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

Financial Performance Standards2.3 UNIFORM METHODOLOGY FOR CALCULATING INDICATORSPerformance indicators require a reliable calculation method in order to be comparable. This requires that theexact formula for each indicator is detailed for uniform interpretation and that there is an agreement on hownecessary adjustments/re-grouping of financial data is made so that every financial data would have a universallycommon meaning.The latter aspect is critical if a true “level playing field” is to be established on which to measure financialperformance, since un-adjusted measures may be ambiguous, reflect differences in interpretation; they mayalso reflect differences in accounting practices and access to subsidies. The key aspect here is that unlessaccounting practices are adjusted to reflect a normal position across MFIs, establishing actual financialperformance comparisons is not feasible.The basic issues to consider here are the following:• Norms for provisioning for loan loss• Charging depreciation on fixed assets and• Accounting for accrued interest - income & expenseThere are other issues for consideration, namely• Adjustments for the effect of inflation on equity.• Adjustments for subsidies including cost allocation of unrecognised and/or hidden subsidies2.4 BENCHMARKS FOR FINANCIAL PERFORMANCE INDICATORS, LEADING TO STANDARDSThe fourth step in standards-setting involves elaboration of chosen benchmarks for each indicator. Finally, thestandards are set, based on practical observation of indicators evolving from MFIs and evaluating them forcomprehensive application across the industry. A look at benchmarking, first.Benchmarking is achieved in two steps – (a) making choice of suitability of specific indicators from the universallist of indicators and then (b) elaborating the appropriate financial ratios for each indicator.Benchmarking provides MFIs with “milestone” to drive their institution to optimal financial performance.More important, it helps to pinpoint potential trouble spots / areas where MFIs need to focus.The microfinance industry represents a range of institutions and different operating environments. Benchmarkingis meaningful only if an MFI is compared with similar other MFIs. One simple method is by comparisonamong peer group of MFIs – peers by location, size and operational models. The Micro Banking Bulletin, forexample, forms their peer groups using three main criteria: region, scale of operation, and target market. Table2 below lists the criteria for these peer groups.RegionTable 2 - Micro Banking Bulletin Peer Group CriteriaScale of OperationsTotal Loan Portfolio (US$)21Target MarketAverage loan balance/GNP per capitaAfricaLarge: > 5 millionMiddle East/North Africa Medium: 800,000 to 5 million Low-end: < 20% OR Avg. LoanCentral Asia Small: < 800,000 Balance = US$150Asia (Pacific) Large: > 8 million Broad: 20% to 149%Asia (South) Medium: 1 to 8 million High-end: 150 to 249%Small: < 1 million Small Businesses: = 250%Eastern EuropeLatin AmericaLarge: > 12.5 millionMedium: 1.5 to 12.5 millionSmall: < 1.5 millionSource: Micro Banking Bulletin, November 2002.