Unit 6

Measuring the Performance of

MFIs
Analyzing financial statements
• Financial statements for banks and financial Institutions(B&FIs) present a
different analytical problem than manufacturing and service companies. As
a result, analysis of a bank's financial statements requires a distinct
approach that recognizes a bank's somewhat unique risks.
• The concept and functions of banks(B-FIs) is quite simple. Banks employ
cash taken from depositors, stockholders and earnings and lend the funds
to creditworthy borrowers and invest the remainder in safe securities at an
interest rate higher than the rate paid to depositors and cost of capital.
Cash derived from depositors and savers in essence, become the banks
inventory.
• Profits are derived from the spread between the rate they pay for funds
and the rate they receive from borrowers. This ability to pool deposits from
many sources and then lend to many different borrowers creates the flow
of funds inherent in the banking system. By managing this flow of funds,
banks generate profits, acting as the intermediary of interest paid and
interest received and taking on the risks of offering credit.
Financial statements or Financial Reports
• Income statement
The most important financial statement for the majority of users is likely to be the income
statement, since it reveals the ability of a Banks and Financial Institutions to generate a profit. Also,
the information listed on the income statement is mostly in relatively current rupees, and so
represents a reasonable degree of accuracy. However, it does not reveal the amount of assets and
liabilities required to generate a profit, and its results do not necessarily equate to the cash flows
generated by the Bank and financial institutions. Also, the accuracy of this document can be suspect
when the cash basis of accounting is used.
• Balance sheet
The balance sheet is likely to be ranked third by many users, since it does not reveal the results of
operations, and some of the numbers listed in it may be based on historical costs, which renders the
report less informative. Nonetheless, the balance sheet is of considerable importance when paired
with the income statement, since it reveals the amount of investment needed to support the sales
and profits shown on the income statement.
• Statement of cash flows
A possible candidate for most important financial statement is the statement of cash flows, because
it focuses solely on changes in cash inflows and outflows. This report presents a more clear view of
a company's cash flows than the income statement, which can sometimes present skewed results,
especially when accruals are mandated under the accrual basis of accounting.
General Principles of Banks&FIs Management
General principles of bank management (bank manager/management team)
has the following primary concerns:
1. Deposit-Outflow: To make sure that the bank has enough ready cash to
pay its depositors when there are Deposit-outflows. (Because depositors
make withdrawals and demand payment). To keep enough cash on hand, the
bank must engage in liquidity management, which is the acquisition of
sufficiently liquid assets to meet the bank obligations to depositors.
2. Asset Management: To pursue an acceptable low level of risk by acquiring
assets which have allow rate of default (credit risk) and by diversifying asset
holdings.
3. Liability management: To acquire funds at low cost
4.Capital adequacy Management: To decide the amount of capital the bank
should maintain and then acquire the needed capital.
5. Interest-rate risk: To manage risks associated with financial institution
practices (the risk of earnings and returns on bank assets that results from
interest-rate changes)
Financial Performance Ratios
Financial ratios are created with the use of numerical values taken
from financial statements to gain meaningful information about a company.
The numbers found on a company’s financial statements – balance
sheet, income statement, and cash flow statement – are used to
perform quantitative analysis and assess a company’s liquidity, leverage,
growth, margins, profitability, rates of return, valuation, and more.
Major Financial ratios are:
Liquidity ratios
Leverage ratios
Efficiency ratios
Profitability ratios
Market value ratios
Uses of Financial Ratio Analysis
Analysis of financial ratios serves two main purposes:
1. Track Bank and FIs performance
Determining individual financial ratios per period and tracking the change in their
values over time is done to spot trends that may be developing in a financial
institutions. For example, an increasing debt-to-asset ratio may indicate that a FIs is
overburdened with debt and may eventually be facing default risk.
2. Make comparative judgments regarding Bank and FIs performance
Comparing financial ratios with that of major competitors is done to identify
whether a Financial Institutions is performing better or worse than the industry
average. For example, comparing the return on assets between institutions helps
an analyst or investor to determine which institutions is making the most efficient
use of its assets.
