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Model Solutions to Practice Questions 2.5

  1. The institution has an AROA of –17%. AROA is calculated by dividing Adjusted Operating Profit (Loss) by the Average Total Assets for the period, in this case: (2243)/13140. It is not financially self-sufficient. Remember that financially self sufficient institutions should have an AROA greater than 0. The adjustment that the institution must make to the income statement for inflation and subsidized cost of funds should be as follows (on the next page):

  1. The case study suggests a number of reasons for which the AROA is higher for Bosnian MFIs than for the broader New MFI peer group. The article suggests among others: streamlined operating procedures, higher average loan balances (less expensive to administer), and very low arrears. This last is particularly important, as adjustments made for portfolio quality can greatly reduce the AROA of an institution. The Bosnian MFIs manage to have higher AROA than the New MFIs, while averaging lower portfolio yield. They do so because their expenses as a percentage of the outstanding loan portfolio are much lower than in the comparable peer group.

  2. In April 2001 Bulletin, the highest average AROA among peer groups was found in the Asia – Large – Low/Broad category. Over the period covered, we can identify the following consistent trends in AROA:

Over the period covered, two peer groups slipped below 100% financial self sufficiency: Latin America – Medium – Broad and Latin America – Credit Union – Broad. These peer groups, as has been stated before, have changed in composition over the course of the Bulletin’s six current publications. As such, it is sometimes difficult to track the historical performance of a given peer group, as new members may have come in, others may have stopped sending in data, changing the sample size, and affecting the weight of each institution’s data in the overall result. When making comparisons between an institution and a peer group, you must be careful to fully understand the composition of that group and how it has changed over time.