Tracking Financial Performance Standards of ... - Sa-Dhan

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Tracking Financial Performance Standards of Microfinance InstitutionsSTRUCTURE OF THE MANUALUnderstanding of financial performance standards is essential for every Microfinance manager irrespectiveof their institutional priority. The best way to bring them in the fold of financial standards is to unveil itsutility/application in most basic form. The attempt to demystifying financial standards contributes both to thelength of this manual and to the order in which the things are presented.CHAPTER 1 provides a basic introduction to importance of standards and how they are developed with aspecific mention of Sa-Dhan’s approach towards building standards.CHAPTER 2 describes the characteristics & components of Financial Performance Standards and at the endit provides summary of financial performance standards suggested by Sa-Dhan.The technical contents of the manual are structured as follows:CHAPTER 3 provides a basic introduction to financial statements for Microfinance Institutions - their categories,utilities, components, conceptual definition of terms, construction (only Balance Sheet and Income Statement)and finally it deals with key issues in cost allocation while preparing financial statements.CHAPTER 4 goes into specific step-by-step details to prepare loan repayment schedule and calculating age ofloans from it, concepts & rationale of loan loss allowances, its calculation based on aging analysis of loans andrelated accounting entries. Finally, construction of portfolio report with conceptual definition of terms associatedwith itChapter 3 & 4 come early in the technical section of the manual because the following chapter is based on clearunderstanding of financial statements, repayment schedule, aging analysis and portfolio report. The data required forcalculation of different ratios dealt in subsequent chapter, come from these three financial statements viz. Balancesheet, Income statement and Portfolio Report.CHAPTER 5 provides the conceptual framework where the broad standards/constructs of Asset (Portfolio)Quality, Efficiency, Productivity, and Viability are discussed with specific indicators. It further goes into detailsfor each indicator, providing conceptual definition along with a discussion on their utility/limitations andidentification of key methodological issues with regard to their calculation. For each indicator, the details arestructured as:1. Formula with numerator and denominator2. Trends and the interpretation3. Sa-Dhan suggested Benchmark4. What the indicator means? – Simple Definition5. What the ratio measures?6. Minimum records to be maintained7. Step-by-step illustration of how to calculate each indicator8. What events/activities distort the indicator9. Some examples, where required and appropriateThe Technical Appendix containing annexes, given below:Annex 1Annex 2Financial Performance Assessment for MFIs: Some Popular Tools used worldwideGlossary of Financial Terms10 IV
Introduction to Microfinance StandardsChapter1INTRODUCTION TO MICROFINANCE STANDARDS1.1 BACKGROUNDAfter more than a decade of experimentation, the Microfinance sector in India has graduated to take-offstage and has begun to scale up rapidly, attracting substantial attention and resources. In the context ofsustained growth of Microfinance in India and given the twin imperatives of enhanced sustainability andexpanded outreach, there is growing emphasis on professional growth of the sector. ‘Standards setting’ is one ofthe tested means to achieve professionalism. Several global initiatives have been undertaken to promotedevelopment of reliable financial standards (including performance, accounting and governance standards) tocompare Microfinance Institutions (MFIs) operating in different environments and across the world. Inaddition, MFIs themselves have together attempted (especially, on a regional and/or national basis) to define aconceptual framework for assessment – using commonly agreed indicators and standards.1.2 WHY IS THERE SO MUCH TALK ABOUT STANDARDS?In the recent few years, micro-finance has experienced a significant shift from being an “intervention” made upof short-term development programmes to being a full-fledged “industry” composed of permanent institutions.This push, by donors, bankers and practitioners alike, towards organisational sustainability has led toprofessionalisation of the sector, wherein micro-finance institutions strive to apply commercial principles totheir context and uniqueness of operations in order to become sustainable and self-sufficient.Earlier impact and outreach (i.e. disbursing credit to large numbers of poor) used to be the main goals for aMicrofinance programme, but now-a-days portfolio quality and institutional viability have also gained dueimportance as indicators of success. Microfinance is now being seen as an industry whose objective is toprovide a wide range of financial services to poor households, the informal sector, micro-enterprises, andothers with no or little access to the formal banking system.Consequently, wholesale bank/donor-funded projects are increasingly geared towards strengthening thefoundation and infrastructure of the overall industry, in addition to the traditional provision of one-on-onetechnical assistance to the Microfinance institution itself. These “industry-wide” initiatives usually have twoend goals:1. To increase transparency in the system through information sharing and reporting mechanisms includingdevelopment of standards and their use by MFIs; and2. To integrate Microfinance institutions into the overall financial system.The second reason for the importance of standards comes from the institutional level. Despite the fact thatmicro-finance has evolved to a greater level of sophistication and experienced constant growth, a simple factremains—there still exists a wide gap between the number of clients served by MFIs and the potential marketof poor people lacking access to credit, savings and other financial services. To start bridging this gap, MFIswould need to do two things:• Make better (optimal) use of the resources at hand (i.e. become more efficient and reach more people withthe same amount of resources/funding);• Attract other (eclectic) sources of funding besides traditional donor funds in order to be able to growfurther and expand outreach.11
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REFERENCESBarrel, Margaret, Michael
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