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

Financial Statements of a Microfinance Institution3.4 COST ALLOCATION – KEY ISSUES FOR PREPARING FINANCIAL STATEMENTSA number of institutions that provide Microfinance services also offer a range of non-financial services, such asbusiness development services (training & technical assistance to micro entrepreneurs) and training in areaslike literacy, health, natural resource management etc. Usually the consolidated financial statements of suchmulti-service organisations contain financial data pertaining to all activities undertaken by the organisation.Assessing financial performance and sustainability of Microfinance operation of a multi-service organisationfrom its consolidated financial statements would become rather difficult. Though Microfinance is being carriedout with developmental agenda, the activity per se is commercial. Unlike other traditional developmentalprogramme, in this activity, there is two-way flow of money – money is given or taken as credit or deposit to orfrom the poor and also it is repaid in the form of money. Therefore, the financial services should be treated asdistinct cost centres vis-à-vis non-financial services in an MFI’s accounts.The following points provides a summary of the key issues in preparing financial statements for multi-serviceorganisations who also undertake Microfinance programme:• Before embarking on a cost allocation exercise, MFI managers must first decide which services offered, ifany, can be considered functionally separate from the provision of financial services. In other words, theymust answer the question of “to what extent are the non-financial services integral to the success of the Microfinanceprogramme?”• In some Microfinance programmes, the provision of skills and literacy training, for instance, is consideredvital to core elements of the Microfinance methodology, such as group development and cohesion. In thesecases, non-financial services may be seen as directly contributing to good credit/savings behaviour, particularlyin programmes serving extremely poor clients. This sense of “non-separability” may pertain particularly incases where credit officers are charged with providing training and where on-site technical assistance isinseparable from credit supervision.• Cost allocation is appropriate for MFIs that offer non-financial services on a voluntary basis Therefore, ifnon-financial services are considered an integral part of the Microfinance or lending methodology, then costallocation between financial & non-financial services may not be warranted since the MFI implicitly orexplicitly considers these services as part of the Microfinance methodology and cost. On the other hand, ifnon-financial services are thought to be complementary (but not necessary) to the successful delivery offinancial services, cost allocation is recommended. However, MFIs interested in exploring the possibility ofchanging their approach and offering these services on a voluntary basis may wish to conduct a costallocation exercise to guide their planning process.• Some MFIs recognise that the provision of non-financial services may require ongoing subsidies, particularlythose services with a “social” character like health and literacy training. They often approach internationaldonors or national funding agencies for separate financing of these services. This financing may or may notbe combined with a fee charged to clients to help cover the costs of delivering the service. Other MFIsexpect that these social activities will be financed with income and fees earned from the provision offinancial services. Such MFIs may charge a separate commission on loans or otherwise integrate the cost ofproviding non-financial services into the effective interest rate on financial services.• MFIs that fund their non-financial services separately, either through donations or fees or some combinationof the two, are likely to view these services as separate “cost centers”. These MFIs are good candidates forcost allocation.43