Users of financial ratios include parties external and internal to the Bank and FIs:
• External users: Financial analysts, creditors, competitors, tax authorities,
regulatory authorities, and industry observers
• Internal users: Management team, employees, and owners/stockholders
 Measuring Financial Performance
Profitability Ratios in Banking/MFIs
Bank Profitability: The net after tax income or net earning of a bank
(usually divided by a measure of bank size). Some of key ratios are:
Net Income After Taxes
Return on Equity Capital(ROE) =
TotalEquity Capital
Net Income After Taxes
Return on Assets(ROA)=
Total Assets
Net Interest Income
Net Interest Margin =
Total Assets
Net Noninterest Income
Net Noninterest Margin =
Total Assets
TotalOperatingRevenues−TotalOperatingExpenses
Net Bank Operating Margin =
Total Assets
ROE = (Profit margin x Asset utilization x Equity multiplier)
Measuring Financial Performance (Cont.…
ROE = Tax management efficiency x Expense control efficiency x Asset
management efficiency x Funds management efficiency
Return on Assets and its Components
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒
ROA = × = PM X AU
𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑒𝑠
Tax Ratio =
𝑇𝑜𝑡𝑎𝑙 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
The Spread- it measures the difference between the average yield on
earning assets and the average cost of interest bearing liabilities.
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
Spread = −
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑎𝑠𝑠𝑒𝑡𝑠 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑒𝑎𝑟𝑖𝑛𝑔 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Measuring Financial Performance (Cont.…
Net Interest Margin
Net interest margin measures the difference between interest income
generated and interest expenses. Unlike most other companies, the
bulk of a bank’s income and expenses is created by interest. Since the
bank funds a majority of their operations through customer deposits,
they pay out a large total amount in interest expense. The majority of a
bank’s revenue is derived from collecting interest on loans.
The formula for net interest margin is:
Net Interest Margin = (Interest Income – Interest Expense) / Total
Assets
A bank maintains bank capital to lessen the chance that it will become
insolvent.
How the Amount of Bank Capital Affects Returns to Equity Holders. Because
owners of a bank must know whether their bank is being managed well, they
need good measures of bank profitability. A basic measure of bank
profitability is the return on assets (ROA), the net profit after taxes per
dollar/rupee of assets:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
ROA =
𝐴𝑠𝑠𝑒𝑡𝑠
The return on assets provides information on how efficiently a bank is being
run, because it indicates how much profits are generated on average by each
dollar of assets.
However, what the bank’s owners (equity holders) care about most is how
much the bank is earning on their equity investment. This information is
provided by the other basic measure of bank profitability, the return on
equity (ROE), the net profit after taxes per dollar of equity (bank) capital:
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥𝑒𝑠
ROE =
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Liquidity Ratios
Liquidity ratios are financial ratios that measure a company’s ability to repay both short-
and long-term obligations. Common liquidity ratios include the following:
• Current Ratio:-The current ratio measures a company’s ability to pay off short-term
liabilities with current assets:
Current assets
Current ratio =
Current liabilities

• Acid-test Ratio:-The acid-test ratio measures a company’s ability to pay off short-term
liabilities with quick assets:
Current assets−Inventories
Acid-test ratio =
Current liabilities
• Cash Ratio:-The cash ratio measures a company’s ability to pay off short-term liabilities
with cash and cash equivalents:
Cash and Cash equivalents
Cash ratio =
Current Liabilities
• Operating Cash flow ratio:-The operating cash flow ratio is a measure of the number of
times a company can pay off current liabilities with the cash generated in a given period:
Operating cash flow
Operating cash flow ratio =
Current liabilities
Leverage Financial Ratios
Leverage ratios measure the amount of capital that comes from debt. In other words, leverage
financial ratios are used to evaluate a company’s debt levels. Common leverage ratios include the
following:
• Debt Ratio:- debt ratio measures the relative amount of a company’s assets that are provided
from debt:
Total liabilities
Debt ratio =
Total assets
• Debt to Equity Ratio:- debt to equity ratio calculates the weight of total debt and financial
liabilities against shareholders’ equity:
Total liabilities
Debt to equity ratio =
Shareholder’s equity
• Interest Coverage Ratio:- interest coverage ratio shows how easily a company can pay its interest
expenses:
Operating income
Interest coverage ratio =
Interest expenses
• Debt service coverage ratio:- it reveals how easily a company can pay its debt obligations:
Operating income
Debt service coverage ratio =
Total debt service
Efficiency and Productivity
Efficiency Ratio
• The bank efficiency ratio is a quick and easy measure of a bank's ability to turn resources
into revenue.
