MIcrofinance ratios

8/7/2019 MIcrofinance ratios

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PP AA RRTT II CC II PP AA NN TT CC OO UU RRSS EE MM AA TT EE RRII AA LL SS

Financial Analysis for Microfinance

Institutions

CON SU L T AT I V E G ROUP TO AS S I S T THE POOR


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NOTE The participant course materials contain the main technical messages and concepts delivered in this course. It is not

intended to serve as a substitute for the full information and skills delivered through the individual courses Skills forMicrofinance Managers training series. During the actual courses, key concepts are presented with case studies, exchange of

participant experiences and other activities to help transfer skills. Users interested in attending a training course should directly

contact CGAP hubs and partners for course dates and venues. CGAP would like to thank those who were instrumental to the

development and design of the original course that led to this participant summary and to its update in 2008: Janis Sabetta,

Michael Goldberg, Ruth Goodwin-Groen, Lorna Grace, Brigit Helms, Jennifer Isern, Joanna Ledgerwood, Patricia Mwangi, Bridge

Octavio, Ann Wessling, Djibril Mbengue, Tiphaine Crenn and all CGAP training hubs and partners. Copyright 2009, The

Consultative Group to Assist the Poor (CGAP).


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Overview

Overview and Goals of the Course ........................................................................................4

Financial Statements ............................................................................................................ 7

Balance Sheet........................................................................................................................... 7

Income Statement..................................................................................................................... 8

Cash Flow Statement ................................................................................................................. 9

Portfolio Report and Activity Report............................................................................................ 10

Non-Financial Data Report ........................................................................................................ 10

Formatting Financial Statements ........................................................................................ 12

Indicators for Financial Analysis ......................................................................................... 17

Portfolio Quality .................................................................................................................. 20

Rationale for Loan Loss Impairment and Impairment Loss Allowance ............................................. 24

Accounting for Loan Loss Impairment and Write-Offs.................................................................... 25

Analytical Adjustments ....................................................................................................... 27

Asset /Liability Management .............................................................................................31

Efficiency and Productivity .................................................................................................. 36

Sustainability and Profitability ............................................................................................40

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


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Overview and Goals of the Course

Overview

International best practice in microfinance around the world suggests good financial

analysis is the basis for successful and sustainable microfinance operations. Some would

even say that without financial analysis your MFI will never achieve sustainability.

Sustainability means relying on commercially priced and internally generated funds rather

than on donors for growth.


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Sustainability=

Coverage of financial expense (cost of funds + inflation)+

Loan loss +

Operating expenses (personnel +admin expenses) +

Capitalization for growth from financial revenue


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Goals of the Course

To master the tools needed for understanding the financial position and sustainability of

your institution.

To use financial analysis to improve your institutions sustainability, by

1.Identifying the components, purpose, relationships, and importance of the main

financial statement;

2.Learning the formats of income statements and balance sheets to easily separate

the effect of donor funds;

3.Analyzing financial statements to monitor profitability, efficiency, and portfolio

quality;

4.Adjusting costs for inflation, subsidized cost of funds, and in-kind donations; and

5.Identifying critical factors for moving toward financial sustainability.


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Financial Statements

MFIs commonly use four types of financial statements:

1.Balance sheet

2.Income statement

3.Cash flow statement

4.Portfolio report

Balance Sheet

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

Assets Liabilities Equity

Represent what is ownedby the

organization or owedto it by

others

Are items in which an

organization has invested its

funds for the purpose of

generating revenue.

Represent what is owedby the

organization to others.

Represents the capitalor net

worth of the organization.

Includes capital contributions of

members, investors or donors,

retained earnings, and the current

year surplus.

Assets = Liabilities + Equity


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Income Statement

An income statement reports the organizations financial performance over a specified

period of time. It summarizes all revenue earned and expenses incurred during a

specified accounting period. An institution prepares an income statement so that it can

determine its net profit or loss (the difference between revenue and expenses).

