEARLS – Already discussed above and was developed by World
Council of Credit Unions (WOCCU). This comes with a Certification
process called Finance Organization Achieving Certified Credit
Union Standards (FOCCUS).
- Girafe Rating System – This was developed by PlaNetFinance
- MicroRate – This was developed MicroRate
- Institutional Performance Standards and Plans - Developed by
the Committee of Donor Agencies for Small Enterprise
Development and Donors Working Group on Financial Sector
Development, United Nations Capital Development Fund
- Smart Campaign Certification – This is a Certification done by
Centre for Financial Inclusion Washington DC for MFIs conducted
on its behalf by Rating Agencies appointed for that purpose

It should be noted that while the cost of conducting a rating exercise is

deemed to be high for Nigerian MFI‟s, subsidies and funding is available
for this purpose from Rating agencies and development organizations to
encourage MFIs to get rated. CGAP which is an International NGO that
promotes Microfinance and financial inclusion has a special fund
dedicated to MFI rating and assessment. Notable International.

Microfinance Rating institutions include:

(1) MicroFinanza
(2) MicroRate
(3) M-CRIL (Micro-credit Rating International Ltd)
(4) Planet Rating
These are the biggest and specialised microfinance rating agencies
known as SMRAs. Other MFI rating agencies include:
(5) FinDev Gateway
(6) Rapid Ratings International Inc. (RRI)

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In furtherance to double bottom line concept, Financial Performance
measurement rating and Social Performance assessment rating are
considered. While a number of MFIs focus on financial performance,
reputable MFIs focus on both financial performance and social
performance. Smart Campaign certification which is hinged on the seven
principles of Consumer protection is becoming increasingly important. A
number of MFIs are currently being assessed for certification in Nigeria.

The Seven principles are:

(1) Appropriate Product Design and Delivery

(2) Prevention of Over indebtedness

(3) Transparency

(4) Responsible pricing

(5) Fair and respectful treatment of clients

(6) Privacy Of Client Data

(7) Scoring Exercise

In order to be certified, an institution must score 100% in all parameters

across the 7 principles especially in its policies and practice in services
offerings to clients. A Certified MFI enjoys the pride of place among
responsible MFIs across the Globe. This is an exclusive club of Top MFIs
in Africa and the globe as a whole.

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Practice Questions

(1) Outline 7 SMART Campaign principles and explain the relevance in an

Institutions Service Offerings. What is the purpose of Smart Campaign
Certification?

(2) Why does an MFB have to spend a lot of money to get Certification and
be rated by an International Rating Agency?

(3) Rating Standards are bench marked on key performance ratios for an
MFB. Identify 15 key ratios for CAMELS rating system and explain the
relevance of 5 of the ratios?

(4) Briefly explain the elements of the Acronym „PEARLS‟. Outline the
differences between CAMELS and PEARLS Rating Systems.

(5) The Central Bank of Nigeria is interested in the Healthy operation and
Sound management of MFIs for their sustainability. How does CBN
enforce regulatory provisions to achieve its objectives stated above?
What rating system does CBN use in the course of inspection and how
effective has the inspection been considering the massive failures of
many MFBs that have been liquidated over time?

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- 100 -
 References and Further Reading

CGAP and World Bank, 2009. Financial Analysis for Microfinance Institutions.
Published by the Consultative Group to Assist the Poor (CGAP).

CGAP, 2003. Financial Terms, Ratios and Adjustments for Microfinance.

Published by the Consultative Group to Assist the Poor (CGAP)

CGAP, 2003. Microfinance Consensus Guidelines: Disclosure Guidelines for

Financial Reporting by Microfinance Institutions, written by Richard
Rosenburg, Patricia Mwangi, Robert Peck Christen, Mohamed Nasr.
(Published by CGAP/The World Bank Group)

CIBN, Microfinance Certification Programme: A Study Manual – Published by

CIBN Press Limited.

Chris Malwadde and Boulder Institute of Microfinance, 2014. Financial

Analysis for MFIs 2014 Boulder Training Program.

