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

Tracking Financial Performance Standards of Microfinance Institutions5.3 FINANCIAL VIABILITY STANDARDS1. Financial viability refers to the ability of an MFI to cover its expenses with earned revenue.2. Revenue is generated when the assets of an MFI are invested or put to productive use.3. Expenses are incurred to earn that revenue.4. Thus, to determine financial viability, revenue is compared to expenses through self-sufficiency indicators.5. If revenue is greater that expenses, the MFI is self-sufficient. Some of the commonly used indicators of selfsufficiencyare:F Operational Self-SufficiencyF Financial Self-SufficiencyLevels of Self-Sufficiency – From Four to Two• As the microfinance industry matures, the definition of self-sufficiency has begun to narrow• A few years ago people spoke about four levels of self-sufficiency that an MFI should progressivelyaim to achieve.• Some analysts considered an MFI to be operationally self-sufficiency (level one) if the revenue itgenerated from operations covered its operating costs; level 2 self-sufficiency meant that the MFIcovered its operational costs plus loan loss provisions from operating revenue• Reaching level three meant that an MFI generated enough revenue to cover financing costs, operatingexpenses, and loan provisions.• Level four (financial self-sufficiency) referred to revenue that covered non-financial and financialexpenses calculated on a commercial basis- “profit without subsidy” (Christen and others 1995).• Currently, however, most people in the microfinance industry refer to only two levels of self-sufficiency:operational self-sufficiency and financial self-sufficiency.The various statements/reports/records required for calculating Viability Ratio are given belowPortfolio Report with Ageing AnalysisBalance SheetIncome StatementStatements/Reports Required for Calculation of Viability RatiosLoan Ledger (Individual loan account details)98