Revenue Expenses

Refers to money earned by an organization for

goods sold and services rendered during an

accounting period, including

Interest earned on loans to clients Fees earned on loans to clients

Interest earned on deposits with a bank, etc.

Represent costs incurred for goods and services

used in the process of earning revenue. Direct

expenses for an MFI include

Financial costs Administrative expenses

Provision for loan impairment

An income statement

Relates to a balance sheet through the transfer of cash donations and net profit (loss)

as well as depreciation, and in the relationship between the provision for loanimpairment and the impairment loss allowance.

Uses a portfolioreports historical default rates (and the current impairment loss

allowance) to establish the provision for loan impairment.

Relates to a cash flowstatement through the net profit/loss as a starting point on

the cash flow (indirect method).


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Starts at zero for each period (in contrast to the Balance Sheet which is cumulative

since the beginning of the organizations operation).

Cash Flow Statement

A cash flow statement shows where an institutions cash is coming from and how it isbeing used over a period of time.

A cash flow statement

Classifies the cash flows into operating, investing and financing activities.

oOperating activities: services provided (income-earning activities).

oInvesting activities: expenditures that have been made for resources intended to

generate future income and cash flows.

oFinancing activities: resources obtained from and resources returned to theowners, resources obtained through borrowings (short-term or long-term) as

well as donor funds.

Can use either

oThe direct method, by which major classes of gross cash receipts and gross cash

payments are shown to arrive at net cash flow (recommended by IAS)

oThe indirect method, works back from net profit or loss, adding or deducting

noncash transactions, deferrals or accruals, and items of income or expense

associated with investing and financing cash flows to arrive at net cash flow.

Note: The Balance Sheet and Income Statement are accounting reports. The figures can be influenced by managements choices

regarding accounting policies. A Cash Flow Statement cannot be changed by any accounting policy.


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Portfolio Report and Activity Report

A portfolio report and activity report link the loan portfolio information of the three

previously discussed statementsincome statement, balance sheet, and cash flow. The

purpose of the portfolio report is to represent in detail an MFIs microlending activity,

present the quality of the loan portfolio, and provide detail on how the MFI has

provisioned against potential losses. Unlike other statements, the design of this report

varies from MFI to MFI. The content, however, should be consistent and must include

the following:

Portfolio activity information,

Movement in the Impairment Loss Allowance, and

A Portfolio Aging Schedule.

Non-Financial Data Report

In addition to the information collected in the preceding reports, important operationaland macroeconomic data must be captured to calculate key financial ratios. In order toprovide tools that will give managers and others a complete picture of an MFIs financial

condition, the non-financial data report includes data on products and clients served bythe institution, as well as data on the resources used to serve them.


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Formatting Financial Statements

Most MFIs depend on donor funds but do not realize to what extent and that donor money

is not limitless. We want to create financial statements that will show the impact of donor

funds on the MFIs financial position and its relationship to sustainability.

So whats different ? INCOME STATEMENT

Donor funds are treated below the line.Donor money is recorded after the net income (after taxes before donations).

BALANCE SHEET There are three separate sources of equity from the income statement:Retained earnings/lossescurrent year (minus cash donations)Donationscurrent yearOther equity accounts including net nonoperating income

This is important because it allows one to see over time the proportion of equity that

is from the MFI itself versus the amounts contributed by donors.


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Three Ways in Which MFIs Treat Cash Donations

Goals: 1. Grants are separated from operating income

2. Grants are fully disclosed in equity

IAS 20 Recommends Income approach

Considerations: Where to record them

When to record them

Income Statement Balance Sheet

Operating Profit/Loss Liabilities

All Cash Grants/Donations Equity

...for current year

Assets

DonationsCurrent year

Operating Profit/Loss Liabilities

Grants for Operations

Grants for Loan Funds

Grants for Fixed Assets

...for current year

Assets

EquityDonations

Current year


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Sample Income Statement

Financial Revenue Operating Expense

Financial Revenue from Loan Portfolio Personnel ExpenseInterest on Loan Portfolio Administrative Expense

