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

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Tracking Financial Performance Standards of Microfinance InstitutionsAs outlined below, Microfinance performance standards provide a critical tool in helping MFIs achieve both ofthese goals.1. First of all, by providing across- industry common performance measures, standards initiatives canprovide micro-finance institutions with a cheap and readily available tool to see how their institutionscompare with peers within the industry. (Comparative Analysis).2. Standards initiatives such as the ‘Microfinance Information Exchange’ 1 (MIX) give MFIs a one-stopaccess to a wide range of comparative performance indicators, based on figures from a peer group ofleading international MFIs using common calculation methods and accounting principles.3. MFIs can utilise this data not only to monitor their institution’s progress against the rest of the industry,but also to identify key areas of their operations that require attention or need improvement. (Self-Assessment and Diagnosis)4. Microfinance standards can facilitate MFIs’ access to new sources of funds by providing objectiveevidence to lenders, investors, and donors that particular MFIs are in consonance with internationaland national standards. (Rating Benefits)5. As donors focus on the initial phases of institutional sustainability, MFIs need to access commercialfunds as a logical step forward. Accessing the market- sources of funds requires more than justdemonstrating an ability to offer services to the poor. Commercial bankers and private investors basetheir financing decision not only on “social criteria” but also on the level of return and their riskexposure. Thus, MFIs must demonstrate that they are earning a rate of return on their operationswhere they are able to pay for the real cost of commercial funds (financial self-sufficiency).6. The MFIs need to demonstrate their ability to manage their lending portfolio systematically andeffectively by keeping delinquency and portfolio at risk within an acceptable level.7. Many donors are increasingly adopting emphasis on MFI sustainability in making funding decisions.The Consulting Group on Assistance to the Poorest (CGAP) at the World Bank, for example, requiresthat MFIs who apply for funding present financial statements using a common framework that includesissues of effect of in-kind subsidies, below-market rate refinancing and reductions in the real value ofequity through inflation.8. Some other international standards efforts offer MFI evaluations that are not linked to any specificfinancing request, but are made public to enhance the confidence levels of potential donors and investors.The fact that a variety of actors are involved in this standardisation process—MFIs, networks, donors, privatesector—clearly highlights the extent of “buy-in” to the process and aspect of having comparable (standard)measures of performance.1See Microfinance Information Exchange web site at http://www.mixmbb.org. It should be noted that its publication - Micro-Banking Bulletin publishes only aggregate statistics and not information on specific MFIs.12
Introduction to Microfinance Standards1.3 HOW ARE MICROFINANCE STANDARDS DEVELOPED?The process for developing microfinance standards depends on the type of institution that spearheads theeffort, the overall objective of the exercise, and the ways in which the standards will be used. Current standardsinitiatives can be broken down into three major categories - those led by donor organisations, those led byprivate sector companies, and those led by MFIs.1.3.1 Donor-led effortsDonor-led multi-country comparative standards efforts, such as the Micro-Banking Bulletin and Women’sWorld Banking (WWB) are essentially defined by the sponsoring organisation who then seek to convinceMFIs to participate and supply functional data for feedback and wider dissemination. The Micro-BankingBulletin was constituted on a pro-bono basis and has always been fully funded by donors, with CGAP beingthe primary funder at this date. Institutions send in questionnaires, evaluations and audited financial statements.In return, they receive a detailed financial performance report from the Micro-Banking Bulleting team at nocost. WWB and NCCA use the data also to periodically assess the partner-MFIs.1.3.2 Private sector-led effortsPrivate sector standards initiatives resemble donor efforts in that the MFIs are being rated or evaluated on apre-selected set of indicators. The main difference, however, lies in the fact that the organisations involved inthese efforts are striving to become a commercial rating company similar to Standard & Poor’s or Moody’s,where institutions willingly pay a fee to be included in a formal network of certified institutions. The ratingsthat are given by Standard & Poor’s or Moody’s tend to be the barometer by which private investors judge thesoundness and quality of a company. Because the data reported in the MicroBanking Bulletin are self-reported,with less than 20 percent of respondents submitting information that have been independently analysed andverified, a niche market exists for the development of an autonomous rating company to whom potentialinvestors in microfinance could turn to as an arbiter of quality. Among the principal actors currently in thismarket are – M-CRIL, ACCION, Planet Finance and MicroRate.Planet Finance, through its programme Planet Rating, provides evaluation and rating services to microfinanceinstitutions using the GIRAFE methodology. The GIRAFE evaluation examines six major institutional areasand includes a total of 26 quantitative and qualitative indicators. The six areas are governance and decisionmaking process; information and management tools; risk analysis and control; activities and loan portfolio;financing (liabilities and equity); and efficiency and profitability. The evaluator utilises a grid to rank eachindicator, from which a final score is derived based on the weighting that is assigned to that indicatorMicroRate’s methodology is “risk driven,” focusing on enterprise-critical risk factors such as portfolio at risk, returnon equity, and debt to equity ratio. MicroRate’s evaluation and supervision missions examine the followingcategories of performance measure: portfolio quality, information systems, internal controls, market environment,financial health of the MFI, and operational efficiency.Based on the conceptual framework of the original CAMEL, ACCION developed its own instrument, although itreviews the same five areas as the original CAMEL. ACCION use its CAMEL primarily as an internal assessmenttool, which has contributed to setting performance standards both for the ACCION Network and for themicrofinance industry as a whole. The ACCION CAMEL analyzes and rates 21 key indicators, with eachindicator given an individual weighting. Eight quantitative indicators account for 47% of the rating, and 13qualitative indicators make up the remaining 53%. The final CAMEL composite rating is a number on a scaleof zero to five, with five as the measure of excellence.13
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REFERENCESBarrel, Margaret, Michael
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