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

Tracking Financial Performance Standards of Microfinance InstitutionsDefining Operational Self- Sufficiency – Alternative View Points• The definition of operational self-sufficiency varies among different MFIs and donors.• The difference centres on the inclusion of financing costs. Whereas actual financing costs used to beincluded only in levels three and four (as mentioned earlier), some analysts include them in calculatingboth operational and financial self-sufficiency and some only in calculating financial self-sufficiency.• Some MFIs argue that operational self-sufficiency should not include financing costs, because not allMFIs incur financing costs equally, which thus makes the comparison of self-sufficiency ratios betweeninstitutions less relevant.• While some MFIs fund all of their loans with grants or concessional loans and do not need to borrowfunds–or collect savings–and thus either do not incur any financing costs or incur minimal costs.• Other MFIs, as they move progressively toward financial viability, are able to access concessional orcommercial borrowings and thus incur financing costs.• However, all MFIs incur operating expenses and the cost of making loan loss provisions, and they shouldbe measured on the management of these costs alone.• Furthermore, these MFIs argue that they should not be penalised for accessing commercial fundingsources (through the inclusion of financing costs in the formula), nor should MFIs that are able tofinance all of their loans with donor funds be rewarded.• The choice of which formula to use is personal, because both are correct. However, it is important thatwhen comparing institutions, the analyst determine that the same formula has been used, because nostandard definition has yet been established.5.3.1.4 What events/activities affect (distort) the ratio?F This ratio is also affected by unaccounted, unreported and/or hidden subsidies with regard to operationsF Organisations providing micro-credit as well as other services can allocate costs in such a way that theircredit operations look more sustainable than they really areF When MFIs allocate costs to subsidiaries or do not carry them on the books at all, for instance whendonors meet certain costs, such as paying for consultants or health workers collect loans/savings – this ratiois affected5.3.1.5 How to calculate the ratio?1. From the income statement, sum up all operating income. This would include:F Interest on Current and Past Due Loans {refer Table 8 (a), IS 1)}F Loan Fees and Service Charges {refer Table 8 (a), IS 2)}F Late Fees on Loans {refer Table 8 (a), IS 3)}F Interest on Investment {refer Table 8 (a), IS 5)}GRANT INCOME SHOULD NOT BE INCLUDED2. From the income statement {refer Table 8 (a)}, sum all expenses related Microfinancing, including cost offund and loan loss provision. These typically would included:I. Operational Costs 13 {refer Table 8 (a), IS 20)}a) Salaries and Benefits {refer Table 8 (a), IS 14)}b) Administrative Expenses {refer Table 8 (a), IS 15)}13The cost of promotion of SHGs should be treated as an expense for the period100