Fees and Commissions on LoanPortfolio

Depreciation and Amortization Expense

Financial Revenue from Investments Other Administrative Expense

Other Operating Revenue Net Operating Income

Financial Expense Net Non-operatingIncome/(Expense)

Financial Expense on Funding

Liabilities

Non-operating Revenue

Interest and Fee Expense on Deposits Non-operating Expense

Interest and Fee Expense on

Borrowings

Net Income (Before Taxes and

Donations)

Other Financial Expense TaxesNet Financial Income Net Income (After Taxes and Before

Donations)

Impairment Losses on Loans Donations

Provision for Loan Impairment Donations for Loan Capital

Value of Loans Recovered Donations for Operating Expense

Net Income (After Taxes and

Donations)

Source: SEEP Framework, 2005


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Sample Balance Sheet

ASSETS Accounts Payable and Other Short-term

LiabilitiesCash and Due from Banks Long-term Time Deposits

Trade Investments Long-term Borrowings

Net Loan Portfolio Other Long-term Liabilities

Gross Loan Portfolio Total Liabilities

Impairment Loss Allowance EQUITY

Interest Receivable on Loan Portfolio Paid-In Capital

Accounts Receivable and Other Assets Donated Equity

Other Investments Prior Years

Net Fixed Assets Current Year

Fixed Assets Retained Earnings

Accumulated Depreciation andAmortization

Prior Years

Total Assets Current Year

LIABILITIES Reserves

Demand Deposits Other Equity Accounts

Short-term Time Deposits Adjustments to Equity

Short-term Borrowings Total Equity

Interest Payable on Funding Liabilities Total Liabilities + Equity

Source; SEEP Framework, 2005


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Financial analysis is required for many financialmanagement decisions:

How to manage the finances to achieve the strategic goals of the institution

How to increase profitability

How to reach self-sufficiency/breakeven point

How to increase efficiency especially reducing the cost per client

What is the optimum level of each different operational expense including the cost of funds

How to manage the costs of human resources as part of overall human resource management

How to deal with the effect of inflation

What is the loan impairment allowance policy

What is the write-off and rescheduling policyWhat interest rate should the MFI charge on products?

How to manage liquidityi.e., how to keep solvent at the same time as disbursing the maximum

number of loans, setting a target level of liquidity

What is the best financing structure, i.e., how much debt including from commercial sources and

how much capital do you need?

What should the asset structure be?

How to manage the fixed assets, i.e., the depreciation policy, how to finance them, are they insured,

are they safe?

What are currency risks and can they be minimized?

How to undertake trend analysis and to compare actual performance against planned performance


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Indicators for Financial Analysis

An MIS is created to generate information for decision making, the best

information for that purpose is in the concise form of a financial or management

indicator.

Waterfield and Ramsing, p. 39.

Indicators generally compare two or more pieces of data, resulting in a ratio that providesmore insight than do individual data points.

Sustainability and Profitability

Operational Self-Sufficiency

Financial Self-Sufficiency

Return on Assets (ROA)

Adjusted Return on Assets (AROA)

Return on Equity (ROE)

Adjusted Return on Equity (AROE)


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Asset/Liability Management

Yield on Gross Portfolio

Portfolio to Assets

Cost of Funds Ratio

Adjusted Cost of Funds Ratio

Debt to Equity

Adjusted Debt to EquityLiquid Ratio

Portfolio Quality

Portfolio at Risk (PAR) Ratio

Adjusted Portfolio at Risk (PAR) Ratio

Write-off Ratio

Adjusted Write-off Ratio

Risk Coverage RatioAdjusted Risk Coverage Ratio


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Efficiency and Productivity

Operating Expense Ratio

Adjusted Operating Expense Ratio

Cost per Active Client

Adjusted Cost per Active Client

Borrowers per Loan Officer

Active Clients per Staff MemberClient Turnover

Average Outstanding Loan Size

Adjusted Average Outstanding Loan Size

Average Loan Disbursed


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Portfolio Quality

Portfolio at Risk (PAR) and the Write-off Ratio are the preferred ratios for analysingportfolio quality. The other ratios are more limited as noted in the measurement columnbelow.