• The efficiency ratio assesses the efficiency of a bank’s operation by dividing non-interest expenses
by revenue. The formula for the efficiency ratio is:
Efficiency Ratio = Non-Interest Expense / Revenue
• The efficiency ratio does not include interest expenses, as the latter is naturally occurring when
the deposits within a bank grow. However, non-interest expenses, such as marketing or
operational expenses, can be controlled by the bank. A lower efficiency ratio shows that there is
less non-interest expense per dollar of revenue.
2. Operating Leverage
• Operating leverage is another measure of efficiency. It compares the growth of revenue with the
growth of non-interest expenses. The formula for calculating operating leverage is:
Operating Leverage = Growth Rate of Revenue – Growth Rate of Non-Interest Expense
• A positive ratio shows that revenue is growing faster than expenses. On the other hand, if the
operating leverage ratio is negative, then the bank is accumulating expenses faster than revenue.
That would suggest inefficiencies in operations.
Capital Adequacy Management
The bank has sufficient net worth or equity capital to maintain a
cushion against bankruptcy or regulatory attention but not so much
that the bank is unprofitable. This second tricky trade-off is
called capital adequacy management.
Banks have to make decisions about the amount of capital they need to
hold for three reasons.
1. Bank capital helps prevents bank failure, a situation in which the
bank cannot satisfy its obligations to pay its depositors and other
creditors.
2. The amount of capital affects returns for the owners (equity-
holders)of the bank
3. A minimum amount of bank capital (bank capital requirements) is
required by regulatory authority.
There is a direct relationship between the return on assets (which
measures how efficiently the bank is run) and the return on equity
(which measures how well the owners are doing on their investment).
This relationship is determined by the so-called equity multiplier (EM),
which is the amount of assets per dollar of equity capital:
𝐴𝑠𝑠𝑒𝑡𝑠
EM =
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
Using our definitions, yields: ROE =ROA x EM

𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 𝐴𝑠𝑠𝑒𝑡𝑠

= ×
𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
ROA and ROE reveal different information about a bank or other financial
institution.
ROA is a measure of efficiency. It conveys information on how well the
institution’s resources are being used in order to generate income.
Liquidity Risk
Liquidity refers to the ability of an asset to convert into cash without
loss within a short time.
Probability the Bank Will Not Have Sufficient Cash and Borrowing
Capacity to Meet Deposit Withdrawals and Other Cash Needs
• Liquidity Risk Measures
 Purchased Funds (Eurodollars, federal funds, large value certificate of
deposits (CDs) and commercial papers)/Total Assets
Net Loans/Total Assets
 Cash assets and Due from Banks/Total Assets
 Cash assets and Government Securities/Total Assets
Liquidity Risk
Liquidity refers to the ability of an asset to convert into cash without
loss within a short time.
Probability the Bank Will Not Have Sufficient Cash and Borrowing
Capacity to Meet Deposit Withdrawals and Other Cash Needs
• Liquidity Risk Measures
 Purchased Funds (Eurodollars, federal funds, large value certificate of
deposits (CDs) and commercial papers)/Total Assets
Net Loans/Total Assets
 Cash assets and Due from Banks/Total Assets
 Cash assets and Government Securities/Total Assets
Loan loss and provisioning
Banking industry lenders generate revenue from the interest and expenses they receive from
lending products. Banks and FIs lend to a wide range of customers, including consumers, small
businesses, and large corporations.
