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

Tracking Financial Performance Standards of Microfinance Institutions• MFIs that expect their financial services to cross-subsidise their non-financial services may see the value incost allocation so they can understand exactly what portion of their income from financial services goestoward covering the costs of non-financial services. Similarly, MFIs that charge a dedicated fee on theirloans to cover a specific non-financial service may wish to verify that the fee actually covers the relevantcosts.• Non-financial services may represent a marginal activity to MFIs. If non-financial services make up a verysmall proportion of total costs and institutional effort, a complicated cost allocation exercise is probablynot necessary. No fixed standard of materiality can be applied to all cases. However, MFIs with less than 10percent of their costs attributable to non-financial services should consider whether they need anythingbeyond the simplest cost allocation exercise.When costs related to non-financial services have to be allocated, the SIMPLE procedure given below is suggestedto be followed. Complicated cost allocation exercises are avoided because, as experience indicates, the additionalityof such an exercise is really minimal.1. First, identify what the non-financial services are and ask the question as to whether they are compulsoryand an inevitable part of Microfinance.2. If they are integral (compulsory) part of Microfinance services, then NO cost allocation is necessary.3. If they are not an integral part of Microfinance services (i.e., not compulsory) then determine what costscan be attributed to them?4. If they exceed 10 percent then a Simple cost allocation may be warranted5. Assuming that cost allocation is to be done, first determine, what are the resources used to the variousactivities that constitute Microfinance?The major resources are:(a) Fixed Assets – Immovables (land and building)(b) Fixed Assets – Movables (vehicles)(c) Fixed Assets – Equipment (computers etc)(d) Human Resources – Staff(e) Financial Resources(f) Other Resources6. This requires that the MFI identify all activities related to Microfinance – which of course would vary withthe methodology. An example is given in the Box below7. For each activity, determine, if any resource, not part of the Microfinance programme, is used. If yes,identify the resource and attribute a cost value to it.8. For fixed assets (immovables), like shared office space, some MFIs use the square feet approach to allocaterental costs (based on the going market rate in the area). This is fairly simple and accurate.9. Steps for this would include:(a) Identifying the actual measurement of office space in Square Feet(b) Multiplying it by the rental per square feet per month for all months in a year based on the localmarket conditions(c) Adding the cost of borrowing money to make the deposit that would have been paid, if it were actuallya rental44