INDICATOR RATIO MEASUREMENT

(R9)

Portfolio at Risk

PARBy Age

Adjusted PAR Ratio

Unpaid Principal Balance of all loans with

payments > 30 Days past due + Value ofRenegotiated Loans

Gross Loan Portfolio

Adjusted Unpaid Principal Balance of all loans

with payments > 30 Days past due + Value of

Renegotiated LoansAdjusted Gross Loan Portfolio

The most acceptedmeasure of portfolio

quality. The mostcommon international

measurements of PAR are> 30 days and > 90 days.

But can vary with termsof loan.

The adjusted PAR reducesthe Gross Loan Portfolio

by the Write-offAdjustment.

Write-Off Ratio

Adjusted write offratio

Value of Loans Written OffAverage Gross Loan Portfolio

Value of Loans Written Off + Write-off

AdjustmentAverage Adjusted Gross Loan Portfolio

Represents the percentageof the MFIs loans that hasbeen removed from the

balance of the gross loanportfolio because they are

unlikely to be repaid. MFIs

write-off policies vary;managers are


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recommended to calculatethis ratio on an adjusted

basis.

Risk Coverage Ratio

Adjusted riskcoverage ratio

Impairment Loss AllowanceUnpaid Principal Balance of all loans with

payments > 30 Days past due

Adjusted Impairment Loss AllowanceAdjusted Unpaid Principal Balance of all loans

with payments > 30 Days past due Write-offAdjustment

Shows how much of theportfolio at risk is covered

by the MFIs ImpairmentLoss Allowance.

The adjusted ratioincorporates theImpairment Loss

Allowance Adjustment andthe Write-off Adjustment.


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Calculating Portfolio at Risk ratios

Ref. DESCRIPTION

R9 Portfolio at Risk

aPAR > 30 Days

b Value of Renegotiated Loans

c a + b

d Gross Loan PortfolioR9 PAR Ratio = c/d

Adj R9 Adjusted Portfolio at Risk Ratio

aAdjusted PAR > 30 Days

b Value of Renegotiatedc a + b

d Adjusted Gross Loan Portfolio

Adj R9 Adjusted PAR Ratio = c/d

R10 Write-off Ratioa

Value of Loans Written-off

b Average Gross Loan Portfolio

R10 Write-off Ratio = a/b


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Adj R10 Adjusted Write-off Ratio

aValue of Loans Written-off + Write-off Adjustment

b Average Adjusted Gross Loan Portfolio

Adj R10 Adjusted Write-off Ratio = a/b

R11 Risk Coverage Ratio

aImpairment Loss Allowance

b Portfolio at Risk > 30 days

R11 Risk Coverage Ratio = a/b

Adj R11 Adjusted Risk Coverage Ratio

aAdjusted Impairment Loss Allowance

b Adj PAR > 30 days - Write-off Adjustment

Adj R11 Adjusted Risk Coverage Ratio = a/b


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Rationale for Loan Loss Impairment and

Impairment Loss AllowanceMaintaining loans on the books that are unlikely to be repaid overstates the value of the

portfolio.

IMPAIRMENT LOSS ALLOWANCE

is an account that represents the amount of outstanding principal that is not expected tobe recovered by a micro-finance organisation

it is a negative asset on the Balance Sheet and reduces the Gross Loan Portfolio. (An

alternative presentation is to show it as a liability.)

PROVISIONFOR LOAN IMPAIRMENT

is the amount expensed on the Income and Expenses Statement.

It increases the Impairment Loss Allowance


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LOAN LOSSES or WRITE-OFFs

occur only as an accounting entry. They do not mean that loan recovery should notcontinue to be pursued.

