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Evaluating Microfinance InstitutionsPerformance Indicators
Session Objectives:
1. Establish crucial performance indicators for evaluating the performance of microfinance institutions.
2. Establish industry benchmarks for performance indicators
Microfinance Institutions - 2014
Banks with Microfinance-related activities
18%
82%
WORLDWIDE
Banks Non-Banks
33%
67%
ASIA
Banks Non-Banks
Categories of Performance Indicators
INDICATOR MEASURE
PORTFOLIO QUALITY • Portfolio at Risk Ratio (> 30 days)• Write-off Ratio
EFFICIENCY & PRODUCTIVITY • Operating Expense Ratio• Cost per Borrower• Loan Officer Productivity
FINANCIAL MANAGEMENT • Debt-Equity Ratio
PROFITABILITY • Return on Equity (ROE/AROE)• Return on Asset (ROA/AROA)• Portfolio Yield• Operational Self-Sufficiency• Financial Self-Sufficiency
PORTFOLIO QUALITY
• Portfolio-at-Risk Ratio (PAR)• Portion of the loan portfolio “contaminated” by arrearages, as a percentage of total loan
portfolio outstanding
• Based on specific number of days of delayed installment – not loan maturity date
• Microfinance loans being primarily collateral-free, quality of the portfolio is the most crucial measure
• Leading MFIs are typically better at maintaining a higher portfolio quality than their commercial bank peers in many countries.
• A microenterprise loan is typically considered to be at risk if a payment on it is more than 30 days late ~ stricter than what is practices among most commercial banks.
EFFICIENCY & PRODUCTIVITY
• Shows how well institution is streamlining its operation• Productivity – amount of output per unit of input
• Efficiency – cost of inputs ~ price of outputs
• Microfinance being highly labor-intensive, MFIs have much lower efficiencies vis-à-vis commercial banks
FINANCIAL MANAGEMENT
• Ensures sufficiency of liquidity to meet the MFI’s obligations to disburse loans to its borrowers, repay loans to its creditors and service withdrawal requirements of its depositors (in the case of banks).
PROFITABILITY
• Summary of performance of all aspects of the MFI
• Must be viewed in relation to operational efficiency and portfolio quality
• Comparing “apples to apples”• Caveat:
• A number of MFIs still receive grants and subsidized loans• No standardized accounting practice across MFIs ~ “creative accounting”• Especially true in the case of non-regulated/non-bank MFIs
• In areas where there is less competition, MFIs may operate in a “seller’s market.” In the absence of competition, even the most inefficient MFI can actually be profitable.
Performance Indicators International Standards
INDICATOR FORMULA STANDARD
PORTFOLIO QUALITY
Portfolio at Risk Ratio (PAR)
Outstanding balance portfolio with loan delays > 30 days
Outstanding Gross Loan Portfolio
≤ 5%
Write-off Ratio Value of loans written-offAverage Gross Loan Portfolio
≤ 2%
Performance Indicator Formulas
INDICATORS FORMULA
EFFICIENCY & PRODUCTIVITY
Operating Expense Ratio Operating ExpenseAverage Gross Portfolio
Cost per Borrower Operating ExpenseAverage No. of Active Borrowers
Loan Officer Caseload Number of Active BorrowersNumber of Loan Officers
FINANCIAL MANAGEMENT
Debt-Equity Ratio Total LiabilitiesTotal Equity
Performance Indicator Formulas
INDICATORS FORMULA
PROFITABILITY
Return on Equity Net IncomeAverage Equity
Return on Asset Net IncomeAverage Asset
Portfolio Yield Cash Financial RevenueAverage Gross Portfolio
Operational Self-Sufficiency (OSS)
Financial RevenueFinancial Expense + Impairment losses on loan +
Operating Exp.
Microfinance Industry Benchmarks ~ 2014(Source : Mix Market)
WORLDWIDE
All MFIs Banks Non-Banks
PORTFOLIO QUALITY
Portfolio-at-Risk >30days 5.34% 3.60% 5.71%Write-off Ratio 9.47% 37.78% 2.77%Loan Loss Rate 7.34% 31.40% 1.41%
EFFICIENCY & PRODUCTIVITY
Operating Cost Ratio 27.22% 26.25% 27.44%Loan Officer Caseload 243 273 234Cost per Borrower $494.70 $503.38 $492.55
Microfinance Industry Benchmarks ~ 2014(Source: Mix Market)
WORLDWIDE
All MFIs Banks Non-Banks
Financial Management
Debt-Equity Ratio 2.64 5.67 1.97Profitability
Return on Equity 5.08% 10.25% 3.88%
Return on Assets 0.14% 1.19% - 0.10%
Portfolio Yield (real) 25.41% 24.17% 25.71%
Operational Self-Sufficiency 111.93% 114.03% 111.46%
Thank You!