DFI Working Group on Blended Concessional Finance for Private Sector

Projects – Summary Report

Hari Srinivas: Options for New Microfinance Agency: Rating Standards and
Certification (PEARLS Rating System) – Unpublished

Joana Ledgerwood, Julie Earne and Candace Nelson (edited) 2009. The
New Microfinance Handbook: A Financial System Perspective.
(Published The World Bank)

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Julie Abrams, 2012. Microfinance Analytics: Global Microfinance
Comparability. Published by Multilateral investment Fund (A member of
the IDB Group).
Lagos Business School 2015 AMP 27. (Presentation). Introduction to Strategy
in a Turbulent Environment by Chris Ogbechie. (Unpublished).

Basic Financial Management and Ratio Analysis for MFIs Toolkit March
2008 Mustanzer Hussain: CAMEL Model Conceptual Framework. Published by
The Academia

Private Sector Development Institutions Round Table, 2013. DFI Guidance

for using Investment Concessional Finance in Private Operations. (Published
Private Sector DFIs made up of EBRD, IFG, AsDB, IDGB, AfDB, EIB, ICD, AIIB,
and EDFI)

Ruth Dueck Mbeba, MEDA 2008. Basic Financial Management and Ratio
Analysis for MFIs Toolkit. Published By MicroSave/MEDA.

SEEP, 2010. Pocket Guide to the Microfinance Financial Reporting Standards:

Measuring Financial Performance of Microfinance Institutions. Published
by The Seep Network.

WOCCU Inc, A Technical Guide to Pearls – A Performance Monitoring System.

Published by WOCCU (World Council of Credit Unions).

Other Sources (online):

www.wikipedia.com

www.investopedia.com

www.businessdictionary.com

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- 103 -
 INDEX

INDEX

A D
Accounting Concepts - 2 Debt Funding - 48
Accounting Conventions - 2, 5 Delinquent Loans - 93
Accounting Principles - 3 Development Funds - 52
Accounting Record - 6 Disclosure - 5
Accrual Concept - 4 Donations - 50, 61
Adjustments and Ratio Analysis - 40 Dual Concept - 4
Asset Quality - 87, 93

E
B Earnings - 89
Bonds - 51 Effective Financial Structure - 93
Borrowed Funds - 48 Efficiency and Productivity Ratios -
Budgeting and Strategy - 67 26
Business Entity Concept - 3 Equity Fund - 46
Business Plan - 80 External Audits - 16

C F
Capital Adequacy Ratio - 87 Financial Analysis - 15
Cash Flow Statement - 9 Financial Information - 2
Conservatism - 5 Financial Modelling - 69
Consistency - 5 Financial Position - 2, 8
Consultative Group Against Poverty Financial projection - 69
(CGAP) - 16 Financial Statements - 2, 6
Co-operative Funds - 62 Cost Fixed Deposits - 50
Concept - 4 Foreign Currency Loans - 51
Financial Planning – 68
Fluctuation - 91

- 104 -
 INDEX

G N
GAAP - 2 New Capital Requirements - 47
Going Concern Concept - 4
Grants Funds - 61
O
Override - 6
H

P
I PEARLS - 95
Identifying - 53 Periodicity - 4
Income Statement - 7 Portfolio Report - 11
Portfolio Quality Ratios - 20
Project Funds - 60
J
Joanna Ledgerwood - 52
Julie Earne - 52 Q
Quantitative - 95
Qualitative - 95
K Quasi-Equity - 62, 71

L R
Leveraging - 53 Ratings - 96
Liquidity - 79, 90 Realisation Concept - 4
Risk management - 59

M
Management Soundness - 89 S
Materiality - 5 Savings - 50
Matching Concept - 4 Senior Debts – 72
Money Measurement Concept - 4 Sensitivity to Market Risks - 91
Signs of Growth - 94
Statement of Changes in Equity - 10
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Statement of Comprehensive Income - 7
Statutory Bodies - 86
Socially Responsible Funds - 62
Subordinated Debts - 49, 60, 72
Sustainability and Profitability Ratios - 22

T
Tax Authorities - 2
Timing - 59

Y
Yield - 94

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 INDEX

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