Take Home Final Exam DEV 572 Fall 07

(Due by 15th December , e-mail submission)

For the first two questions please use the attached financial statement:
1. How do the loan loss provision expense and loan loss reserve relate to each other,
and where do you find each in an MFI’s financial statements? The financial
statements on the following pages are from an MFI that started operations in
1999. Assume that no loans have been written off. Fill in the missing numbers in
the areas shaded in gray. How much is the net outstanding portfolio at the end of
December 2001? How much has it increased since December 2000? How much
have total operating expenses increased over the same period?

2. Equity provides an important source of capital for the growth and sustainability of
an MFI, as you haveseen in this lesson. Many factors effect an institution’s equity.
Take the example of the MFI whosefinancial statements you just completed. What
happens to the Net Operating Profit (Loss) of this MFI?Where does it appear on
the institution’s Balance Sheet? If the MFI’s operations continue to generatethis
return, what would happen to the institution’s equity? Is it important for an MFI to
generate a netoperating profit in the long run? If so, why? If not, why not?

3. The Local Government Agency (LGA) is your donor agency’s partner in a local
area development scheme. LGA wants to start up a microfinance project in the
area. The area is isolated and there are few potential clients with year round
economic activities. Several best-practice MFIs that work in the area have
difficulty keeping their branches open due to lack of demand. LGA, the partner,
states that the reason there is no demand for the MFIs’ services is that the interest
rate is too high. Further, they state that neither of the MFIs lends to the people in
the development area villages. LGA requests a revolving loan fund that will be
managed by the village development committee that is made up of elected
officials.

Your agency is considering approval of this project, but asks your advice on the
likelihood that this initiative would become sustainable. What type of information
would help you explain your position?

4. Your donor agency has identified seven microfinance institutions that request
technical assistance and grant funding for loan capital. Five of the MFIs have
been operating for over five-10 years, have a limited outreach – fewer than 2,000
clients and have weak operation systems. There are also two MFIs that appear to
have the capability to grow, become sustainable and become significant providers
of financial services in their market over the next three years. They are committed
to the principles of deep outreach and achieving financial sustainability, and have
developed systems, products and service delivery methodologies that appear to
create a solid base for future growth. There are funds available to finance only
four MFIs. Your donor agency wants to support the five older, weaker MFIs based
on the argument that they are in more need of technical assistance and financial
support. Because of limited financing your donor agency recommends that the
grant funding for loan capital be extended to all of the MFIs as loans rather than
grants, through a government on-lending institution. The government on-lending
institution notes that it will have to lower its minimal performance criteria in
order to extend loans to these MFIs. But, because of political pressure by your
donor agency and others in the government, the on-lending institution will
reluctantly support this new effort. What is the likelihood that all of these MFIs
will become sustainable? What questionable donor practices can you identify in
this case?