how productively the MFI has employed its assets. Reflects the MFI's real unsubsidized operating profitability relative to its earnings base. Formula: Adjusted Operating Profit/ Average Total Assets
the return on the capital of the MFI. Formula: Adjusted Operating Profit/Average Equity
measures the overall operating efficiency of a microfinance institution. Useful in comparing across various MFIs, because it does not include the cost of funds, and does not penalize institutions that are accessing commercial sources. Formula: (Personnel + Other administrative Expenses + In-kind Donations) / Average Net Portfolio Outstanding
refers to categorizing loan amounts past due according to the amount of time the amounts are past due. Aging categories are often 30 day increments such as 1-30 days past due, 31-60 days past due, 61-90 days past due, and greater than 90 days past due.
the written, formal contract between the donor and recipient. An agreement specifies the performance, reporting and other obligations the recipient assumes by accepting the donated funds.
the schedule for paying off the interest and principal of a loan.
measures the amount past due in a portfolio. Under-estimates the level of risk in the portfolio. See Portfolio at Risk. Formula: Amount Past Due / Outstanding Portfolio
the economic resources owned by the institution that provide future value to the institution. Cash, the loan portfolio, furniture and equipment are examples of assets.
used for calculations that require a comparison of assets to income. Formulas: 1. Most accurate: (Portfolio Outstanding at the End of Each Month in the Period + Portfolio at the End of the Previous Period) / (1 + Number of Months in the Period) 2. Less accurate: (Portfolio Outstanding at the End of the Previous Period + Portfolio Outstanding at the End of Current Period) / 2
a report on the financial position of an organization at a specific point in time. The balance sheet provides a summary of the institution's assets what the institution owns, and claims on those assets, or what the institution owes at a specific point in time, such as on December 31, 2002.
a strategic plan that places financial planning and financial performance at its core. Charts the future course of an institution through a realistic projection of operations. Incorporates financial models that allow managers to understand the financial implications of their decisions and of changing conditions.
the average number of clients served by one loan officer. Formula: average number of active loan clients during the period / the average number of loan officers during the period.
a one-time charge, usually a percentage of the loan amount that is charged at the time of disbursement. A commission increases the effective interest rate of a loan.
a requirement that the borrower maintain a minimum amount in a savings account in order to receive a loan.
an interest rate calculated based on the principal amount of the loan actually in the hands of the borrower during each amortization period.
the situation that occurs when a borrower cannot or will not repay his/her loan and the MFI no longer expects to receive repayment.
the situation that occurs when loan payments are past due. A delinquent loan (or loan in arrears) is a loan on which payments are past due. Delinquency is also referred to as arrears or late payments.
the process of deducting interest, commissions or fees from the initial loan amount before the loan is disbursed. Discounting reduces the initial loan amount actually received and therefore increases the effective interest rate.
the rate that converts all the borrower's financial costs for a loan into a single declining balance interest calculation. It includes the effects of interest rates, whether they are calculated on a flat or declining basis, payment schedules, commissions, fees, discounting, and compensating balances. The effective rate allows a calculation of all financial charges as a percent of the loan actually held by the client during each payment period. It is the rate that a client actually pays based on the amount of loan proceeds actually in the client's hands.
an operation is efficient when it produces the greatest output for the least input.
see administrative efficiency ratio, operating efficiency ratio.
the remaining interest in the assets of an organization after its liabilities have been satisfied. Sources of this interest may be donor or investor funds or the organization's retained earnings.
the provision of equity to an institution by donors or investors. Equity participants expect to share in the financial returns of the organization. They are distinct from creditors whose interest, in the form of liabilities, is due regardless of the institution's performance.
a charge, usually a fixed amount independent of the loan size, levied as part of the loan process. Fees increase the effective interest rate of a loan. If the amount is fixed, their impact on the effective interest rate will vary according to the loan size.
the process by which the formal and informal financial sectors manage liquidity in the economy, reallocating liquid resources by mobilizing savings from institutions and individuals and allocating it in the form of credit to institutions and individuals.