They decrease the Impairment Loss Allowance and the Gross LoanPortfolio

Accounting for Loan Loss Impairment and Write-OffsAn impairment loss allowance indicates the possibility that an asset in the Balance Sheet is not 100%

realizable. The loss of value of assets may arise through wear and tear such as the depreciation of

physical assets, loss of stocks, or unrecoverable debts.

The provision for loan impairment expenses the anticipated loss of value in the portfolio gradually over

the appropriate periods in which that asset generates income, instead of waiting until the actual loss of

the asset is realized.

Provisions are only accounting estimates and entries, and they do not involve a movement of cash, like

saving for a rainy day.

A provision for loan impairment charged to a period is expensed in the Income Statement. The

corresponding credit accumulates over time in the Balance Sheet as an allowance shown as a negative

asset:

The accounting transaction is:

Dr Provision for loan impairment

Cr Impairment loss allowance


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Loan losses or write-offs occur when it is determined that loans are unrecoverable. Because the

possibility that some loans would be unrecoverable has been provided for in the accounting books through

allowances, loan losses are written off against the impairrment loss allowance and are also removed from

the gross loan portfolio.

The accounting transaction is:

Dr Impairment loss allowance

Cr Gross loan portfolio

Write-offs do not affect the net portfolio outstanding unless an increase in the impairment loss allowance

is made. When write-offs are recovered, they are booked in the Income Statement as Value of Loans

Recovered which reduces the Provision amount.

Adapted from: Joanna Ledgerwood. Financial Management Training for Microfinance Organizations, Calmeadow, 1996.


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Analytical Adjustments

Adjustments are additional, or hidden, costs incurred by the MFI that we need to recognize

for internal management purposes, for example, when calculating and analyzing efficiency

and profitability ratios. They are not to be included in the audited financial statements;

they are internal adjustments.

Which costs does an MFI incur that are not reflected in the expenses?

SubsidiesInflationPortfolio at risk


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REF. ACCOUNTNAME

EXPLANATION FORMULA

1. Subsidies

A1Subsidized

Cost of Funds

Examines the difference between

an MFIs financial expense and thefinancial expense it would pay if all

its funding liabilities were priced atmarket rate.

{(Average Short-term

Borrowings + Average Long-termBorrowings) x Market Rate for

Borrowing} Interest and FeeExpense on Borrowings

A2 In-kind Subsidy

The difference between what the

MFI is actually paying for adonated or subsidized good or

service and what it would haveto pay for the same good or

service on the open market..Common examples of these in-kind subsidies are computers,

consulting services, free officespace, and free services of a

manager.

Period Estimated Market Cost of

[Accounts] Period Actual Costof [Accounts]

2. Inflation

A3 Inflation

The rationale behind the inflationadjustment is that an MFI should,

at a minimum, preserve the value

of its equity (and shareholdersinvestments) against erosion due

to inflation. In addition, thisadjustment is important to

consider when benchmarkinginstitutions in different countriesand economic environments.

Unlike subsidy adjustment,recording an inflation adjustment

(Equity, Beginning pg Period x

Inflation Rate) (Net FixedAssets, Beginning pf Period x

Inflation Rate)


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is common in many parts of theworld and is mandated by Section

29 of the International AccountingStandards (IAS) in high inflationeconomies.

3. Portfolio at Risk

A4Impairment

Loss Allowance

Intended to bring as MFIsImpairment Loss Allowance in line

with the quality of its Gross LoanPortfolio.

Gross Loan Portfolio x [Allowance

Rated] (Impairment LossAllowance)

A5 Write-off

Intended to identify loans on anMFIs books that by any

reasonable standard should bewritten-off. This adjustment can

significantly reduce the value ofan MFIs assets if persistent

delinquent loans are not counted

as part of the gross loanportfolio.

