ACCION CAMEL Financial Assessment

Instrument for Microfinance Institutions

Lynne CurranSenior Director; Financial Analysis28 May, 2005Bucharest, Romania

• Over 30 years experience in microfinance

– Financial Management Unit:

• Autonomous unit dedicated to financial assessments (ACCION CAMEL), performance monitoring, financial projections and other analytical tasks

ACCION International

ACCION CAMEL

• Capital Adequacy

• Asset Quality

• Management

• Earnings

• Liquidity

Management

ACCION CAMEL: What is it?

• Internal evaluation and financial assessment instrument of microfinance institutions (MFIs)

• In-depth analysis of all areas of the MFI

• Provides recommendations for improvements to management

1978

Creation of the traditional CAMEL instrument by the U.S. Federal Reserve Bank

1980s

ACCION Latin America Bridge Fund

1992

Creation of ACCION CAMEL instrument for MFIs

1993 – 1999

ACCION CAMEL evaluations of ACCION Network members only Transfer of ACCION

CAMEL methodology to supervisory agencies and lending institutions

Expanding use of ACCION CAMEL beyond Network and Latin America

1999 + 2000 +

History of the CAMEL

1998

Publication of ACCION CAMEL Technical Note

To issue a rating of the financial performance and possiblel risks facing the MFI in the medium term

To demonstrate the financial health of MFIs to banks and potential investors, via recognized financial performance measurements

To provide quality information/evaluation for improved management of MFIs

To establish indicators and benchmarks for improved management of MFIs

Why was the ACCION CAMEL created?

Definition of key variables Including establishment of how variables should

be measured

Definition of standards

Availability of required information

Sensitivity of the MFI to being rated

Challenges in Creation of ACCION CAMEL

ACCION CAMEL: Versions

TRADITIONAL CAMEL

RATING CAMEL (“MINI-CAMEL”)

UPDATE CAMEL

Main Focus In-depth analysis of all areas of MFI

Financial strengths & weaknesses

Previously identified risks

Main Purpose Management Demonstrate financial situation

Measure progress

Weighting 46% Quantitative54% Qualitative

60% Quantitative40% Qualitative

Same as previous CAMEL

Average Level of Effort (consultant days)

3 consultants15 days each

2 consultants8 days each

1 consultant6 days

• Microfinance-specific

• Prove MFIs can meet the same standards as traditional financial institutions

• Not an audit

• Not an impact measure

• Confidential results

Characteristics of the ACCION CAMEL

ACCION CAMEL: Target Market

Third Parties:

Commercial Banks

Private Investors

Second-tier lenders

Supervisory agencies (Central Banks and Bank Superintendencies)

Rated MFIs: NGOs

NGOs in transformation to regulated institutions

Regulated MFIs (banks and finance companies)

20 Key Indicators

– Rated between 0 and 5

(optimal = 5)

– Weighting7 Quantitative Indicators: 46%13 Qualitative Indicators: 54%20 Key Indicators: 100%

– Supporting quantitative and qualitative

indicators

– Trend analysis (two years, or three periods)

ACCION CAMELCharacteristics

ACCION CAMELQuantitative and Qualitative IndicatorsQuantitative Indicators:

Portfolio Quality and Financial Analysis

Adjustments:

•To measure the viability of the MFI as a commercial institution

•To standardize the analysis of different MFIs

Optimal ranges established based on in-depth analysis of the performance of MFIs worldwide

Qualitative Indicators: Indicators that are not quantifiable

– Direct impact on the financial situation and overall condition of the MFI

Analysis based on: – Interviews of staff, board members,

clients– Review of policies and procedures

ACCION CAMELQuantitative and Qualitative Indicators

When to conduct ACCION CAMEL Rating

Most common examples:

• Potential Investment/Loans

• Requested by the MFI

• Requested by donor or other third party

• Transformation from NGO to regulated institution

• Technical Assistance

Quantitative Indicators

Qualitatitive Indicators

Capital Adequacy (16%)Capital Adequacy Ratio 5Adequacy of Reserves 6

Ability to Raise Equity 5

Asset Quality (21%)

Portfolio at Risk 8Loan Loss Rate 7

Portfolio Classification System 3Productivity of Long-term Assets

3

ACCION CAMELQuantitative and Qualitative Indicators

Quantitative Indicators Qualitatitive IndicatorsManagement (23%)

Governance 4Management

4Human Resources 4Processes, Controls, Audit

4 Information Systems

4Strategic Planning & Budgeting 3

Earnings (24%)ROE 5Operating Efficiency

8ROA 7

Interest Rate Policy 4

ACCION CAMELQuantitative and Qualitative Indicators

Quantitative Indicators Qualitatitive IndicatorsLiquidity (16%)

Liability Structure 8Cash Flow Projections 4Productivity of Liquid Assets

5

Total 46% 54%

ACCION CAMELQuantitative and Qualitative Indicators

Increased MFI access to national and international capital markets– Reducing risk profile through an objective

evaluation

Standardization of variables and indicators used to measure MFIs

Database to analyze the evolution of the microfinance industry

Achievements of the ACCION CAMEL Instrument