A loan loss provision refers to funds set aside by a bank to cover bad loans – the ones that don’t get
fully repaid because the customer defaults or those that provide less interest income because the
borrower negotiated a lower rate. They’re a bank’s best estimate of what percentage of a loan may
not get paid back. Once made, the estimate will be included in a bank’s financial statement as an
expense so investors to get a proper sense of a bank’s financial health. A loss on a loan is still a lost
asset for the bank, but the goal of the loan loss provision is to ensure that the bank’s cash flow is
protected so it still has the funds to provide services to other borrowers and depositors.
The bank loan can be classified into two types according to the overdue of the credit period.
They are –Performing Loan (सक्रिय कर्जा) and Non-performing loan (क्रिष्कृय कर्जा)
Performing Loan (सक्रिय कर्जा)
• Pass Loan (असल कर्जा )
• Watchlist (सुक्ष्म निगरजिी)
Non- Performing Loan (सक्रिय कर्जा)
• Sub-standard (कमसल)
• Doubtful (शंकजस्पद)
• Loss (खरजब
Loan loss and provisioning
• Loan Loss Provision Coverage Ratio = Pre-Tax Income + Loan Loss
Provision / Net Charge Offs
Net charges = Actual Losses
Benchmarking
Benchmarking is the process of comparing one’s business processes
and performance metrics to industry bests or best practices from
other industries.
In the process of benchmarking, management identifies the best
firms/FIs in their industry, or in another industry where similar
processes exist, and compare the results and processes of those
studied to one’s own results and processes.

Benchmarking is a measurement of the quality of an organization’s

policies, products, programs, strategies, etc. and their comparison
with standard measurements or similar measurements of its peers.
Benchmarking
In addition to providing a better indication of the true performance of a single MFI,
adjustments also enable managers and outside analysts to compare or benchmark
an MFI’s performance with other MFIs. Adjustments for benchmarking create
common minimum standards for recognizing and managing credit, country, and
operational risk in financial reporting. These standards eliminate many of the
distortions among institutions caused by different legal forms, regulatory
environments, and accounting, and other institutional policies.
Benchmarking is the process of comparing a single institution’s performance to that
of its peers. The value of benchmarking depends on the availability and quality of
comparative data. Fortunately, a fairly large body of quality comparative data is
now available for benchmarking through the Micro Banking Bulletin, rating
agencies, and international and local network organizations. This Framework is
intended to further the availability of data by promoting standard definitions and
formats so that data can be easily shared across institutions and continents.
Comparisons across institutions or peer groups require caution. Local conditions,
institutional characteristics, and the management choices affect institutional
performance
Advantages of Benchmarking
Performance improvement
 Sets the foundation of performance improvement aimed at enhancing competitiveness.
 Identifies best practices in key business processes
 Determines what constitutes superior performance.
 Quantifies the gap between the expected performance and the actual state;
New Paradigms
 Forces organizations out of their comfort zones and provides specific and measurable short-term
improvement plans based on current reality rather than historical performance.
 Remove “paradigm blindness” and forces the organization to take a fresh approach to goal
setting based on a broader perspective, including the external perspective, the most critical
factor that drives customer expectations.
Change
 Enables organizational focus on change and provides the direction for the change process.
 Making management aware of the competitors’ standards that provide the organization with
minimum standards of excellence.
 Provide new ideas and better ways of doing things.
 Opens minds to new ideas, heralding a process of continuous learning that leads
to a learning organization.
Types of Benchmarking
Different types of Benchmarking
• Process Benchmarking
• Financial Benchmarking
• Product Benchmarking
• Performance Benchmarking
• Strategic Benchmarking
• Functional Benchmarking
• Operational Benchmarking
Benchmarking in Banking
Benchmarking is an important tool in the financial world. Companies, hedge funds, mutual funds,
investors, and other financial bodies pick a specific benchmark in the industry and seek to replicate
its returns or to compare its own performance to that of the benchmark.