Portfolio at Risk > 180 days

Calculating Adjustments

DESCRIPTION

A1Adjustment for SubsidizedCost of Funds

a. Average Short-term Borrowings

b. Average Long-term Borrowings

c. Average Loang and Short Term Borrowings

d. Market Rate, End of Period


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e. Market Cost of Funds = c x d

f. Interest and Fee Expense on Borrowings

g. Adjustment for Subsidized Cost of Funds =e - f

A2Adjustment for In-kindSubsidies

a. Personnel Expense

b. Administrative Expense

c. Adjustment for In-kind Subsidies = a + b

A3 Inflation Adjustment

a. Equity, Beginning of Periodb. Inflation Rate

c. Inflation Adjustment to Equity = (a x b)

d. Net Fixed Assets, Beginning of Period

e. Inflation Adjustment to Fixed Assets = (d x b)

f. Net Adjustment for Inflation = c - e

A4Adjustment for ImpairmentLoss Allowance

a. Adjusted Impairment Loss Allowance

b. Actual Impairment Loss Allowance

c. Adjustment to Impairment Loss Allowance = a - b >0

A5 Adjustment for Write-off

PAR > 180 days Past Due


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Asset /Liability Management

Asset/ Liability Management is the ongoing process of planning, monitoring andcontrolling the volumes, maturities, rates and yields of assets and liabilities. The basis offinancial intermediation is the ability to manage assets (the use of funds) and liabilities(the source of funds). Asset/liability management is required on the following levels:

Interest Rate Management: The MFI must make sure that the use of funds generates

more revenue than the cost of funds.Asset Management: Funds should be used to create assets that produce the most

revenue (are most productive).

Leverage: The MFI seeks to borrow funds to increase assets and thereby increase

revenue and net profit. The term leverage indicates the degree to which an MFI is usingborrowed funds. At the same time, the MFI must manage the cost and use of itsborrowings so that it generates more revenue than it pays in Interest and Fee Expenseon those borrowings.

Liquidity Management: The MFI must also make sure that it has sufficient fundsavailable (liquid) to meet any short-term obligations.


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Asset/Liability Management Ratios

Interest rate management

Yield on gross

Portfolio

Cash Received from Interest, Fees and

Commissions on Loan PortfolioAverage Gross Loan Portfolio

Yield gap

100% - Cash Revenue from Loan Portfolio

Net Loan Portfolio x Expected Annual Yield

Cost of Funds

Financial Expense on Funding Liabilities(Average Deposit + Average Borrowing)

Adjusted Cost of

Funds

Adjusted Financial Expense on FundingLiabilities

(Average Deposit + Average Borrowing)

Asset Management

Portfolio toAssets

Gross Loan PortfolioAssets


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Leverage

Debt/Equity

Adjusteddebt/Equity

Liabilities

Equity

LiabilitiesAdjusted Equity

Liquidity Management

Current Ratio

Cash + Trade InvestmentsDemand Deposit + Short-term TimeDeposit + Short-term Borrowing +

Interest Payable on Funding Liabilities +Accounts Payable and Other Short-term

Liabilities)


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Calculating Asset/Liability Management Ratios

Ref. DESCRIPTION

R4 Yield on Gross Portfolio Ratio = a/ba Cash Received from Interest, Fees,and Commissions on Loan Portfolio


R4 Yield on Gross Portfolio Ratio = a/b

R5 Portfolio to Assets Ratio

a Gross Loan Portfolio

b Assets

R5 Portfolio to Assets Ratio = a/b

R6 Cost of Fund Ratio

a Financial Expenses on Funding Liabilities

b Average Deposits

c Average Borrowings

d b + cR6 Cost of Fund Ratio = a/d

Adj

R6 Adjusted Cost of Fund Ratio

a Adjusted Financial Expenses on Funding Liabilities

b Average Deposits

c Average Borrowingsd b + c

Adj

R6 Adjusted Cost of Fund Ratio = a/d

R7 Debt to Equity Ratio

a Liabilities

b Equity

R7 Debt to Equity Ratio = a/b


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Adj

R7 Adjusted Debt to Equity Ratio

a Liabilities

b Adjusted Equity

AdjR7 Adjusted Debt to Equity Ratio = a/b

R8 Liquid Ratio Ratio

a Cash

b Trade Investments

c a + b

d Demand Depositse Short-term Deposits

f Short-term Borrowings

g Interest Payable on Funding Liabilities

h Account Payable and Other Short-term Liabilities

i d + e + f + g + h

R8 Liquid Ratio Ratio = c/i


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Efficiency and Productivity

Efficiency is related to Productivity in terms of serving clients and keeping costs low.

