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

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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
Performance Standards - Concept, Definitions, Calculation and Methodological Issues5.3.1 Operating Self-SufficiencyOperating Income (Loans + Investments)________________________________________________________Operating Costs + Loan Loss Provisions + Financing CostsTrend – An increasing Operating Self-Sufficiency ratio is positiveStandard Proposed by Sa-Dhan – Operating Self-Sufficiency should equal 100%5.3.1.1 What is meant by Operating Self-Sufficiency? - Simple DefinitionF Operating self-sufficiency is a percentage (%)F Operating Self-Sufficiency indicates whether or not enough revenue has been earned to cover the MFI’stotal costs – operational expenses, loan loss provisions and financial costs.5.3.1.2 What does it measure?F It is an important measure of sustainability of the lending operationsF Looking at the ratio as a self-sufficiency figure allows determination of the extent to which operations arebecoming (increasingly) self-sustaining.F Operational self-sufficiency thus indicates whether or not enough revenue has been earned to cover theMFI’s direct costs, excluding the (adjusted) cost of capital but including any actual financing costs inincurred.F If an MFI does not reach operational self-sufficiency, eventually its equity (loan fund capital) will bereduced by losses (unless additional grants can be raised to cover operating shortfalls). This means thatthere will be a smaller amount of funds to loan to borrowers, (which could lead to closing the MFI oncethe funds run out).F To increase its self-sufficiency, the MFI must either increase its yield (return on assets) or decrease itsexpenses (financing costs, provisions for loan losses, or operating costs).5.3.1.3 What minimum records are required for calculating the Ratio?F Loan ledger with disbursement, schedule and repayment data on each individual loan backed-up a comprehensivecredit policy outlining various terms and conditionsF Aggregation of the loan ledger data with regard to delinquent and current loans – either a simple ageingtable or comprehensive portfolio reportF Key financial statements like the Balance Sheet and Income Statement, adjusted for loan losses, depreciation& accrued interest99
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TECHNICAL TOOL SERIES 1TRACKING FIN
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INTRODUCTION TOMICROFINANCE STANDAR
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5. PERFORMANCE STANDARDS - CONCEPT,
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ACKNOWLEDGMENTSThe need of the oper
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Tracking Financial Performance Stan
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