Banks and Financial Institutions typically use ratios as benchmarks are;
• liquidity ratios and debt ratios
The appropriate benchmarks for tracking the banking sector's performance depend on the type of
bank. For instance, commercial-only banks are evaluated very differently than retail-only banks.
• For, smaller savings and loan institutions, MFIs, standard benchmarks include net interest margins
the ratio between equity and total assets, and accounts receivable collection ratios.
• Huge multinational firms, on the other hand, should be tracked with profitability ratios, average
net asset values, and market indexes designed to track the overall performance of one sector.
Other important ratios to use as benchmarks include;
 return on assets (ROA)
 provisions for credit losses
 return on equity(ROE)
 solvency ratios
Rating MFIs
Micro-finance institutions (MFIs) face a distinct challenge when trying to encourage
prospective donors and financial markets to back their activities. Although evaluations
and assessments are available to MFIs from credible agencies, these tend to be
expensive, and lack a common standard that can be applied to the entire industry.
Most of the evaluations have not been made public, leaving the methodology and/or
results unknown to other potentially interested parties.
Ratings, common performance standards, and benchmarking in the Micro-finance
industry, will become increasingly important.
First, performance standards contribute to raising the quality and efficiency of MFIs and
provide confidence and security for private investors. Second, in competitive
environments where there is pressure to commercialize microfinance, regulators view
ratings and standards as a way to separate from 'star' performing institutions. Third,
donors are interested in setting performance standards to provide clear benchmarks and
guidelines to determine future funding for MFIs.
In this context, performance standards can be useful in promoting independent and
transparent review of MFIs which should enhance prospects for the growth and
capacities of MFIs.
.
Rating MFIs
A common understanding on the reporting, measurement, and evaluation of MFI
performance has to develop rating and certification systems include:
PEARLS rating system. This is a rating system developed for credit unions by the World
Council of Credit Unions (WOCCU). The rating system includes a certification process
called Finance Organization Achieving Certified Credit Union Standards (FOCCUS).
ACCION Camel. The evaluation guideline for MFIs developed by ACCION International.
Girafe rating system. Developed by PlaNetFinance.
Micro Rate. Developed by Damian von Stauffenberg of MicroRate.
MicroBanking Bulletin/ MicroBanking Standards Project. Funded by the Consultative
Group to Assist the Poorest (CGAP).
The Philippine Coalition for Micro-finance Standards. Developed a set of performance
standards to serve as guidelines or benchmarks to assess the operations of Philippine
NGOs involved in Micro-finance.
CGAP Microfinace Rating and Assessment Fund
Institutional Performance Standards and Plans Developed by the Committee of Donor
Agencies for Small Enterprise Development and Donor's Working Group on Financial
Sector Development, United Nations Capital Development Fund.
Social Performance Measurement
Social performance is the effective translation of an institution’s mission into practice in line with accepted
social values that relate to:
• improving the lives of poor and excluded clients and their families; and
• widening the range of opportunities for communities.
To create this value the social objectives of an MFI may include:
• serving increasing number of poor and excluded people sustainably by expanding and deepening outreach to
poorer people;
• improving the quality and appropriateness of financial services available to the target clients through a
systematic assessment of their specific needs;
• creating benefits for microfinance clients, their families, and communities to improve access to social capital,
social links, assets, income, and services; reduce their vulnerability; and fulfill their basic needs; and
• improving the social responsibility of the MFI toward its employees, its clients, and the community it serves.
Ultimately, a focus on social performance makes microfinance more customer-driven by monitoring
performance against both social and financial goals. This requires that MFIs:
• set social and financial performance goals;
• identify indicators that measure achievement of these goals;
• continuously collect client data to monitor progress against the indicators;
• adapt program strategy and operations in response to both social and financial performance information;
and
• incorporate the social performance information into management systems so that the information can be
useful for decision making.