RATIO FORMULA EXPLANATION

Operating Expense

Ratio

Adjusted OperatingExpense Ratio

Operating Expense

Average Gross Loan Portfolio

Adjusted operating Expense

Average Adjusted Gross Loan Portfolio

Highlight personnel and

administrative expenses relative to

the loan portfolio the mostcommonly used efficiency indicator.

The adjusted ratio usually increasesthis ratio when the affect of

subsidies are included.

Cost per ActiveClient

Adjusted Cost perActive Client

Operating ExpenseAverage Number of Active Clients

Adjusted Operating ExpenseAverage Number of Active Clients

Provides a meaningful measure ofefficiency for an MFI, allowing it to

determine the average cost ofmaintaining an active client.

The adjusted ratio usually increase

this ratio when the affect ofsubsidies are included.

Borrowers per LoanOfficer

Number of Active BorrowersNumber of Loan Officers

Measures the average caseload of

(average number of borrowersmanaged by) each loan officer.


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Active Clients per

Staff Member

Number of Active Clients

Total Number of Personnel

The overall productivity of the MFIs

personnel in terms of managingclients, including borrowers,

voluntary savers, and other clients.

Client Turnover

Number of Active Clients, beginning ofperiod + Number of New Clients during

period Number of Active Clients, end of

period

Average Number of Active Clients

Measures the net number of clients

continuing to access services duringthe period; used as one

measurement of client satisfaction.

AverageOutstanding Loan

Size

Adjusted Average

Outstanding Loan

Size

Gross Loan PortfolioNumber of Loans Outstanding

Adjusted Gross Loan Portfolio

Adjusted Number of Loans Outstanding

Measures the average outstandingloan balance per borrower. Thisration is a profitability driver and a

measure of how much of each loanis available to clients.

The adjusted ratio incorporates the

Write-off Adjustment.

Average Loan

Disbursed

Value of Loan DisbursedNumber of Loans Disbursed

Measures the average value of each

loan disbursed. This ratio isfrequently used to project

disbursements. This ratio or R17

can be compared to (N12) GNI per

capita.


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Calculating Efficiency and Productivity Ratios

Ref. DESCRIPTION

R12 Operating Expense Ratioa Operating Expense


R12 Operating Expense Ratio = a/b

Adj R12 Adjusted Operating Expense Ratio

a Adjusted Operating Expense

b Average Adjusted Gross Loan PortfolioAdj R12 Adjusted Operating Expense Ratio = a/b

R13 Cost per Active Client Ratio

a Operating Expense

b Average Number of Active Clients

R13 Cost per Active Client Ratio = a/b

Adj R13 Adjusted Cost per Active Client Ratio

a Adjusted Operating Expense

b Average Number of Active Clients

Adj R13 Adjusted Cost per Active Client Ratio = a/b

R14 Borrowers per Loan Officer Ratio

a Number of Active Borrowersb Number of Loan Officers

R14 Borrowers per Loan Officer Ratio = a/b

R15 Active Clients per Staff Member Ratio

a Number of Active Clients

b Total Number of Personnel

R15 Active Clients per Staff Member Ratio = a/b

6 Cli i


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R16 Client Turnover Ratio

a Number of Active Clients, beginning of period

b Number of New Clients during period

c Number of Active Clients, end of period

d Average Number of Active Clients

R16 Client Turnover Ratio = (a+b-c)/d

R17 Average Outstanding Loan Size Ratio

a Gross Loan Portfolio

b Number of LoanOutstanding

R17 Average Outstanding Loan Size Ratio = a/b

Adj R17 Adj Average Outstanding Loan Size Ratio

a Adjusted Gross Loan Portfolio

b Number of LoanOutstanding - Write-off Adjustment

Adj R17 Adj Average Outstanding Loan Size Ratio = a/b

R18 Average Loan Disbursed Ratio

a Value of Loans Disbursedb Number of Loan Disbursed *)

R18 Average Loan Disbursed Ratio = a/b


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Sustainability and Profitability

Profitability and sustainability ratios reflect the MFIs ability to continue operating andgrow in the future.