the financial output produced per input. The most financially productive operation is one that produces the greatest revenue for the least cost. Example: Average outstanding portfolio per loan officer
for an MFI, financial statements refer to the three basic financial reports that show the financial position of an MFI. These are the balance sheet, the income statement and the portfolio report. Financial statements also may include a fourth report, the Cash Flow Statement.
measures the degree to which operating income covers the adjusted operating expenses. Expenses include all operating expenses included in operational self-sufficiency as well as the value of subsidies and the cost of inflation to equity. Equivalent to AROA because it includes the same information. Formula: Operating Income /Adjusted Operating Expenses.
A flat interest rate is an interest rate calculated on the basis of the stated initial principal amount of the loan irrespective of the payment plan, (not on the amount of the loan actually in the hands of the borrower during each amortization period.)
the interchangeability of things that are identical or uniform. Frequently applied to money because any given amount can be used interchangeably with any other amount. The use of financial resources is highly fungible as the household budget shifts between consumption and investment in response to changing needs and opportunities. The divide between business and personal assets is often not clear.
the set of internationally accepted accounting standards.
the total amount of outstanding loans including the amount for which repayment is not expected, which is represented by the loan loss reserve.
growth based on replicating a standardized retail model in new geographic areas. Although horizontal growth has been the norm for MFIs, simple horizontal expansion can make it difficult to quickly introduce new products or changes to products.
one of a set of financial statements, the income statement shows what the institution earns and spends over a period of time, for example from January 1, 2002 through December 31, 2002. It reports the net income, profit (or net loss). Inflation Adjustment Formula: (Average Equity Average Fixed Assets) x Inflation Rate
refers to the sector of the economy that includes micro and small enterprises. In developing countries, the informal sector can account for one to two thirds of total employment. Actors in the informal sector usually lack access to the full range of financial services and to financial services at reasonable prices.
using equity to access commercial funds. MFIs can leverage commercial funds only if they have achieved financial viability because sources of commercial funds are concerned with receiving a market return on their investment. The Basel agreements enable a bank to leverage up to 12 times its equity with debt. MFIs have leveraged 5 to 8 times their equity.
a business's obligations to pay money or provide goods or services to another party. Liabilities are claims against a firm's assets. Examples: An outstanding bank loan or savings the institution has mobilized from others.
the degree to which assets are held in the form of money or in a form that can easily and immediately be converted into money. Liquidity can also be defined as the ability of an institution to meet its current financial obligations.
an accounting entry on the expense side of the income statement. It is made to adjust the loan reserve so that the loan loss reserve accurately reflects the risk of default in the portfolio. Loan loss provisions increase the loan loss reserve.
measures the amount the institution has declared non-recoverable, or written off, as a percentage of the average outstanding portfolio.
an accounting entry on the balance sheet which represents the amount of the outstanding portfolio that is not expected to be recovered. The amount of the loan loss reserve is based on historical information regarding loan default and the aging analysis of the current portfolio and should be calculated periodically, or set by the Central Bank.
according to the loan agreement, for loans paid in regular installments, the length of time between installments.
according to the loan agreement, the length of time between the date of disbursement of the loan and the date it is expected to be fully repaid.
refers to how microfinance services are delivered to the client. Elements of a service delivery methodology include type of guarantee or collateral required, processes for client selection, and policies for receiving additional loans.
the gross outstanding loan portfolio minus the loan loss reserve. The net portfolio is the portion of the gross outstanding loan portfolio for which repayment is expected.
the stated rate of interest to be paid on a loan. The rate the lender says the borrower will pay, it can be either a flat or declining balance rate. Nominal interest rates reveal little about the costs of a loan.
the cost per unit of loan outstanding (i.e., what it costs the MFI to lend each unit of money). Formula: Operating Expenses + In-kind Donations / Average Net Portfolio Outstanding
measures the degree to which operating income covers operating expenses. Operating costs are adjusted for generally accepted accounting practices. It does not include covering the value of subsidies received or the cost of inflation. Formula: Operating Income / Total Operating Costs)
non-cash costs incurred by the borrower associated with foregone opportunities associated with accessing the loan. These costs are frequently greater than financial and transaction costs. Examples include attendance at loan-related meetings and the corresponding absence from the business and the costs of maintaining forced savings rather than using the money directly in the business.