Social Performance Measurement
• Input – output analysis
• Cost and benefit analysis (qualitative and quantities)
• Performance outreach (Financial access and inclusion, depth and
width)
• Return on Social Investment
Social Performance Measurement
Social Performance for Microfinance In the microfinance arena,
success of a microfinance institution (MFI) has long been associated
with financial performance outcomes measured by loan portfolio
quality, cost recovery, and profitability. Yet, these indicators only tell
part of the performance story in microfinance.
Most microfinance institutions strive to meet both financial and
social goals, managing a double bottom line by which financial
performance facilitates the fulfillment of a social mission.
Social Performance Measurement
Current missions of microfinance institutions suggests that they follow
different approaches such as:

• Supporting SMMEs(small, medium and micro-enterprise)

• Fostering individual development
• Poverty alleviation
• Rural microfinance
• Serving the under banked
• Local economic development
• Business approach
• Quality microfinance
• Empowerment
Outreach Performance evaluation of MFIs
Outreach performance is a commonly used performance indicator for
performance evaluation.
Outreach is defined as the extent to which MFIs are wide and deep in
their client base.
Breadth outreach indicates the width that is the size of the client
base.
Depth outreach indicates the nature of clients, which is assessed by
the poverty level, place of residence (rural or urban) and gender.
Impact performance evaluation of
microfinance institutions in the framework of
WOCCU model, CGAP model, and SEEP model
• WOCCU Model
• CGAP Model
• SEEP Model
World Council of Credit Unions (World Council or WOCCU)
The World Council of Credit Unions (World Council or WOCCU) is the
leading international trade association and development agency for credit
unions and cooperative financial institutions.
World Council promotes the self-sustainable development of credit unions
and other financial cooperatives around the world to empower people
through access to high quality and affordable financial services.
World Council advocates on behalf of the global credit union system before
international organizations, and works with national governments to
improve legislation and regulation. Its technical assistance programs
introduce new tools and technologies to strengthen credit unions' financial
performance and increase their outreach.
World Council is funded by member dues, government agency and
foundation grants and annual gifts to its foundation.
World Council of Credit Unions and its subsidiaries are headquartered
in Madison, Wisconsin, U.S. World Council also has a permanent office
in Washington, D.C., and program offices worldwide.
WOCCU Model – IT System
Management information systems & other IT investment for financial institutions
WOCCU works with financial institutions to implement management information systems (MIS), which help
financial institutions improve internal efficiencies and business processes, which in turn make it more
convenient and cost-effective for their customers. We collaborate with financial institutions to customize the
software, ensuring that it will meet their consumers’ needs.
Most recently, in Colombia, Mexico and Guatemala, WOCCU translated, customized and installed MIS software
at all credit unions, which enabled them to handle transactions and accounting electronically, facilitate
reporting, reduce the human resource burden and strengthen off-site monitoring of financial performance and
operations. In Haiti, our incentive grants enabled microfinance institutions, credit unions and private
development finance.
WOCCU supports institutions’ technology-driven system networks which enable financial institutions to pool
resources, allowing them to:
1. Expand points of services and provide a broader array of services.
2. Mitigate risks by sharing said risks.
3. Ensure smooth seasonal liquidity risk (deposit insurance) or increase returns by pooling liquidity.
4. Gain efficiency by sharing investment in infrastructure.
 These activities help WOCCU’s partners to expand into client services such as bill payment, national and
international shared branching, remittance distribution, ATM networks, card services and mobile money
services. (see example of payment platform architectures being explored by our partner the Asian
Confederation of Credit Unions)
Performance Monitoring
PEARLS monitoring system
The PEARLS Monitoring System is a financial performance monitoring system
which is designed to offer management guidance for credit unions and other
financial cooperative institutions.
It is a set of 44 financial ratios or quantitative indicators that help to
standardize terminology between institutions, which is used to analyze the
financial health of any financial institution. Since its creation in the 1980s, we
have used it with credit unions in 30-plus countries across the globe.
What Does PEARLS Stand For?