RATIO FORMULA EXPLANATION

Operational Self-

Sufficiency

_Financial Revenue_

(Financial Expense + Impairment Losses on Loans +

Operating Expense)

Measures how well

a MFI can cover itscosts throughoperating

revenues.

Financial Self-

Sufficiency

_Adjusted Financial Revenue_

(Adjusted Financial Expense + Adjusted Impairment

Losses on Loans + Adjusted Operating Expense)

Measures how wella MFI can cover itscosts taking into

accountadjustments to

operating revenues

and expenses.

Return on Assets

(ROA)

_Net Operating Income - Taxes_

Average Assets

Measures how well

the MFI uses itsassets to generatereturns. This ratio

is net of taxes and

excludes non-operating items

Adj t d R t Adj t d N t O ti I T and donations


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Adjusted Return on

Assets (AROA)

_Adjusted Net Operating Income - Taxes_

Average Adjusted Assets

and donations.

Return on Equity

(ROE)

Adjusted Return onEquity (AROE)

_Net Operating Income - Taxes_

Average Equity

_Adjusted Net Operating Income - Taxes_

Average Adjusted Equity

Calculates the rateof return on theaverage Equity for

the period.

Because the

numerator does notinclude non-operating items or

donations and isnet of taxes, theratio is frequently

used as a proxy for

commercialviability.

C l l ti S t i bilit d P fit bilit R ti


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Calculating Sustainability and Profitability Ratios

Ref. DESCRIPTION

R1 Operational Self-Sufficiency Ratioa Financial Revenue

b Financial Expense

c Impairment Losses on Loans

d Operating Expense

e b + c + d

R1 Operational Self-Sufficiency Ratio = a/e

Adj

R1 Financial Self-Sufficiency Ratio

a Financial Revenue

b Adjusted Financial Expense

c Adjusted Impairment Losses on Loans

d Adjusted Operating Expense

e b + c + dAdjR1 Financial Self-Sufficiency Ratio = a/e

R2 Return on Assets (ROA)

a Net Operating Income

b Taxes

c a - bd Average Assets

R2 Return on Assets (ROA) = c/d

AdjR2 Adjusted Return on Assets (AROA)

a Adjusted Net Operating Income

b Taxesc a - b

d Adjusted Average Assets


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d Adjusted Average Assets

Adj

R2 Adjusted Return on Assets (AROA) = c/d

R3 Return on Equity (ROE) = c/da Net Operating Income

b Taxes

c a - b

d Average Equity

R3 Return on Equity (ROE) = c/d

AdjR3 Adjusted Return on Equity (AROE) = c/d

a Adjusted Net Operating Income

b Taxes

c a - b

d Adjusted Average Equity

Adj

R3 Adjusted Return on Equity (AROE) = c/d


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Use of Ratios

Ratio analysis is a financial management tool that enables managers ofmicrofinance institutions to assess their progress in achieving sustainability.

They can help answer two primary questions that every institution involved inmicrofinance needs to ask.

Is this institution either achieving or progressing towards profitability?

How efficient is it in achieving its given objectives?

Taken together, the ratios in the framework provide a perspective on thefinancial health of the lending/savings, and other operations of the institution.

No one ratio tells it all. There are no values for any specific ratio that is necessarilycorrect. It is the trend in these ratios which is critically important.

Ratios must be analyzed together, and ratios tell you more when consistentlytracked over a period of time.

Documents

MIcrofinance ratios