the ability to reach large numbers of people, especially the very poor and less advantaged, with quality financial services. Outreach is considered along three dimensions: level of income or advantage of clients, scale of services, and quality of services. Deep outreach refers to reaching very poor or hard-to-reach clients. The latter could be women in certain societies or clients in sparsely populated areas with minimal infrastructure.
the loan balance. That is, the portion of a loan that has not yet been paid whether it is due or not.
refers to the physical output produced per input. An MFI may achieve a high level of physical productivity but still may have a low level of financial productivity. Measure: number of active clients per loan officer.
measures the level of risk in the portfolio by comparing the balance of all loans that have one or more payments past due to the outstanding portfolio. The portfolio at risk rate is considered the most appropriate measure of delinquency. Formula: Outstanding Balance of Loans with Payments Past Due / Current Portfolio Outstanding
refers in general to the amount of risk of default in the loan portfolio. A high quality portfolio contains a lower amount of risk. Portfolio quality changes continually as loans are disbursed, payments are made, and payments become due.
measures what the portfolio actually earned. Tells us about the MFI's pricing policy. Formula: Income from Lending / Average Net Portfolio for the Period. See Yield gap.
refers to what is delivered to the client. Elements of a loan product include the loan size, price (interest rate), repayment intervals, term and purpose.
when operating income is greater than adjusted operating expenses
see (adjusted) return on assets.
a donor agency's formal, written solicitation of funding proposals. Specifies what the donor seeks to fund, the required format and content of proposals, and the details of the funding process.
An interest rate adjusted to compensate for the effect of inflation. A negative real rate implies that the rate of interest charged is less than the inflation rate. Formula: Nominal Rate Rate of Inflation
in calculating the loan loss rate, the relevant portfolio is the portfolio of loans disbursed to which the losses are attributable.
measures the amount of payments received with respect to the amount due. Does not measure the risk in the portfolio (as do the portfolio at risk and other delinquency measures.)
the income the institution will need to receive in order to cover all costs. The required yield is often expressed as a percentage of the average outstanding portfolio.
a self-organized group of individuals who contribute a fixed sum on a regular basis to provide each other, in turn, with a sum of money.
refers to what is delivered to the client. Elements of a loan product include the loan size, price (interest rate), repayment intervals, term and purpose.
see methodology.
the difference between two measures, usually expressed as percentages, such as the difference between the operational and financial self-sufficiency of an MFI. Subsidy Adjustment Formula: (Average Liabilities x Shadow Price of Funds) - Actual Interest and Fee Expense
used interchangeably with viability, which see.
money paid out to access a loan and not paid directly to the MFI. These are costs other than those paid to the financial institution but often imposed by lenders through the delivery system. Examples include transportation costs involved in receiving and repaying a loan fees paid to obtain financial documents or business registration, and the cost of maintaining a bank account that is a requisite for obtaining a loan.
the comparison of financial ratios for one financial institution over time. Trend analysis is a key to analyzing financial ratios. No ratio is an island.
growth within existing service areas through product diversification and expanding clientele.
refers to financial and institutional viability. Financial viability is the ability of a microfinance institution (MFI) to cover its costs with its interest and fee revenues. Institutional viability is the capacity of the institution to continue to thrive as a sound service delivery organization. Viability allows MFIs to maintain their operations into the future, independent of donor subsidy or grant funding.
the institution's policy governing when loans are "written off," or declared non-recoverable and deducted from the loan loss reserve. A standard recommendation is that loans past due for one year without any payments being made should be written off.
a comparison between what the portfolio actually earned and what it should have earned given pricing and product structures. A yield gap may be caused by delinquency, fraud, poor MIS, or structure of loans and disbursement.