Protection
Effective Financial Structure
Asset Quality
Rates of Return and Costs
Liquidity
Signs of Growth
PEARLS rating system
Objective: PEARLS uses a set of financial ratios to monitor the financial stability of the
credit unions within WOCCU's developing movement projects. These ratios provide credit
unions, project staff, national federations and regulators with essential tools for
monitoring, planning, standardizing, ranking and facilitating supervisory control in credit
unions.
Methodology: Each letter in the word PEARLS measures the key areas of credit union
operations: Protection, Effective financial structure, Asset quality, Rates of return and
costs, and Liquidity and Signs of growth.
P = Protection. Protection is measured by comparing the adequacy of the provisions for
loan losses against the amount of delinquent loans. A credit union has adequate protection
if it has sufficient provisions to cover 100% of all delinquent loans for more than 12 months
and at least 35% of loans delinquent between 1 and 12 months.
E = Effective Financial Structure. Financial structure of the credit union is the single most
important factor in determining growth potential, earnings capacity and overall financial
strength. The PEARLS system measures credit union assets, liabilities and capital, then
recommends the "ideal" structure. Credit unions are encouraged to maximize earning
assets as the means to achieve sufficient earnings.
A = Asset Quality. A non-earning asset is one that does not generate income. An excess of
non-earning assets negatively affects credit union income. PEARLS indicators are used to
identify the impact of non-earning assets by analyzing delinquency ratios, percentages of
non-earning assets and the financing of non-earning assets.
PEARLS rating system (Cont….
R = Rates of Return and Costs. By segregating all of the essential components of net earnings, the
PEARLS system helps management calculate investment yields and evaluate financial costs and
operating expenses. PEARLS calculates yields on the basis of average outstanding investments,
unlike other systems that calculate yields on the basis of average assets.
Yield is computed in four main areas: loan portfolio, liquid investments, financial investments and
other non-financial investments. Operating costs are also important and broken down into three
main areas: financial intermediation costs, administrative costs and unrecoverable loan costs. "By
segregating in-come and expenses into the previously mentioned areas, PEARLS ratios can
accurately pinpoint the reasons why a credit union is not producing sufficient net income," noted
Dave Richardson, WOCCU Director of Technical Development.
L = Liquidity. Liquidity is traditionally viewed in terms of cash available to lend - a variable
exclusively controlled by the credit union. With the introduction of withdrawable savings deposits,
the concept of liquidity radically changes. Richardson explained, "Liquidity now refers to cash
needed for withdrawals - a variable the credit union can no longer control. The maintenance of
adequate liquidity reserves is essential to sound, financial management of the new credit union
model." PEARLS analyzes liquidity from three perspectives: total net liquidity reserves, obligatory
liquidity reserves and idle liquid funds.
S = Signs of Growth. The advantage of the PEARLS system is that it links growth to profitability, as
well as to other key areas by evaluating the strength of the system as a whole. Growth is measured
in seven key areas: total assets, loans, savings deposits, external credit, shares, institutional capital
and membership.
Consultative Group to Assist the Poor (CGAP)
CGAP (the Consultative Group to Assist the Poor) is a global
partnership of 34 leading organizations that seek to advance financial
inclusion.
CGAP develops innovative solutions through practical research and
active engagement with financial service providers, policy makers,
and funders to enable approaches at scale.
Housed at the World Bank, CGAP combines a pragmatic approach to
responsible market development with an evidence-based advocacy
platform to increase access to the financial services the poor need to
improve their lives.
CGAP model- Dimensions of Social Performance
INTENT AND DESIGN
What is the mission of the institution?
Does it have clear social objectives?
INTERNAL SYSTEMS & ACTIVITIES
What activities will the institution undertake to achieve its social mission?
Are systems designed and in place to achieve those objectives?
OUTPUT
Does the institution serve poor and very poor people?
Are the products designed to meet their needs?
OUTCOME
Have clients experienced social and economic improvements?
IMPACT
Can these improvements be attributed to institutional activities?
CGAP model
The following areas are suggested for a MFI performance appraisal:
• Executive summary and funding recommendation
• Institutional factors
 Stage of development of the institution, potential market size, and competition
 Governance and leadership
 Management
 Products
 Organizational structure and systems
 Social performance, if requested by funder
• Financial performance
 Portfolio quality
 Managed growth of portfolio and number of clients
 Efficiency
 Client retention
 Profitability
 Access to funding (grants, loans, guarantees, and equity from local and foreign sources)
• Business plan (projections and strategy)
SEEP Model- Impact performance evaluation of microfinance
institutions
M&E consists of two distinct but complementary parts:
• Monitoring is the routine collection and analysis of information to
track progress against set plans. It helps to identify trends and patterns,
adapt strategies, and inform decisions for project/program
management.
• Evaluation is an assessment of an ongoing or completed project,
program, or policy, with respect to its design, implementation, and
results. The purpose is to determine the relevance and fulfilment of
objectives, and/or developmental efficiency, effectiveness, impact, and
sustainability of the activity.
SEEP Model- Impact performance evaluation of microfinance
institutions
Internationally, there are differences in the terminologies used by various stakeholders for
the stages of a project or program, from activities to outputs to outcomes to impact.
Regardless of the terminologies used, all theories of change should provide a clear and
logical articulation of how one will get from an intervention, or set of activities, to the final
impact, or change in the lives of beneficiaries, that the program intends to generate in the
long run.
SEEP’s M&E documents define the different levels as follows:
Activities are actions that the association takes, such as conducting a training, producing a
report, organizing events that bring the sector together, etc.
Outputs are the deliverables or direct results of the activities, including participants
trained, reports produced, events organized, etc.
Outcomes are the adoption or use of program outputs, such as increased capacity of
members, improved services by members to their clients, or sector actors’ use of
information presented in studies to change their market strategies.
Impact is the higher-level change that a program will work towards achieving, particularly
with respect to how the lives of end beneficiaries will be affected. It is important to note
that the impact is not intended to be achieved solely by the association
Social Performance for Microfinance
In the microfinance arena, success of a microfinance institution (MFI)
has long been associated with financial performance outcomes
measured by loan portfolio quality, cost recovery, and profitability. Yet,
these indicators only tell part of the performance story in microfinance.
Most microfinance institutions strive to meet both financial and social
goals, managing a double bottom line by which financial performance
facilitates the fulfillment of a social mission.
What Is Social Performance?
Social performance is the effective translation of an institution’s mission into practice in line with accepted
social values that relate to:
• improving the lives of poor and excluded clients and their families; and
• widening the range of opportunities for communities.
To create this value the social objectives of an MFI may include:
• serving increasing number of poor and excluded people sustainably by expanding and deepening outreach to
poorer people;
• improving the quality and appropriateness of financial services available to the target clients through a
systematic assessment of their specific needs;
• creating benefits for microfinance clients, their families, and communities to improve access to social capital,
social links, assets, income, and services; reduce their vulnerability; and fulfi ll their basic needs; and
• improving the social responsibility of the MFI toward its employees, its clients, and the community it serves.
Ultimately, a focus on social performance makes microfinance more customer-driven by monitoring
performance against both social and financial goals.
This requires that MFIs:
• set social and financial performance goals;
• identify indicators that measure achievement of these goals;
• continuously collect client data to monitor progress against the indicators
Social Performance
The basic tools to measure performance are:
1. Breadth of outreach—How many clients are being served?
2. Depth of outreach—How poor are the clients?
3. Loan repayment (portfolio quality)—How well is the lender
collecting its loans?
4. Financial sustainability (profitability)—Is the MFI profitable enough
to maintain and expand its services without continued injections of
subsidies?
5. Efficiency—How well does the MFI control its operating costs?
Unit 6: Measuring the Performance of MFIs LH 8
Analyzing financial statements, Financial performance ratios, efficiency
and productivity; liquidity and capital adequacy; asset and liability
management, Loan loss and provisioning, Benchmarking ,Rating MFIs,
Social Performance Measurement and Impact performance evaluation
of microfinance institutions in the framework of WOCCU model, CGAP
model, and SEEP model